TNX reached 3.11 this morning, but DXY isn’t buying it.  We asked rhetorically, yesterday, whether “investors algos [will] even care about the stagnation which, abetted by inflation-driven higher interest rates, has ensnared the economy in its razor sharp talons?  Or, will a tumbling ‘risk indicator’ and copious share buybacks be enough to ward off a correction?  …hey, VIX is off 8%! Everything must be awesome!”

As it turned out, VIX dumped 11.4%, which is all the algos needed to ensure a bounce off the SMA100 and, more importantly, the 2.24 extension at 2703.62.  The game continued overnight.

With futures off 12 points from yesterday’s highs — about half of the session’s gains – someone decided to dump a boatload of VIX futures — just enough to break VIX’s uptrend and ES’ downtrend.  The timing was perfect.USDJPY, meanwhile, is taking the opportunity to rally on higher interest rates and is nearing our next upside target.  And, RBOB and CL hit new highs.  Are the algos really so easily fooled?  Have carbon-based investors — who have certainly done the math on the economic damage higher rates and rising inflation are already doing — become irrelevant?

In the midst of VIX dumping and USDJPY, CL and RBOB pumping, futures are still off 4 points.  Perhaps even the algos are tiring of the charade…

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While a higher dollar might help mitigate inflation, higher interest rates are starting to bite. Both mortgage refinancing and housing starts and permits tumbled in April.

Futures tumbled about 5 points on the news.  But, even that was a problem, as SPX is perched precariously atop the critical support of its 2.24 Fib extension at 2703.62 (not exactly a random walk…)It should come as no surprise to readers that VIX has already begun its nosedive.Meanwhile, Deutsche Bank — the third largest bank in the eurozone with $1.8 trillion in assets and $40 trillion in derivatives — continues its meltdown, closing in on our target from Feb 7 [see: What is Deutsche Bank Trying to Tell Us?]  But, hey, VIX is off 8%!  Everything must be awesome!

Will investors algos even care about the stagnation which, abetted by inflation-driven higher interest rates, has ensnared the economy in its razor sharp talons?  Or, will a tumbling “risk indicator” and copious share buybacks be enough to ward off a correction?

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In our Mar 8 update [see: RUT – How it Got Here, Where it’s Going] we noted that VIX had been particularly sensitive to VIX’s machinations.  In the throws of an analog at the time, we suggested RUT might be nearing a turning point.

At some point, probably around Mar 14, VIX will plunge below [support], thereby driving RUT up to or through the .886 at 1595 or to new highs.  If the analog holds, it might run out of steam [there.]

As it turned out, RUT topped out on Mar 13 at 1609.05, slightly above the .886 at 1595, and dropped back to the support of its 200-day moving average.  It enjoyed the journey so much, it has made two more runs — each within about 1% of the January high.With SPX backtesting critical support today, could RUT be coiling for a breakout?  Or is it about to run out of steam again?

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Higher interest rates and inflation, but falling retail sales?  Not a great combination for equities.  In fact, it feeds right into our base case of stagflation.Not even the venerable VIX gimmick was able to paper over the implications.Back on May 3 [see: Decision Time] we identified the 15-16th as a potential new low.  The next day, of course, the massive VIX dump sent stocks scurrying higher.  Though we had a nice bounce, ES and SPX reversed course, yesterday, at the lines in the sand we had drawn for them — meaning, the downside case is still in play.

The key, of course, will be whether the damage can be limited to SPX 2703.62.  A bounce there at the 2.24 Fib extension would suit bulls just fine.  A drop through it would expose stocks to new lows.

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Take a look at Tesla’s bonds, and you might wonder if the company is careening towards that Great Center Divider in the Sky.  Yet, TSLA stock has held on to some important levels of technical support.  Setting aside the considerable, robust debate and analysis, what do the charts say?

I’m a big believer in logarithmic charts, especially for stocks like TSLA which have increased in price so dramatically.  The logarithmic scale chart portrays a stock which has struggled to remain above a channel midline, and has plenty of downside potential should it ever drop to the channel bottom.

The arithmetic version, on the other hand, illustrates a stock which has successfully bounced at critical points along its channel bottom.  Its channel bottom is much closer, but the risk entailed in even a mild selloff is also considerable.

Regardless of which perspective one chooses, the stock has traded in a broad band since late 2013 — crisscrossing its 200-day moving average dozens of times.

IMO, the most important chart feature has been the horizontal line at roughly 290.  It served as resistance between Sep 2014 and Apr 2017, when TSLA pushed up through it and it became support.The support didn’t hold, however.  After several backtests, TSLA finally plunged through it (also, the neckline of a large H&S Pattern) on Mar 27.  From the next morning’s post:  More Where That Came From…

The following morning, TSLA gapped even lower — threatening a breakdown before genius Elon Musk inexplicably did something very stupid.

