The spread between the 10-yr and 2-yr has now narrowed to 50 bps — the same level it was when stocks peaked in October 2007.  Many take this as a harbinger of financial disaster. Is it?

Flat or inverted yield curves typically signal a recession.  And, it’s hard to argue the point.  Investors would have to be pretty pessimistic if they’d rather tie up their money for 10 years at a rate lower than shorter-term instruments offer.

The yield curve inverted just before the recessions of 1981, 1991 and 2000.  And, it inverted about two years before the 2007-2009 GFC.  But, as the chart below shows, inversions and market peaks haven’t always lined up that well.

In 1998, a brief inversion occurred about two months prior to the 22% correction.  In 2000, we saw the same two month lead time but this time the inversion lasted 11 months and stocks plunged by over 50%.The curve inverted again beginning in late 2005 and bounced around for quite a while before going positive in May 2007.  Five months later, as the curve was rapidly steepening, the S&P 500 peaked and began a 57% crash.

The other significant selloffs since then — Apr-Jun 2010, May-Oct 2011, and May 2015-Feb 2016 — have occurred with positive curves that were either in the midst of flattening or about to flatten sharply.

The current levels are, indeed, equal to those at about the same time as the market peaking in Oct 2007.  But, in 2007 the curve was rapidly steepening.  Today, it is (not quite as) rapidly flattening.  I’ve highlighted a similar move in 2005 (from 1.34 to .57) for comparison purposes.

Note that in 2005 the rate of change was even greater that it has been this past year.  But, it still took another 8 months to invert and another 22 months for stocks to peak.

While admittedly a very simplistic exercise, I believe the above shows that while the potential is there for a recession, this is just an early warning at this time.  If the yield curve bottoms out here and rapidly steepens, we’ll have a lot more to worry about.

Stay tuned.

As we expected [see: Dollar Duldrums] the US dollar has continued to slide.  Today’s price action threatens to take out the November 27 low and reach our 91.483 target.

Today, we’ll update some key currency pairs and see if we can make sense of the bond market.

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Stocks remain in a year-end holding pattern, meaning they’re getting plenty of support from algos.  SPX had a shot at its SMA10 yesterday, but seems undecided between its 2.24 extension at 2703.62 and a backtest of its SMA10, currently at 2675.41.  It’s a whopping (sarc) 1% spread which simply won’t make a difference.Things could get interesting if SPX drops through its SMA10.  But, after all the pushing and shoving it took to get here, is that likely?

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Wishing all our members a peaceful holiday season and a joyous new year!

 *  *  *

This past year was challenging in many ways.  Despite record highs in the markets, poverty, food insecurity and homelessness have not gone away. About half the world population lives on less than $2.50 per day.  Eighty percent live on less than $10 per day.

We Americans are accustomed to discussing poverty in other nations, particularly “third world” countries. But, in America — the richest country in the world — about 12.7% of us live in poverty.  For children, its more like 15.6%.

If this shocks you, take a few minutes to read a special report in The Guardian.  Philip Alston, UN special rapporteur on extreme poverty and human rights, shines a spotlight on the 41 million fellow Americans living in poverty.  With important safety nets being pared back or eliminated, it’s hard to envision an improvement in the coming year.

No one can do everything.  But, everyone can do something.

Until shortly before he passed away last Christmas at age 86, my Uncle Don was still delivering meals to the elderly through Meals on Wheels in Bucks County, PA. I’d like to honor his memory in some small way.

Between now and Jan 30, we’ll donate 10% of all new membership sales to Meals on Wheels.  In addition, we’re offering discounts on memberships to anyone making a contribution to this or any other bona fide charity offering services to the poor, the hungry and/or the homeless.

Simply sign up for the new membership of your choice, then email a copy of the receipt for your donation to michael (at) pebblewriter (dot) com to receive the following special deals.

Recurring Monthly and Quarterly Memberships:
Make a donation of $25 or more and we’ll rebate 25% of your initial payment.  For $50 or more, your rebate increases to 50% of your initial payment.

