Stocks were not thrilled with Powell’s somewhat hawkish testimony yesterday.  Bottom line, he didn’t do much to inspire confidence that tightening would be limited to three rate hikes.

The killer line came, however, when he admitted that the US is not on a sustainable fiscal path.  It was, perhaps, the least surprising comment he might ever utter during his tenure.  But, the algos were not amused that he said it out loud.

This sent note yields spiking higher…

…which sent stock prices tumbling lower.  Fortunately for the bulls, SPX’s slide landed it right at important support.  It will be very easy to measure whether or not the bounce has run its course for now.

Keep an eye on TNX and VIX today, as they should both provide clear signals.

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I made French toast for my daughter this past weekend.  Most people think I’m a pretty decent cook, especially with weekend staples like French toast, pancakes, etc.

I left her to chow down while I went back to work — only to find this when I returned.  The conversation went something like:

Me: Didn’t you like it?
Her: I don’t like the crust.

It reminds me of the task ahead for newly minted FOMC Chair Jerome Powell.  He must somehow convince investors that the economy is yummy, but that inflation (the crust) isn’t a problem.

In his prepared remarks, he cites the 1.5% core PCE annual rate (as of December) in describing inflation as “low and stable.”  He further makes reference to some of the monthly data:

We continue to view some of the shortfall in inflation last year as likely reflecting transitory influences that we do not expect will repeat; consistent with this view, the monthly readings were a little higher toward the end of the year than in earlier months.

By “a little higher” he is apparently referring to the 0.4% November monthly CPI figure —  carefully avoiding mention of the 0.5% increase registered in January.Hopefully, he will do a good job of explaining how strong economic growth is compatible with low inflation.  The market will not be pleased if he can’t demonstrate more intelligence than Steve Mnuchin did last week, insisting that “you can have wage inflation and not necessarily have inflation concerns in general.”

I suspect Powell is not only much more knowledgeable, but less likely to stick his foot in his mouth.  If his word salad of prepared remarks are any indication, he will walk the same fine line as his predecessor.  Look for his testimony to promise nothing more than the Fed’s continued focus on maximum employment and price stability.

All he really has to do is buy some time, keeping a lid on rates until February’s inflation data is released on Mar 16.  The way things are shaping up, it should be considerably lower, supporting the narrative that inflation was transitory after all, irrespective of actual inflation [see Inflation: The Charade Continues.]

Our analog remains on track. For those who’ve been away, note that I revised the timeline yesterday.  Details may be found in the members’ section at A Break or A Breakdown?  Tomorrow, Feb 28 is our new Day 12.

Powell’s testimony is a potential disruptor.  But, for now, the algos like what they’re hearing.

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The last time the FOMC released minutes was Jan 3 [see: Will the FOMC Minutes Save the Dollar?]  At the time, we looked at the effect of FOMC rate hikes on the dollar index (DXY.)  The obvious conclusion was that rate hikes in 2017 had marked interim tops, while failures to hike rates has produced temporary bumps that lasted anywhere from 1-6 weeks.

Here’s the exact same chart, updated with January’s non-hike.  In honor of today’s Fed minutes release, I’ve also added markers (the purple arrows) for previous releases.

Looking at each, you’d have to conclude that either: (1) the FOMC knew what they were doing, and wanted to talk the dollar down throughout 2017; or, (2) they had no clue how to prop it up.  What’s interesting to me, as a chartist, is how well the inflection points occasioned by the minutes releases tracked our falling white channel — allowing our forecast from last May [see: Update on US Dollar May 1, 2017] to play out very precisely.Our conclusion back on Jan 3 was that the minutes would not only not save the dollar, but its continued slide would present problems for stocks.

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.  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.

If [SPX can’t push through 2703] 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.

We all know what happened next.  The minutes produced a momentary bump in DXY and USDJPY, safely escorting SPX through the resistance at 2703.  At the same time, CL went on a month-long 11% tear and VIX continued to plunge when necessary.  SPX didn’t look back until reaching 2872.

At that point, the rally ran out of steam.  Obviously, it was overbought.  But, DXY’s slide from 92 to 88 didn’t help.  Nor did USDJPY’s plunge from 112.5 to 105.5.

The most intractable problem, however, was the sharp rise in interest rates.  They reflected a growing recognition that the sharp spike in oil and gas prices which helped fuel algos throughout December and January would also produce inconveniently high inflation.