In perhaps the most ill-advised April Fools joke since United Airlines announced their new concierge deplaning service, Musk tweeted that the company had gone bankrupt.

“Despite intense efforts to raise money, including a last-ditch mass sale of Easter Eggs, we are sad to report that Tesla has gone completely and totally bankrupt.  So bankrupt, you can’t believe it.”

I can only surmise that Rudy Giuliani must have surreptitiously been brought on board to direct Tesla’s public relations.  Needless to say, investors weren’t amused.

The stock gapped lower the next day.  For all intents and purposes, it had broken down — along with many other indices and market leaders.  It was a dangerous moment for the market, which explains what happened next.

SPX had closed below its 200 DMA on Apr 2.  On the 4th, SPX (and virtually every major index) benefited from a coordinated (Bullard and Kudlow) effort to prop up stocks [see: The Market’s Latest “Lucky” Bounce] on the 4th.

TSLA joined in, rallying 14% that day and another 6% the following day — putting it safely back above the H&S neckline and horizontal support.

But, the autopilot is clearly malfunctioning.  The stock has gone sideways for five weeks, repeatedly dropping back through its neckline and conspicuously failing to break out.  Today, it reinforced the notion that it’s in trouble by failing to follow through on the latest bounce (inspired by Musk’s $10 million open market purchase – the yellow arrow.)Perhaps TSLA will join AAPL, AMZN, FB and countless other stocks which have have driven their shares higher by promising to give you some of your own money back.

It has neckline support at 290 and trend line support at 270ish.  Unless it drops below that support, resist that urge to short it.

But, if it fails (again) to hold, nothing will have changed since that Mar 28 chart targeting 193 — a deep retracement of the post-Trump election lows.  Stay tuned.

 

 

 

 

There are very few charts which tell the story of this market as dramatically as does VIX’s. The most noticeable pattern is the falling purple channel which accurately signaled its highs and lows between Nov 2015 and Jan 2018.  But, this falling channel conflicted with a much larger rising yellow channel.

In the wake of the US election, VIX had a decision to make: bounce off the yellow channel bottom again (meaning stocks had peaked) or continue following the purple channel lower (supportive of new highs.)

The bulls won out, as VIX spent more than a year dipping below the yellow channel bottom (arrows), occasionally setting new lows whenever stocks were in trouble.  Suddenly, in February 2018, VIX exploded out of the falling purple channel and retraced a Fibonacci .886 of its drop from the Aug 2015 highs — resulting in an 11.8% correction for SPX in only 6 trading days.  SPX would go on to test its 200-day moving average — something it hadn’t done since the US election — eight times between Feb 9 and May 3. VIX was supportive, settling lower in waves.  But, SPX remained mired in a downtrend, unable to break out of a falling channel it had been in since its January highs.  Finally, after SPX tagged its SMA200 on May 3, VIX plunged dramatically from 16.92 to 10.91 in one day.  Actually, the plunge lasted a matter of minutes.  But, it was a very powerful signal to the algos (and, any carbon-based traders paying attention) as it dipped back into the purple channel and below the yellow channel bottom.

Three sessions later, VIX dropped through its SMA200, something it hadn’t done since Jan 23.  SPX loved it, and quickly broke out of its falling channel.

As stocks approach our next upside target, it would be prudent to keep a very close eye on VIX.  After reaching the purple channel again, it has a fresh choice to make: re-enter the falling purple channel and resume violating the yellow channel bottom to make new lows, or bounce off it and give stocks an opportunity to properly correct.

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With the algos firmly back in control of stocks, it seemed like a good time to take a step back and look at the big picture.  The Iran matter changes a few things — with potentially much bigger changes to come.

We’ll start with VIX which, as expected, continues to get hammered — particularly when ES or SPX faces a specific hurdle such as SPX’s Fib 2.24 extension at 2702.78.

There’s a fairly well-formed channel guiding it lower, but the real action comes when it drops below previously established horizontal support — even if it’s only a brief shot across the bow.

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Another day, another ramp job.  Yesterday’s oil and gas price recovery wasn’t enough to help stocks break out.  But, VIX’s dip below horizontal support was more than up to the task.There’s just one problem – inflation. Ignore the seasonally-adjusted PPI poppycock and look beneath the hood.  Petroleum products rose 21.7%.  That was an understatement, but at least closer to reality.A casual glance at crude prices reveals the YoY difference was closer to 30%.  The real problem comes next month, where the YoY delta is currently tracking 42%.  Then, there’s June.  The average price of $45/barrel is about 55% below current prices.In that light, yesterday’s decision to ratchet up tensions with Iran — the world’s fifth-biggest oil producer — spells economic trouble.

