We all know about the strong earnings, stimulative tax cuts, low unemployment, etc. which have driven this recovery. These are the headlines that scream for our attention every day.
Here’s a quick counterpoint: the algo-driven aspect of the recovery. For those not familiar with Fibonacci ratios, here’s a quick primer. Suffice it to say that SPX has paid a great deal of attention to key Fib levels over the years.
Since SPX first sliced through its 2.24 extension at 2703, there has been a battle brewing — with bulls desperate to hold the newly acquired support.
I present below just a few of the weapons used to motivate algorithms (and, the relative handful of carbon-based traders still standing) to ignore tariffs, geopolitical instability, rising inflation, tightening monetary policy, and stagnant real growth.
- Jan 3: SPX popped above its 2.24 Fib extension, the result of oil breaking out of a rising channel it had been in since April 2016
- Feb 9: the first 200-DMA tag since Nov 2016
- Mar 23: the second 200-DMA tag
- Apr 2: SPX closes below its 200-DMA, DJIA makes lower lows
- Apr 4: Bullard – no reason to hike rates any further
- Apr 4: Kudlow – Tariffs may not take effect; if do, would end in “pot of gold”
- May 3: Another 200-DMA tag. VIX crushed 42% in 24 hours, continues to fall until SPX rises back above its 2.24 Fib at 2703.
- Jun 25: VIX begins another 42% drop, continues until SPX above IH&S neckline
- Aug 6: Bullard – recessions need not follow extended expansions
- Aug 7: VIX reaches new lows
- Behind the scenes, oil rallied 30% between Feb 9 (cycle lows) and Jul 3 (last backtest of 2703) dipping just enough each month (watch it today) to justify understated CPI
Something to think about as stocks approach new all-time highs…
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