The big economic news overnight was Japan’s continuing economic meltdown.  Imagine that – the most aggressive QE on the planet and it’s doing nothing for the real economy.  Seems like someone would start to question it, no?

Offsetting it, as usual, CL continued its ascent, reaching a critical price level.

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All eyes will be on the Fed minutes today, but only after Bullard gets a chance to convince us that: (1) a rate increase is a real possibility; and, (2) they might just have to lower rates some more.

The problem, as yesterday, is that the dollar still looks susceptible here.  And, the US needs the dollar to remain strong (we are importers, after all) without actual higher interest rates (we are in debt up to our eyeballs.)

It’s not helping the yen carry trade much at all.  And, with CL at a point of inflection, the riskcontinues to be to the downside.  Yesterday’s targets remain in place.

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The dollar index, which has spent the past two months at lofty heights based on expectations of an eventual rate hike, broke through key support overnight on a dose of reality from, of all places, Fed President Williams.

This enabled USDJPY to finally tag our 99.96 target, which has resulted in a rare sell off in the futures.

Naturally, another Fed President (Dudley, this time) immediately grabbed a microphone to exclaim that a September rate hike is very much a possibility, and that “the market is underpricing rate hikes.”

Wouldn’t it just be easier if they’d announce where they’d like SPX to close this afternoon?

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Oil futures pushed above the 100-day moving average this morning, providing the boost the ES needed to make new, new highs.  All-together, CL is up 15.2% since Aug 3, enabling a 41-pt (1.9%) SPX rally over the same period.  Great trade-off, no?

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Now, through Aug 25, sign up for a one-month, non-renewing subscription and we’ll throw in two additional months for free.  It’s about half-off the regular quarterly subscription price.  Available for new members only.  See details and SIGN UP HERE.

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First, a little Q&A.

Q: How high did oil go yesterday?  A: As high as it needed to in order to produce new highs.

It was almost laughable as every time SPX started to lose a little momentum, CL spurted just a little higher.  In the end, it spiked 6.7% in less than 12 hours from the overnight lows — the equivalent of 1,250 Dow points!This hasn’t happened since, oh, last week when it shot up 7.6% in 24 hours [see: The Not so Invisible Hands Guiding the Market.]

The question today is whether the “market” will focus on the atrocious economic data just released (big misses in PPI and retail sales), CL’s continuing levitation or USDJPY’s overnight plunge.

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Futures were up as much as 6 points overnight, largely on a rebound in oil prices back above the SMA10 on a heels of a (perennially wrong) IEA forecast of higher prices to come.Oil’s gains should fade, however, as we head into the cash open.  There are other factors at work that indicate yesterday’s decline might not be finished.

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When a rising channel breaks down, but prices rise up to tag it from below one last time before dropping further, we call that a backtest.  Traditionally, it has represented a last gasp before a significant drop.

Over the past year or two, it’s often been a head fake. Prices often: (1) continue higher on the underside of the broken channel; or, (2) rejoin the broken channel and continue higher as though nothing ever happened.

I’ve seen several instances the past couple of days in the many charts I watch, raising the question: is this one for real?

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It’s getting downright silly again.  I get the whole recovery from Brexit, as though it never happened and doesn’t matter.  And, I get the whole spike to above the 1.618 extension.  But, now they won’t even allow a 6-8 point decline, in order to maintain the appearance of normalcy for the rising channel they fabricated.  Who’s running this circus, anyway?  Probably the same guy who’s been in charge of USDJPY for the past week. Recall that it broke down, then recovered a bit in a channel that paralleled the broken one, then rejoined the broken one, only to break down again this morning in a show of bearish potential.  To quote Joe Bob, it’s ugly on a stick.

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If there’s any one chart that exemplifies what’s going on in the “markets” these days, it’s the Nikkei 225 futures: NKD.  Note the breakout from the breakdown — the key feature I see practically everywhere except for VIX, which is just plain breaking down.

BTW, I have some lingering issues with the website this morning.  If you experience any difficulties logging in or accessing any posts, please log back out, clear your cache and cookies, and try logging back in.  If this doesn’t resolve the problem, please contact me.

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If the S&P 500 Index suddenly shot up 160 points, or the DJIA 1,350 points (7.4%) in one day, would anyone notice?  It would be the biggest point move ever for the Dow, and the third biggest percentage move ever.  It would make headlines, right?

So, why is it that when oil prices gained an equivalent amount in 24 hours earlier this week, no one blinked an eye?  Maybe the guys filling up their Family Trucksters this weekend will grumble a bit.  But, besides them, nobody seems to notice.  Nobody seems to care.

Would they care if they knew the extra pain at the pump was the result of central bankers manipulating the stock market higher?

Sure, oil companies benefit from higher oil prices.  But, the real point is to goose automated stock buying programs — algorithms — to push stocks up to new highs.

It’s not always as obvious as this week, when the 7.4% spike occurred on the heels of news that should have driven oil prices lower.

Some Background

As we’ve discussed countless times, the relationship between CL and SPX has been quite strong — particularly between February and June 2016.  CL doubled following its Feb 11 lows, which enabled SPX to experience an exceptionally strong recovery.  After topping out in early June however, CL became a drag on SPX.