When the 10Y broke out on Jan 10 [see: China – It’s Not Me, It’s You] we slapped a 28.56 target on TNX — a target it reached on Feb 5.  Not so coincidentally, Feb 5 was the day SPX plunged back below support (formerly resistance) at 2703.  The next day, SPX plunged to within 5 points of our 2588 target.  Three sessions later, it tagged the 200-day moving average.

The rally off of 2532 has been impressive, following our analog [see: Analog Watch] very closely for the past two weeks.  As we wait for word on whether to expect three or four rate hikes in 2018 (at least, so everyone says,) our analog suggests that the Fed will have to deal with the divergence between spreads and the 10Y itself.It might not be pretty.

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The chart below usually stops charting skeptics cold in their tracks.  We can argue all day about whether Fibonacci levels should matter.  But, it’s pretty obvious they have.

The reversal in 2010 at the .618 Fib resulted in a drop tot he .382.  The tag in 2011 at the .786 Fib yielded a drop to the .500.   The most recent large reversal came in 2015 at the 2.618 at 2138, resulting in additional backtests of the 1.272 at 1823.We can also see the importance of moving averages — with the 100-day (yellow) and 200-day (red) figuring prominently over the years.  And, of course, channels have been extremely helpful in identifying periodic tops and bottoms.

I tend to chart in logarithmic scale because, besides making more logical sense to me, it offers earlier warnings of breaks in trend.  According to the chart in log scale above, SPX has bounced (off the SMA200) to the midline of the rising white channel — often a point where reversals occur.

But, if we map a channel to the past couple of years in arithmetic scale, we get a very different result: a wild overshoot that corrected and is now back to the channel top — a moment of truth for the bulls.

Today is Day 9 of our analog, so we have a pretty good idea what to expect.

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DXY just made it official, tagging the .618 Fib at 88.423 overnight.  It came close on Jan 26, coming within 0.015 before a strong bounce which surprised a lot of people by not supporting stocks.This latest move, along with VIX reaching our downside target, made it possible for ES to tag our first upside target from Feb 5 – albeit two days late.I suspect this had more to do with SPX’s delay in tagging its own SMA200 than anything else.  Bottom line, our analog remains on track.

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It’s an odd feeling when multiple forecasts play out all at once.  It’s exciting, probably not unlike drawing several royal flushes in a row.  Except, in the case of the markets, it has less to do with the luck of the draw and everything to do with detecting how the house has rigged encouraged a particular outcome.

DXY is about to tag the next lower target we set back on May 1, 2017.

EURUSD is within .0043 of the target we set on Jan 8.

And, USDJPY just reached a target we set last October.

On the bond side, the 10-yr note has slightly overshot our 28.56 target from Jan 10...

…which could potentially accelerate the yellow channel bottom tag posted on Jan 31.

Perhaps the most satisfying results have been on the equity front.   After many false alarms during the Great Meltup of 2017, we wondered on Jan 30 why we weren’t getting the usual instantaneous recovery and included 2703 to our downside case for SPX.  We added 2732 and 2533 on Feb 2.  SPX nailed our 2533 target a week later (2532.69.)

As SPX was tumbling on Feb 6, however, an analog became apparent [see: Analog Watch.] If it played out, the bounce from the upcoming lows would be very sharp and VIX would collapse from its then current value of 49.21 to 19.10 (refined on Feb 7) by Feb 14.

After SPX bottomed at our 2533 target, we set 2765 on Feb 14 as our initial upside target.  This was modified on Feb 12 to 2719.   Earlier this morning, SPX reached 2717.66 — a nice 184-pt bounce from our buy signal at 2533.  While a day late, this qualifies as pretty decent outcome.  And, we’re not done yet.

My point in presenting the above isn’t to toot my own horn (okay, maybe just a little.) Rather, it’s to point out that by understanding the motives and methods of those pulling the levers, and paying attention to chart patterns, Fibonacci patterns and analogs, reasonably accurate forecasts can be made.

I heard a financial commentator say, this morning, that higher interest rates must not be that big a deal.  The 10-yr was pushing 3% and stocks were soaring, so all the anxiousness we saw over the past couple of weeks was overdone.

This is one of the silliest things I’ve heard all week.  To this, I would say don’t confuse the ability of algos (which, as we saw last week can push stocks in both directions) to rescue markets with an economically sound framework.

The corollary, of course, is don’t confuse the market with the economy.  The US might well be way in over its head, with $100 trillion in obligations (most of which would cost more to meet if rates continue to rise), a growing budget deficit, and consumers who are piling on debt in order to keep up with actual inflation.

But, that doesn’t mean the party is over — at least, not yet.

