Futures dipped a bit overnight as reports suggested Trump was considering withdrawing from the WTO.  For the second time this week, Mnuchin came to the rescue with a vehement denial.  And, for the third time this week, the algos got plenty of support from VIX shorting (breaking trend no less)……and USDJPY ramping. What a fitting end to a quarter where politicians, central bankers and corporate buybacks have set the tone, calming the markets at every turn.  Still, this isn’t exactly a bullish-looking pattern — especially when SPX fails to break out of the falling white channel.And, while everything appears copacetic, has anyone noticed that the Dow closed below its 200-day moving average for the past four sessions in a row?

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GDP was revised from 2.2% to 2.0% — highlights: personal consumption lower than expected, prices higher than expected.  The market was ahead of this, with rates continuing to slide.  Bottom line, it doesn’t make a terribly compelling case for two additional rate hikes. Futures are off about 10 points, tagging our next downside target a day ahead of schedule.SPX closed 2017 at 2673.61.  Can it hang on to its slight gain for two more sessions?

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SPX’s backtest of the 2.24 Fib extension and channel top was meant to establish strong support.  So, it was surprising to see futures dropping like a rock overnight.  Did the Masters of the Universe somehow miss the message that there would be no further drops this week — the final few days of the quarter and half-year?

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SPX tagged our target at the 2.24 Fib extension yesterday — the 16th time it has touched this important level since the beginning of the year.

For now, the Fib remains support.  The moment SPX drops through it, it becomes overhead resistance.  And, with the SMA200 now only 38 points below it, potential drops aren’t as scary as they were in February when it was 170 points below.

VIX spiked to within a few pennies of our upside target where it met reasonable resistance. And, the Nikkei and the Dow backtested their SMA200s yesterday, suggesting the stars will align to support stocks through the end of the month/quarter.

But, what about oil and (especially) gas, which are still exerting upward pressure on CPI?  Can their latest breakouts hold, or will they fail and drag stocks back into the red for the year?

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It’s a rare Monday morning when a ramp doesn’t appear in time for the open.  But, the hits keep coming: more trade problems, more political and economic problems in the euro zone, and the failure of the USDJPY to hold important support.  And, the oil and gas decline might not even be over.It’s a sloppy start to what could be a simple backtest of ES 2.24 at 2728.79, but could easily accelerate to test the SMA100 at 2704.  SPX’s 2.24 at 2703.62 is a good 51 points below Friday’s ugly close.

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Oil and gas futures are higher as we await word on the deal being hammered out in Vienna.The latest reports are that we’ll get a 1MM barrel per day increase.  But, Iran is resisting any increase and is threatening to veto any deal that doesn’t include condemnation of the US’ withdrawal from the nuclear deal.

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We’re going to do sometime a little different today, and take a look back at 2011.  IMO, it’s an excellent analog for the current macro scene — particularly as it concerns inflation, interest rates, and oil and gas.

For those who’d like a primer on the relationships between the above and equities, check out April’s Inflation, Oil & Gas, Inflation and Interest Rates: A Delicate Balance or Goal Seeking?

We start with CPI — immensely understated, but the official measure of inflation that’s closest to reality.  CPI had turned negative during the GFC — bottoming shortly after stocks did.  But, it wasn’t stocks’ recovery that reignited inflation; it was rising oil and gas prices.The 2009 bounce was enough to get CPI back over +2%.  But, it wasn’t enough to keep it there.  A second leg up in 2010-2011 did the trick – but too well.  In April 2011, CPI topped 3% and by September it was nearing 4%.

Needless to say, interest rates noticed.  The 10Y rose from 2.33 in Oct 2010 to 3.74 in Feb 2011.  Total federal debt had doubled in the past 7 years ($7.3T to $14.8T), so higher interest rates were a pretty obvious problem.  And, the lack of inflation had been an important rationale for the massive QE to date — so, it made the Fed’s argument for more QE sound downright silly.

Having overshot 2% inflation and with rising interest expense becoming an obvious problem, it was time for oil and gas prices to come back down.  But, by now, the algos had come to recognize higher oil and gas prices as positive for stocks.