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Yesterday’s late-day reversal was a minor victory for the bears — even if it came on the heels of an algo-driven melt-up which still threatens a break out.How do we know when the algos have free rein?  A quick glance at VIX offered one pretty nice clue.  Every dip below horizontal support (the yellow line at roughly 14.76) prompts SPX to rally; while, every rise above it prompts a sell off.

And, like the past three days, we saw a rally overnight that could facilitate another intraday decline.  In the past 2 hours, its almost imperceptible dip (except to the machines) was enough to erase almost 10 points off ES’ overnight decline.But, the real story today is oil — meaning what Trump decides about the Iran nuclear deal.  Now, to talk about Iran, we really have to talk about Iraq.  It wasn’t that long ago that our leaders decided Saddam Hussein was such a threat to our existence that we sacrificed $2.4 trillion, 4,424 American lives, and perhaps over a million Iraqi lives.

Volumes have been written on the other costs: destabilization in the Middle East, loss of global unity reached in the wake of 9/11, the rise in terrorism, etc.

Most now accept that the Iraq War was about oil and, by extension, regime change — a conclusion that’s difficult to fault given that no weapons of mass destruction or evidence of collusion with al-Qaeda were ever found. From a 2013 CNN article:

“Of course it’s about oil; we can’t really deny that,” said Gen. John Abizaid, former head of U.S. Central Command and Military Operations in Iraq, in 2007. Former Federal Reserve Chairman Alan Greenspan agreed, writing in his memoir, “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.” Then-Sen. and now Defense Secretary Chuck Hagel said the same in 2007: “People say we’re not fighting for oil. Of course we are.”

It’s this thread I’d like to explore a bit.  I think our experiences in Iraq are relevant to the current situation in Iran.  This became more clear on Saturday, when newly minted Trump mouthpiece Rudy Giuliani declared “we have a president who is as committed to regime change [in Iran] as we are.”  SecState Pompeo and National Security Adviser Bolton have made similar comments.

I’ve  heard it said that taking control of Iraq’s oil fields somehow benefited Americans by reducing the price of oil — a statement which is pure fantasy.  Oil prices increased rapidly as the war escalated, and fell sharply only after negotiation of the Status of Forces Agreement (SOFA) which effectively spelled the end of US control.If that’s the case, then what did the US gain by invading Iraq, taking control of its oil fields and negotiating sweetheart deals?  The real benefactors of the Iraq War were military contractors and oil companies.  Halliburton’s performance was fairly typical.Aside from the obvious benefits to the stock market, where did this leave the US economy?  CPI averaged 1.59% in 2002, as the US was trying to recover from the Tech Bust. In 2003, when the US invaded Iraq, it averaged 2.27%.

CPI peaked at 3.62% in 2004, 4.69% in 2005, 4.32% in 2006, 4.31% in 2007, and 5.60% in July 2008.  The 2008 figure is all the more impressive given that the Great Financial Crisis was taking hold.  It dropped to 0.09% by December.

Of course, inflation is just part of the story.  With higher inflation, we get higher interest rates.  And, because the war cost so much, those interest rates were being paid on an ever growing pile of debt. Annual interest expense exploded from $318 billion in 2003 to $451 billion in 2008.That kind of expense was unsustainable.  Interest rates had to come down, which meant inflation had to come down — which, in turn, meant that oil and gas prices had to come down.  Of course, that’s exactly what happened.

By the time CPI hit 0.09% in December 2008, the 10-year — which had peaked at 5.26% in June 2007 — had fallen to 2.13%.  It was possible because oil fell from $147/barrel in July 2008 to $33/barrel by Jan 2009.  Gas prices fell from $4.00 to $1.67 per gallon between July and December 2008.

Although we haven’t started a new major war yet, it’s important to recognize that a military confrontation in Iran would be much greater in scale than the Iraq War. With Trump’s top advisors advocating regime change, the chances of a shooting war don’t seem nearly as remote as when candidate Trump declared he would “stop racing to topple foreign regimes.”

The 10-year is currently hovering just shy of 3%, and CPI has pushed well above 2%.  Annual interest expense is expected to reach about $500 billion in 2018.  If oil and gas prices don’t come down quickly, the 10-year will soon top 3%.

Bottom line: we can’t afford current oil and gas prices, let alone those which an escalation in the Middle East would produce.  Something for Trump to think about as he scrambles for a distraction from the domestic storms in which he’s embroiled.

For more on the current status of oil and gas prices, and the effect they’re having on inflation, interest rates and equities, see:  Oil & Gas, Inflation and Interest Rates – A Delicate Balance or Goal Seeking?

Now, on to today’s charts.

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