Special: Recurring Annual Memberships:
Make a donation of $100 or more by Jan 10 and get a recurring annual membership for $750/yr.  We haven’t offered these popular annual memberships at any price since 2016.  This is a discount of 58% off the monthly rate.

To sign up now, CLICK HERE.

If you saw this on an EKG, you’d call the time of death and wheel the patient down to the morgue.  The horizontal lines below are, from top to bottom, the 200, 100, 50, 20 and 10-day moving averages.  And, I can find no other time in VIX’s history when they were all arrayed in this order and this perfectly flat.But, this is VIX and these are the “markets.”  More importantly, the holidays and the end of the year have arrived.  And, the underlings lucky enough to be working today are under strict orders not to do anything that will screw up the S&P 500’s 20%+ gain for 2017.

ES has held the purple channel bottom again, RB has seemingly broken out of and backtested a falling channel, CL is defying fundamentals and threatening to break out, ditto for the USDJPY, and the euro has barely budged despite the Catalan crisis.

Sure, core durable goods and new orders dropped in November, and personal savings just hit a 10-yr low.  But, stocks are steady.  And, corporations just got a big Christmas bonus with which to buy back even more shares in the year ahead.  So, everything is peachy.

Despite the above, our targets remain unchanged for ES, SPX, VIX, RB, CL, DXY and EURUSD.  Our stances and forecast targets are listed on the current forecast page.

VIX’s 200-day moving average just registered a 10-handle for the first time ever, dropping to 10.99 this morning… … in order to keep S&P futures in their recently re-acquired rising purple channel.  We saw another test just yesterday (the yellow arrow.)As we discussed last week [see: The Chartist’s Dilemma] this channel dates back to August 17.  It has broken down on multiple occasions, always springing back to life when resuscitated by timely plunges in VIX.With the year-end just ahead, will the excesses of the past year prevail or are stocks finally ready for a rest?

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Despite a pregnant pause, RB is clinging to a slight gain at the moment (+0.18%.)  This is where it should reverse if it’s going to.It all boils down to whether or not the ytd gains are “enough.”  SPX is sitting right now at a 20.03% gain, which might well be the bogey that was in mind.  It seems unlikely TPTB would want to give up such a noteworthy achievement at this late date.ES’ purple channel is a rising subset of and about to intersect with the top of the rising white channel from Jan 2016.The white channel is, in turn, a parallel subset (the bottom .236) of the large rising purple channel from 2009.The white channel top will either serve as an upper limit to ES or will serve as a point of breakout.  The white channel itself is rising around 15-17% per annum — well above the historical rate of return for stocks, but well below the small purple channel’s 32% per annum.

The cycling of VIX — bashing it from higher levels to near the lows or making new lows — will continue.  Obviously, VIX can’t drop below zero.  RB and CL can only go so high before inflation becomes a problem.  USDJPY can go higher, but this means a less valuable yen and higher inflation for Japan.

Interestingly, the BoJ announced just yesterday that it’s leaving its monetary policy on hold because of difficulty in reaching its 2% inflation goal.  Inflation obviously won’t remain in the basement much longer if oil prices continue to rise while the yen drops.

So, we’re likely looking at a reversal for USDJPY (strengthening yen) to compensate for an oil and gas breakout — at least over the next few weeks.  DXY certainly supports this thesis.

I’ll review the devil’s advocate case for a higher USDJPY and other levitating techniques in the days ahead.

UPDATE:  12:40 PM

In an effort to push SPX and ES above TL resistance… …and, to offset continuing DXY weakness……as well as USDJPY resistance……CL and RB are breaking out.  CL could run into TL resistance at 58.43…

…and, RB has reached Fib resistance at 1.7458.

To complicate things, VIX is being bid.  Might there be some real live investors out there who are nervous about remaining 100% long at all-time highs over the holidays?As we discussed last week, the CL and RB breakouts could have consequences for CPI.  So, I’m tempted to regard this as a head fake.  But, if USDJPY and DXY tank as expected, we could be looking at the real thing — at least for the next month or so.

