I wanted to title today’s post “Snow Job” in honor of yesterday’s FOMC minutes.  But, it felt a little snarky, even for me.  If you haven’t read the minutes, here’s a quick synopsis:

We don’t understand why inflation’s not at 2% yet, but we’re going to continue to raise rates anyway. We will continue to raise rates until we decide not to. The economy might get a bump from the tax legislation. But, odds are the corporate tax savings will go toward M&A and more stock buybacks [bigger bubbles!]

Stocks might have been buoyed by the comments, but the real story was the latest collapse in VIX (-19.4% since Tuesday night) — a collapse which has come in handy as DXY’s FOMC minutes rally lasted all of 30 seconds. It’s now continuing its slump toward our next downside target.

As we’ve discussed, the big question is whether it can catch support here at a key channel line and Fib level. The answer lies with the S&P 500 futures.While SPX reached and shot through its 2.24 extension (of the drop from 1576 to 666 between 2007 and 2009), ES is till 7 points away (2728.79.) If TPTB pull out all the algo igniting stops today like they did yesterday, we’ll see it leapfrog through 2728 and usher in another few months of melt-up.

If, on the other hand, ES reverses off the overhead resistance, it’ll be because USDJPY, CL and RB stop ramping and VIX is allowed to bounce up to where it belongs at 16.12.  Which will it be?

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An increase in short-term interest rates is traditionally viewed as bullish for the dollar. Yet, take a look at FOMC rate hikes over the past year.  Each was followed by a strong decline in the dollar index (DXY.)  When the FOMC declined to raise rates, on the other hand, DXY usually rallied — at least temporarily.

The FOMC made no secret of their plans to raise the discount rate.  So, naturally, we can surmise that front-running played an important role in the price action.  But, does it explain the continuing slump that, so far, has nailed each of our downside targets without fail?

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There’s a disconnect between the reported and the true inflation rate.  We’ve touched on this many times over the past year.  And, I think this is key.  The FOMC is well aware of the actual issues — rent, health care and fuel/gas prices.  Gold investors/speculators are aware, too — as witnessed by its recent surge.

So, despite the fact that CPI and PCE perennially report inflation to be under control, it’s not.  The FOMC gnashes its teeth over the failure for PCE to reach 2%…but, maybe to justify continued dovish monetary policy.

The real objective can be seen in the relationship between DXY and SPX.And, as we discussed last week, the problem lies in the chart below.  With TNX about to break out, we can expect continued weakness in DXY.  Needless to say, this will present difficulties for the yen carry trade crowd and, ultimately, equities.As SPX approaches its next key Fib level, and a backtest of the recently broken white channel, I suspect the dollar’s slide isn’t over — with our targets at 88.423-88.682 the next major support when it breaks below September’s lows.The 2.24 extension has been hanging out there ever since SPX broke through the 1.618 in the wake of the US election — when the full court press involving USDJPY, CL and VIX manufactured (for the first time ever) 12 consecutive months of positive gains.If it pushes through the 2.24, the next Fib resistance isn’t until the 2.618 at 3047.34 — only 12.6% higher than current levels.  If it can’t, then the first real support is the bottom of the gray channel, currently around 2588.

And, if that fails, then the SMA100 is currently around 2560 and the SMA200 is around 2485.  Neither of them currently lines up with any significant chart patterns, so it’s difficult to feel very confident about those downside cases in the near term.  But, the MAs are on the rise, so we’ll reevaluate in a few weeks.I’d feel much more confident if DXY would continue dropping, taking the USDJPY with it, and CL and RB would stop rallying to support the equity regime.

GLTA.

ES’ latest rising channel broke down rather decisively on Friday.  ES closed well below its SMA10 and almost tagged its SMA20 — a feat it hasn’t accomplished since Nov 20.This morning, the futures have pushed back above the SMA10, hinting at a full recovery.  Yet, as we’ve discussed, there are several factors that might prove problematic for the bulls.

First and foremost, it’s a New Year.  With a 20% gain in the bag for 2017, might we see stocks at least pause to catch their breath?  If nothing else, it might alleviate some of the incredulity surrounding 2017’s record-breaking ascent.

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