Unless something dramatic happens in the next 24 hours, November CPI will top 2% again.  This obviously lends credence to the overwhelming market expectation for a rate hike in December. – even though PCE is still languishing well below target.Yet, there are still two events in the coming days that could give the Fed pause: the tax bill (due for a vote in the Senate tomorrow) and the debt ceiling (will be reached next Friday.)  If either isn’t successfully navigated, will the Fed still have the nerve to raise rates?  And, if they don’t, what would that do to markets?

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Yesterday, I had one of those conversations that pops up every week or so.  This time, it was a tech executive who was up to his eyeballs in tech stocks and was growing very, very nervous.  He wanted to know if/when he should get out.

I’d just seen this chart from Christian Mueller-Glissmann of Goldman earlier in the day.  It reinforces what many of us believe about the recovery: we’re treading on dangerous ground.  I conveyed the info to my new friend, who replied exactly as I knew he would, “I’ll just have to get out whenever things start to get ugly.”Many investors have seemingly resigned themselves to the musical chair approach.  Hopefully, they’ll be able to grab a chair when the music stops. Listening to Powell’s testimony yesterday, there’s no reason to believe the Fed will willingly preside over such an event.

But, are things entirely under their control?  Can they keep the music playing for another few months or years?  Looking at the destruction of VIX, it’s easy to assume they can.  Yet, there are some natural limits to the means by which the market has been driven to these heights.  And, given that over 80% of daily volume is now machine-driven (algos, indexers, closet indexers, ETFs, etc.) perhaps a better analogy would be a crowded theater whose patrons are all eyeing the exit just in case someone yells “fire!”

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Following Citi’s warning that OPEC might be about to screw the pooch, Goldman is out with its own words of caution.

“With the rhetoric not matching the logic for the first time in years, we believe that the outcome of this meeting is much more uncertain than usual,” Courvalin wrote. “We believe that oil prices have overshot fundamentals and that price risks are skewed to the downside into Thursday’s meeting.”

The research included a nifty graph illustrating what we discussed last week: excessive long positioning has consistently resulted in price declines.Not surprisingly, CL has ignored these latest naysayers and has continued to hold its gains of the last two months — despite the negative divergence, excessive spec long positions, etc.And, even though prices at the pump continue to settle lower, RBOB is holding on to its gains.  With only 3 sessions left in November, are we looking at another 2%+ CPI read?

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Friday offered further confirmation of the distortion in markets driven by manipulated algorithm inputs.SPX was rolling over as the early 10AM close approached.  The only problem was that the SMA5 200 hadn’t even reached the 1.618 extension at 2599.41.  VIX suddenly dropped from 9.69 to 8.56 — an 11.7% plunge in mere seconds.  There would be no backtest of the 1.618 extension (at least on Friday), let alone the many other important support levels further south.

So, we have a new all-time low for VIX… and the bubble expands just a little further.  Just another day in the “markets.”

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Yesterday, the API released quite bullish inventory data which showed a large draw in crude (-6.4MM vs -2.2MM exp.) — the biggest draw since August.  WTI futures rallied sharply on the news, while RBOB bumped a little higher before settling back down.

This might be discouraging to those shorting oil and gas.  But, the EIA will be releasing its own data shortly.  And, the two sources often disagree.

The other factor worth considering is that the last time we had an API-reported draw this big (mid-August) CL proceeded to sell off about 10%.  And, speculative net longs are at an all-time high.  It should be an interesting day.

USDJPY is about to tag its SMA100/200.  If our thesis is correct, the reaction will give CL/RBOB all the cover it needs to nosedive.

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We had yet another head fake last night, as SPX closed below the latest rising trend line, the channel top and the SMA10.  Traditionally, these are all short-term negative indicators from a technical standpoint.But, of course, short-term indicators can’t compare with the impact of a paradigmatic VIX beat down.  It’s now off 30% since tagging our upside target last week.We should get that changing of the guards we’ve been discussing for the past few days — either today or tomorrow.  Keep an eye on USDJPY and CL/RBOB.  The algos sure will be.

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In our last Big Picture update on Oct 24, I downplayed the likelihood of the big downturn that more and more analysts were predicting.  And, in fact, the drop which began the day before was limited to 34 points – about 1.3%.  From there, SPX moved on to new highs, reaching 2597 on Nov 7.

Here, again, it attracted plenty of naysayers.  The subsequent drop was a whopping 1.5% — even though the index was overbought, breadth deteriorated and a H&S Pattern completed.  The day after the pattern completed, SPX gapped back above the neckline and came close to the previous all-time high.

As we discussed in October, and pretty much every other post since then, VIX continues to play an outsized role in the daily market fluctuations.  Each new high has been facilitated by significant drops to below potential support in VIX.

This situation faces us again, today.  And, it’s important to understand why.

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VIX was crushed by 21.5% from Wednesday’s highs, sending stocks soaring.  Nine times out of 10, the fact that it’s is poised on support would suggest they’ll continue to gain.But, oil and gas sunk some more, and the dollar is still struggling. This morning’s bounce aside, they’re not done.

Is it time for bears to throw in the towel?

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Stocks had a nice move yesterday, making new lows before VIX and USDJPY prompted a 20-pt bounce (many hours before WMT’s earnings were announced.)

In the process, we scored a nice win with VIX — which slightly exceeded our target (14.51 vs 14) before crashing back down — as well as with our short on RB.

The big question remains whether or not the H&S Pattern in ES/SPX will be allowed to play out. Is this just a bounce on the way lower, or yet another dashed correction?

SPX closed below its neckline, a bearish move. But, last night’s futures action took ES back above its neckline, a bullish development. Yet more proof that trading the drivers of the algos has become much easier than trading the equities themselves.

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I have to be out for a couple of hours this morning.  But, with S&P futures off 10 points, VIX up 10%, oil and gas down big again, and USDJPY continuing to break down, things are on track to reach our forecast price targets across the board.Yesterday’s PPI numbers got the ball rolling.  Today’s CPI should finish things off.

The only questions left to be answered are how bad CPI will be and whether or not ES and SPX’s H&S Patterns will play out.

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