Stay tuned…

The dollar continues to fizzle, but USDJPY is rallying anyway.  CL, RB and VIX are jumping into the fray just in case, helping ES to a 9-pt gain as we go to press.  Maybe Congress will un-pass and re-pass the tax bill a few more times in order to convince the algos to keep the melt-up going.

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The idea of shorting the markets these days reminds me of the iconic scene in A Christmas Story where Flick is triple-dog-dared into touching his tongue to a frozen flagpole.  It sticks of course.

And, while not quite as painfuul as shooting your eye out with a Red Ryder carbine action two-hundred shot range model air rifle, it reinforced the notion that adages exist for a reason: to protect us from disaster.

Be careful what you ask for.  Look before you leap.  Beware the ides of March. They all pale in comparison to “don’t fight the tape.”  It’s an old expression that originates from the days of the ticker tape.  Put simply, it means you shouldn’t fight the prevailing trend.

These days, we might rephrase it “don’t fight the Fed.”  Sure, Neel Kashkari insists it’s not the Fed’s job to protect investors against losses.  Yet, given that maintaining extremely accommodative monetary policy does exactly that, it’s a rather disingenuous claim.

One of the easiest ways to witness this protection in action is to watch VIX and its influence on the algos that guide the markets these days.  VIX is once again on a precipice — off over 36% from its recent highs and clinging to the bottom of a channel that could easily break down if need be.  But, let’s not overlook the fact that two of the spectacular plunges over the past six weeks have been followed by even more spectacular spikes.  Could a third be right around the corner?  Or, is taking a long position in VIX inviting disaster?

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Tax cut euphoria, combined with an overnight bump in CL/RB and a slump in VIX, has sent futures 10 points higher as we go to press.  As we discussed Friday, ES has rejoined the rising purple channel in the year-end melt-up.continued for members… (more…)

As a chartist, you know something’s gone haywire when a major, long-term channel breaks down and it results in higher prices.  Yet, as every chartist knows, this phenomenon has been a hallmark of the financial markets for the past several years.The S&P futures (ES) offer a very clear example.  Like all channels, the rising purple channel above was formed by a series of rallies and setbacks.  It ran into trouble in late October when ES dipped below the channel bottom (yellow arrow) but recovered only an hour later.  It bumbled along until Nov 9, when it broke down again.This time, however, it formed a Head & Shoulders pattern that suggested an additional 32-pt drop to backtest a key Fibonacci level.  In each case, VIX plunged (32% and 41% respectively), algos responded, and the damage was contained.

Intraday dips that drop below a channel bottom are no big deal.  They happen all the time and are promptly bought — the new normal.

But, when the dip results in a close below the channel bottom, it has (traditionally) mattered.  It matters even more when there are a string of lower lows and closes below the channel bottom such as between Nov 8 and Nov 15.

Fortunately for the bulls, and no doubt quite by coincidence, USDJPY rallied sharply (the shaded area below) at precisely the same time that VIX’s 41% plunge (to new, all-time lows) ran out of steam.  The yen carry trade rarely disappoints.

And (another coincidence?) as the initial spike took a breather, VIX took the opportunity to plunge again — this time by a mere 36%.Between the two influencers, and some help from a timely pop in oil and gas, ES had no trouble making new highs and actually rejoining the broken purple channel — at least between Nov 30 and Dec 5.

On Dec 5, it broke down again — but just enough to establish the bottom of a new, more steeply rising channel shown below in red.  The red channel has provided support for no fewer than six bounces since Nov 15.  And, it has guided ES high enough to rejoin the purple channel multiple times — only to end up dropping the ball.With ES currently up 15 points, it’s backtesting the purple channel bottom .  This would traditionally be a potential bearish signal.  But, clearly, the previous backtests resulted in higher prices.  Is there any reason to believe this one won’t?

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