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Maybe some day someone will draw attention to the many ways CPI data is falsified.  We’ve written about this extensively, most recently in December [see: Again with the CPI Games?] when gasoline prices, which had risen 20.3% YoY for November, were reported by the EIA as a 17.5% increase.

Of course, by the time the BLS was finished massaging the data, gas prices had increased by only 16.5% and the “energy index” increased a measly 9.4%.  Combined with the ludicrous methodology in calculating shelter costs, the BLS was able to report headline CPI had increased only 2.2%.

Equity buyers were thrilled.  SPX gapped higher on Dec 18th (the day CPI was released) and never looked back.  Bond buyers weren’t as sanguine.  The 10-yr, which had traded at 2.35 the day before, was up to 2.49 two days later.

This morning, we get more of the same.  The EIA reported an 8% YoY increase in gas prices for January. (2.467 vs 2.285.)  It was reported by the BLS as an 8.5% increase.  There’s nothing, in particular, wrong with these figures….except that they’re a lie.

Here are the closing prices for RBOB (gasoline futures) in Jan 2018 compared with Jan 2017.  The average close in Jan 2017 was 1.5772, compared to 1.8583 in Jan 2018.  That’s a 17.8% increase.

The extent of the increase is immediately obvious from the RBOB chart below. The Jan 2017 range is shown in 2018 for comparison purposes.  There was zero overlap.EIA reported an average of 2.467 for Jan 2018.  Even a casual glance at the chart below shows that gas might have touched 2.467 only around the first of the month, spending most of its time much higher.My own data, taken from AAA’s daily gas price report, showed that gasoline was as low as 2.467 on exactly one day: Jan 1.

Why the charade?

I’ve been listening to the financial news this morning.  Pretty much every single commentator has opined that, while the 0.5% monthly CPI increase is “concerning,” the 2.1% annual increase means inflation is definitely not out of control (how bad might things have been without the manipulation?)

S&P futures, which just dropped 48 points, beg to differ.  For once, even bulls are openly wondering whether the Fed has, indeed, lost control.  A dismal retail sales figure (the biggest decline in 11 months) hasn’t helped.

Fortunately for them, VIX manipulation is alive and well.  Pay no attention to the momentary pop in the “fear index.”  It’ll be down to our targets soon enough.And, isn’t it great to see the mainstream financial media start to report on this?  MarketWatch, CNBC, Bloomberg, et al have stories out this morning on the whistleblower lawsuit alleging that someone has been manipulating VIX.  Gosh, really?

I and many others have only been writing about this for, oh, 5 or 6 years, so it’s nice to see ace reporters jump right in — even if it is to point out how ludicrous the allegations are.  Bloomberg’s article appears to have been penned by the CBOE, which derives 25% of its profits from VIX trading and is quoted extensively throughout:

The claim sounds dubious: the VIX, that index at the center of the stock market’s wild gyrations over the past week, is somehow being manipulated.  That allegation, made to federal authorities by an anonymous whistle-blower, captivated Wall Street on Tuesday, prompting both quick dismissals and more than a few raised eyebrows.

I imagine most of the eyebrow-raising is related to who is doing to manipulation rather than how they’re doing it.  Ask yourself: who might have an interest in aggressively shorting VIX smack dab in the middle of a 4.5% futures flash crash?  Who would have the money, the mandate and the cajones?

It’s the equivalent of writing thousands of homeowners’ insurance policies as the tornado sirens are spooling up.  Yet, this is exactly what happened on election night in Nov 2016 [see: The Fallout and Why the “Trump Rally” is a Fraud.]

My conclusion all along has been that it was the Fed itself, shorting VIX then and at all the right moments since then to ensure that market volatility was limited to rallies, never declines.

Yet, an explicit admission by then-Governor and now-Fed Chairman Jerome Powell in the Oct, 2012 FOMC transcripts has gone completely unreported in the media [see: The Fed’s Short Volatility Position.]  You’d think one of the intrepid “journalists” covering the current story might have found it relevant.

While I’ve been ranting “someone” has been hard at work…shorting VIX.  It has fallen from its initial 25.72 highs to 20.21 (-21%) and has further to go.ES has recovered 34 of its 48-pt loss and is off a manageable 10 points.  If VIX continues dropping as I expect it to, the algos will soon turn the indices sharply positive.

I’m certainly not complaining.  This is all perfectly in keeping with our analog from Feb 6 [see: Analog Watch] which has already produced nice gains in VIX, SPX, RB, CL and gold.  The currencies are just getting started.

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