In fact, SPX and WTI both hit their highs on the same day: May 2, 2011.  Could inflation (and, therefore, interest rates) be reduced to acceptable levels without derailing the bull market?  In a word, no.  Having peaked on the same day, SPX and WTI would also bottom on the same day: Oct 4, 2011.  WTI fell from 114.83 to 76.25, a 34% drop.  SPX shed 22% over the same period.So, what does this have to do with 2018?

In 2011, with debt at $14.8 trillion and the average interest rate at 2.326%, interest expense was $454 billion

Here in 2018, average interest rates are currently 2.421%.  With average debt of about $22 trillion this year, we’ll shell out somewhere around $532 billion — a 17% increase even though the 10Y is back below 3%.

The chart below is from February [see: Why Rising Rates Are a Problem This Time] when average gas prices were $2.49 (a 12% YoY increase) and CPI was 2.2%.

In May, the YoY increase in gas prices from May 2017 was 22% and CPI was 2.8%. Gas prices are currently $2.87, a 27% increase from June 2017.

It’s not the sort of development that will bring interest rates back down to an acceptable level.  A quick glance at the chart below shows that gas prices, interest rates and inflation are joined at the hip, escalating in unison.

Look, if you believe that oil and gas prices are driven strictly by supply and demand and that the government doesn’t intervene in order to achieve necessary economic goals, God bless you.  The world needs more wide-eyed innocents who won’t foul the interweb with cynical drivel such as you’ve wasted the past ten minutes on.

If, on the other hand, you see the presidential tweets, congressional legislation, and backroom negotiations with Saudi Arabia and Russia as signs of something more deliberate or, dare we say, manipulative…  Well, now you understand why I’ve been uber-bearish on oil and gas prices for the past month.

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Now, on to a recap of where things stand this morning.  Last night’s ramp was all about the USDJPY, which spiked through the SMA200 and broke out of a rising channel, only to tumble back to the SMA200 and channel bottom this morning.  It won’t hold.We know the breakout wasn’t meant to be simply because NKD still has some unfinished business: it’s SMA200 and channel backtest.  Look for yesterday’s rally to come undone — and more.Our focus, however, is on oil and gas – which were closing in on our next downside targets, but are needed for stock-propping purposes.

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A quick glance at VIX tells you all you need to know about the past two weeks.  VIX has steadily gained since Jun 7.  But, most of the gains have come in the after-hours, elevating VIX to a level from which it can make a meaningful plunge during the next day’s trading session.As ES once again pushes up against the TL connecting its highs of the past week, is it any surprise that VIX’s rising white channel is threatening to break down?

This is a classic case of algorithmic misdirection.  While equities are dipping and recovering intraday on VIX’s dramatic plunges, oil and gas have fallen about 12% from their May 22 highs, emerging markets are having a very rough go of things, and the yield curve continues to flatten.

It continues to remind me of 2011 in many ways.  Look for tomorrow’s post concerning oil and gas, inflation, interest rates and equities – then and now.

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The Nikkei 225 offers great perspective on today’s selloff.  One of the most heavily manipulated indices on the planet (the BoJ buys stocks outright), it was knee deep in a steeply falling channel from its January highs until Apr 30, when it tagged the top of the channel and the .618 Fib level.  It was a high probability reversal point.As usually happens, though, the yen carry trade kicked into high gear.  The USDJPY spiked through its SMA200, carrying NKD up and out of the falling channel.  A backtest two weeks later turned into a close call, with NKD closing back inside the channel for a few days — not exactly a clean backtest.

But, after a strong USDJPY bounce, NKD was on its way again.  The critical day was Jun 12, when it failed to make a new high.  This failure spoke volumes, as it was in keeping with our expectation that, just like many major indices, it was simply marking time until its SMA200 emerged from the very bearish falling channel established earlier in the year.

It’s a hallmark of the current bull market — slice through resistance when possible, then defend those levels like there’s no tomorrow.  With ES currently off 32 points, SPX and DJIA are in position to attempt the same maneuver – a day earlier than we had expected.

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Losses on the S&P futures reached 21 points early this morning, ostensibly on trade concerns.  But, it certainly didn’t help that WTI futures dipped below 64 and RB futures tagged our next lower target (the SMA100 at 2.0055) overnight.With scores of central bankers hitting the airwaves this week, housing starts and building permits coming out tomorrow, and the OPEC meeting coming up on Friday, we’re in for an interesting week.

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