Anyone who studies factors is well aware of the impact the yen carry trade, VIX and oil prices have had on equities. While VIX did a spectacular job of igniting algos once USDJPY ran out of upside, it blew up spectacularly in January and February.

Since then, oil (taking turns with VIX and USDJPY) has kept stocks on a steady course.   Remember, when Crude Light (CL) bottomed on Feb 11, 2016, SPX did too — remaining above the critically important 1.272 Fib extension and establishing a rising channel that remains in force over two years later.  And, when SPX reached overhead resistance at the 2.24 extension, CL came the rescue once again – breaking out of the rising channel that had been in place since June of 2016 and even popping above its .618 Fib for good measure.A close-up shows that CL broke out of a secondary, steeply rising channel (in white) on Jan 3… …the exact same day that SPX needed help breaking above its 2.24 as well as a sharply rising trend line (below, in yellow.)In the world of chart patterns, there aren’t many developments that are more bullish than a breakout of an already steeply rising channel.  The algos were positively giddy.

They were less thrilled, however, when CL dropped back through its .618 and the top of the purple channel — contributing to SPX’s sharpest sell off in years.

It was no coincidence that CL bottomed out on Feb 9, the same day that SPX backtested its 200-day moving average.  Nor was it a coincidence that SPX managed to regain its 2.24 on the same day that CL climbed back above its purple channel top.

Since then, CL has continued to bounce along the top of the purple channel — popping higher every time SPX needs a boost, and dropping back down when SPX needs a breather.This game could go on indefinitely, except that changes in oil (and gas) prices have consequences.  As we’ve discussed many times, they are usually the biggest determinant of changes in the monthly and annual CPI data.

When CPI shows big increases, it can send the bond market into convulsions over the prospect of higher interest rates.  When CPI falls flat, yields fall and the dollar takes a hit.

Understanding this dynamic has helped us immeasurably in forecasting oil and gas price moves — considerably more than the fundamentals have.

But, we’ve arrived at a level where keeping CPI in a desirable range will necessarily conflict with keeping stocks on the rise.  And, sooner or later, the algos might just figure out that all these little breakouts and bounces produce no actual follow through.

If stocks are to fly any higher, either further oil and gas price increases will result in undesirable inflation or the algos will need to find themselves a new pilot.

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The analog we’ve been following since Feb 6 [see: Analog Watch] has proven pretty accurate in terms of prices, but has been off by a day or two a few times.

Yesterday was another potentially important deviation.  SPX opened higher, but fell steadily throughout the day — retreating, as expected, to the channel midline where it remains.

VIX had a golden opportunity to reverse lower after tagging its SMA10, as it has countless times before.  But, it didn’t — at least not yet.USDJPY even broke down, dropping through the bottom of the rising channel that suggested a return to the bullish side of a trend line from Jan 7. Perhaps the most troubling development for the bulls, however, was the yield curve breaking down.  It wasn’t a lot, at least not yet.  But, it’s a breakdown.  And, as we’ve discussed several times [see: Does the Yield Curve Matter? A Closer Look], this doesn’t bode well for stocks.The big question, then, is whether the algos can be brought to heel.  Perhaps the VIX can still be crushed by 20%, yields can correct, and USDJPY will regain its uptrend.  But, if not, the higher highs suggested by our analog could be very, very difficult to achieve.

We’ll look back at our base period, and why this time could be different.

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In our analog from Feb 6, today was slated as the day that VIX collapses sharply in order to get SPX just a little higher before a pause.  But, as we noted last week, VIX broke down 6 days early and hasn’t as much firepower left.

And, stocks have run into resistance so strong that it would take some pretty powerful assistance to get them any higher.

In early January, WTI broke out of a rising channel and made multi-year highs, enabling ES to break out of the rising channel it established in the wake of the US election (below, in white.)

ES fell back into the channel during the February correction and, despite making a strong comeback, has failed in five separate attempts to break out again.

Needless to say, we don’t have the exact same set of political and economic issues which were making headlines over a decade ago.  But, on the other hand, stocks are significantly more sensitive to VIX’s every twitch.

With ES, SPX and RUT bumping up against strong resistance, does VIX have enough juice?  Don’t look now, but it’s creeping higher and our yield curve model is hinting at serious trouble ahead.continued for members… (more…)

Inflationless growth.  Sounds too good to be true, like “tastes great, less filling.”

Seasonally-adjusted CPI came in at 0.2% MoM and 2.2% YoY.  Without seasonal adjustment, the MoM figure would have been 0.5% again.  And, without the 7.7% YoY increase in energy prices, the annual number would have been below 2%.