Since then, CL has given up about 24%, dropping in a tight, falling channel ever since mid-July.  Were it not for the weekly spikes prompted by goal-seeking API and EIA data, and daily intraday ramp jobs based on nothing at all, SPX would likely have followed it lower instead of pushing up past its May 2015 highs.

So, on Wednesday, with SPX having dropped 32 points in the last two days and in danger of falling back below its previous highs, swift action was needed.  It was time for a trend change.  It was time to break out of that falling red channel — even if the EIA inventory news should have sent it lower.

How They Did It

The charts below tell the whole story.   We’ll walk through it point-by-point, looking at how oil futures (CL) were used to drive the S&P 500 index (SPX) higher at critical junctures throughout the day.

1. After falling 32 points from Monday’s highs, SPX rebounded — only to reverse at the 20-day moving average (white dotted line.)
2. The following morning, SPX continued falling, shedding 5 points in the opening minutes.  Oil immediately started moving higher — on no news, whatsoever.  This reversed SPX’s drop, sending it back above the 20-day moving average.
3. The EIA’s crude oil Inventory report came out.  Inventories had grown 1.4 MM barrels versus the 1.3 MM barrel contraction that was expected.  Oil futures plunged almost 3% in seconds, and SPX started slipping.  Literally seconds later, CL turned around and started spiking higher.  Within 3 minutes, it had recovered all its losses and was making new highs.   SPX regained all 4 points it had lost during CL’s drop and was soon back above its 20-day moving average again. When CL popped out of its falling channel and topped its 200-day moving average, SPX spiked higher and closed at its high for the day. CL’s gain from its earlier lows: 5.7%.
4. CL settled lower overnight, dropping back below its 200-day moving average.  When SPX opened the following morning, it gave up 7 points right away.  It only reversed when CL started spiking higher, which it (no so coincidentally) did once SPX’s rising red channel started to break down.
5. SPX popped up to the top of a falling white channel, and was having trouble breaking out.  CL to the rescue again, making new highs that allowed SPX to break out of the channel.  CL’s total gains since Wednesday morning: 7.4%.  It produced a 16-pt gain for SPX but, more importantly, reversed a potentially damaging decline and helped it break out above overhead resistance.

Do real investors dive in and buy up something that’s plunging in value by the second?  Of course not.  They wait, read the report, consider its import and draw their conclusions.  Only then, if they feel prices have reached some kind of equilibrium, do they begin to build a position.

In today’s “markets,” measured judgement is hard to find.  Before a real, live analyst has skimmed the first sentence of the report, the algos have scanned the entire report and placed heavy bets based on a predetermined set of criteria.  This can drive prices up or down, of course.

But, when central banks have their fingers on the scale, provide floors or drive prices up through resistance, we get the sort of rebound we saw on Wednesday.  Is it such a bad thing?

Why We Should Care

Gas prices matter to the average consumer.   Collectively, those few cents per gallon all around the world are a tax — a drain on society — that bleeds much-needed money from consumers who are increasingly struggling to make ends meet.

If you have a nice fat stock portfolio, as I’m sure all of our readers do, you’re probably fine spending a few extra bucks when filling up.  But, consider those who aren’t as well off: the families who are unable to afford a new plug-in hybrid.  That few extra bucks has to come out of grocery money.

A recent Bankrate.com study showed that 63% of all Americans couldn’t handle a $500 car repair or $1,000 emergency room visit.  It’s a safe bet that the same 63% aren’t very well represented among the dwindling ranks of stock market investors.

Gasbuddy.com reports that gas prices increased 40% between February and June — an untenable increase for those on fixed income, especially after dealing with rent increases that have far outpaced income growth.

Whether or not you care for the plight of those less fortunate, and whether or not you’re a fan of trickle-down economics, there’s broad agreement on the fact that the economy cannot grow if the “have-nots” don’t participate.

Based on the contraction in the rate of real GDP growth forecast by the Fed, it seems as though all the stock market gains of the past six years have done little to boost the real economy.  Why, then, does the game go on?

Where Do We Go From Here?

The Fed, ECB, BoJ, BoE and SNB are playing a dangerous game.  They’ve figured out how to boost stock prices.  They just haven’t figured out how to expand the global economy.

They play games with currencies, stealing a little growth from each other in a zero sum game.  And, they play games with commodities such as oil, essentially stealing from the poor in order to prop up stocks.  And, they drive interest rates to all-time lows and rents to all-time highs, stealing from pensioners and others on a fixed income.

How much lower can interest rates go?  How much more government and, now, corporate debt can they monetize?  How much more of global stocks can they purchase?  In the end, it won’t make up for the fact that the excesses of 1995-2000 and 2003-2007 bubbles were never allowed to clear.  Today, debt loads are even higher, made bearable only by artificially depressed rates.

I don’t imagine central bankers are proud of what they’re doing.  In fact, I imagine some of them are even ashamed.  They should be.  Their policies prey on the weakest of us.  But, at the end of the day, I think their shame is overshadowed by their fear of what might happen if they stop propping up stocks.

This week it was oil futures.  Next week, it might be the USDJPY, VIX, or interest rate futures that drive algos and stocks higher.  In the end, it won’t really matter to those pushing on the strings, only to those of us who must live with the consequences.