Bottom line, the BLS threaded the needle on this report.  The monthly figure (after adjusting, of course) was low enough to ease tensions over the acceleration in inflation seen over the past few months.  But, the annual figure was high enough to ease tensions over an economic slowdown.

The biggest movers in the annual data were gasoline and fuel oil, at 12.6% and 20.7% respectively — reinforcing the fact that inflation is mostly about oil and gas.  For once, the BLS’ data was almost in line with other official reports.

As expected, the bond market is relieved by the report. 10Y yields have dropped fairly sharply off recent (headfake) highs.Equities are responding favorably, with ES back over its .786 as SPX approaches its (2800.07.)  Both are now within easy striking distance of our next upside targets — thanks largely to algos reaction to the yield drop, USDJPY’s breakout and VIX’s smack down.

It remains to be seen what they’ll think of the loss of Cohn and Tillerson.

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This should be an interesting week.  ES came within 20 points of our next upside target on Friday.  And, with so many important economic data points ahead in the next few days, we should finally see our currency and bond targets hit as well.In my opinion, the most important data this week is Feb CPI due out tomorrow.  I’ve been expecting a number below estimates, and the fedspeak around last week’s jobs report seems to support such an outcome.TNX broke out — but, without making new highs.  If investors the algos can be sold on the prospects of a low-inflation, high growth environment, then stocks have clear sailing.  If not, we’re in for much more volatility.  Let’s just say the headfake potential is quite high.

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Things continue on track, though as we discussed yesterday VIX has jumped the gun — reaching our Mar 14 target today, three sessions early.ES is closing in on our next upside target (though it’ll need help jumping the channel midline at 2761.)  And, SPX should have no trouble reaching today’s target at the purple channel midline (about 2757.)

It remains to be seen whether or not VIX’s early breakdown from its rising channel will present a problem.  The dramatic drop that was due next week is essentially being paid forward.  But, it’s all good as long as the algos continue to see drops.

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Cue the Looney Tunes music.

Another day, another stick save.  Had the 40-pt drop in futures that the Cohn news precipitated occurred when ES was already down 24 points, we probably would have seen 2662 tagged or even exceeded.

As “luck” would have it, the news hit after the markets closed — which is to say, after the earlier stick save.  Note the fortunate timing of VIX’s reversal (the yellow arrow.) Since the Cohn news, both VIX and USDJPY have been heavily managed.  The 44-pt overnight drop has been pared to 19.  VIX’s shot across the bow at 5:31am and USDJPY’s ongoing recovery are an insistent reminder to would-be bears that all is well in the “market.”Speaking of Cohn, would the last grown-up to leave the White House please turn off the lights?  My jaw hit the floor when I read about the likely replacements: Peter Navarro and Larry Kudlow.

Peter Navarro is the guy who, when he was appointed head of Trump’s Trade Council last year, prompted The Economist to describe his views as “dodgy economics.”  No doubt he’s really, really good at telling Trump what he wants to hear.  But, wouldn’t it be better if he were good at telling Trump what he needs to know?

Larry Kudlow — you either love him or hate him, depending on your politics and your views on supply side economics.  But, he’s the guy who in May 2008 insisted the impending Great Financial Crisis was a “non-recession recession.”  Probably enough said about that.

If, as Trump insists, there are untold multitudes of smart, talented people begging for a job in the White House, I hope he’s able to find one.

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Fourteen out of the last 22 sessions, the eminis have reversed at or passed through the 2.24 extension at 2728.79.  There’s no question that it’s important.  The question is whether stocks are ready to push on through or need to gather more momentum first.

Our analog [see: Analog Watch, Feb 6] has been very accurate on price targets over the past month.  But, the timing differences have been somewhat nerve wracking.

We’ve finally reached Day 16, which was supposed to be a peak for VIX and a bottom for ES/SPX.  But, with ES having already tagged the bottom of a well-formed channel (less so for SPX), it’s entirely possible that the inflection point simply came early.

Watch VIX, as always.  But, we should also pay close attention to the currencies today.  Day 16 was supposed to see some pretty dramatic moves which, if they play out, could mean some nasty surprises ahead for equities.

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While direction and price targets are going well, timing continues to be a bit of a challenge — primarily due to equities’ hypersensitivity to VIX.  VIX reached our initial 25.65 target on Friday, at least a day early.SPX’s meltdown and recovery also came early, meaning today’s sell off could extend beyond what the futures currently indicate unless VIX backs off last week’s highs.

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