After being off as much as 15 points earlier this morning, futures are showing an 8 point loss. This, after a massive short-covering meltup yesterday that accelerated once the SMA200 was topped.
It remains to be seen whether the gains will hold when RB and CL sell off big.
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It is often said that there are two sides to every story and, somewhere in middle, lies the price of oil. Okay, I paraphrased that just a bit.
But, isn’t it odd that the day after the Saudis threaten $400/barrel oil, Donald Trump suddenly embraces the ludicrous “rogue killers” theory for the death of Washington Post columnist Jamal Khashoggi?
It appears that after days of vehement denials of any involvement, the Saudis suddenly remembered that Khashoggi was, in fact, assassinated and dismembered in their Turkish embassy (Saudi operative: “Oh, yeah…that guy that we chopped up with a bone saw? I had forgotten all about that!)
After a 20-minute conversation, the president who fell in love with Kim Jong-un also came to terms with Saudi King Salman. Was it love? To quote the master of the deal, himself, who knows?
But since Trump is desperate to reverse the rise in gas prices, inflation, and interest rates between now and November 6 (and, to salvage billions in arms sales) don’t be surprised if we get that next leg down in oil prices very soon. Nobody knew the economy could be so complicated!
And, while we’re on the topic of government prevarication, the much-delayed September Treasury Statement was finally released yesterday. Anyone notice something odd about September outlays? Did we really see a plunge in every expense category? Or, maybe, someone decided to massage the numbers just a bit to prevent the report of a $1 trillion deficit. Appearances, again.
Nah…then we’d surely see other efforts to obfuscate the country’s fiscal plight. For instance, they’d never allow charts like this one from the August report.
The same chart in September… (appearances, indeed!)
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SPX came within 7 points of our downside target on Thursday, bounced 40 points to close just above its SMA200 on Friday, saw futures fluctuate as much as 50 points on Sunday, and recover from a 20-pt decline earlier today. If you like head fakes, you’ll love this morning’s recovery.
Looking for clues? With not-so-veiled threats of $400/barrel oil from our “friends,” the Saudis, CL is up a “whopping” .42% and RBOB is off slightly.
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SPX came within 7 points of our downside target yesterday, getting a midday bounce that couldn’t quite reach the 200-DMA. Futures popped as high as 73 points off the intraday lows, but have since given back about 12 of those points and are perched barely above ES SMA200 at a 28-pt gain in the after-hours.
If those gains hold, it still won’t be enough to ramp SPX back above its 200-DMA. What’s more, USDJPY, RB and CL have further to fall, VIX has additional upside potential and DJIA and COMP remain below their 200-DMAs. Despite the after-hours euphoria, stocks aren’t out of the woods just yet.
One economic item which doesn’t usually attract that much attention, but might today: Treasury Budget. The trend hasn’t been very positive lately as witnessed by the widening gap between outlays and receipts.
For excellent commentary on the problems this poses, see Jeffrey Gundlach’s interview on CNBC yesterday. The latest is due out at 2pm. From Briefing.com:
Export and import prices are also due out (8:30am.) These will get extra scrutiny to see what impact tariffs have had on prices so far. And, Michigan Consumer Sentiment (10am) frequently impacts markets.
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The last Investing for Dummies worked out pretty well; so, here goes again.
There’s a lot of confusion out there about what matters or doesn’t matter at this juncture. Allow me to simplify things…
SPX 2702 is the 2.24 Fib extension of the drop from 1576 to 666 between 2007-2009. If SPX backtests it and bounces tomorrow, the uptrend is intact. If it drops through, there’s plenty of downside potential. It’s a number worth watching very closely.
GLTA.
All good things come to those who wait. Or, so the saying goes. It’s not always easy. The past few weeks have sorely tested bears’ patience.
For many weeks we’ve been wondering when the rising channels would break down. It seemed inevitable, as oil and gas were causing inflation problems, USDJPY had reached a turning point, and VIX was threatening to break out. The post from Sep 21 see: [Quad-Witching] is one example:
But, we’ll see what happens this weekend in Algeria. CL and RB are long, long overdue for a correction. Combined with USDJPY running out of steam and VIX due for a breakout, this would not bode well for stocks.
Yesterday, SPX’s red channel broke down and it made a beeline for the yellow neckline at 2780, closing just above it. It was a long overdue backtest. Interestingly, it leaves the 2.24 Fib extension at 2703.62 within striking distance.
With CL off nearly 7% and RBOB off 8% over the past week, and USDJPY having reversed where expected, it appeared fairly likely. Had VIX not reversed at our next upside target overnight, SPX might be tagging 2702 on the open this morning.
Is this another question of “when” and not “if”?
CPI just came out. One comment… Gasoline’s 9.1% increase over September 2017 was greatly muted by last September’s huge spike. October will not enjoy the same benefit. If the Fed is looking for an excuse to pause rate hikes (without appearing to acquiesce to the Inflator-in-Chief) as I believe they are, gas prices must continue falling.
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Back on May 18 [see: Bonds and Value] I suggested the 10Y might be a good value at 118’105 (yield of 3.11%.) 
The 2s10s had just reached a trend line connecting previous lows.
Ten-year yields had recently reached the top of a channel connecting previous highs.
DXY had just reached the top of a falling channel.
And, 10Y price had just reached the bottom of a rising channel.
It was an important test, as we discussed at the time.
The 10-year is at an important inflection point, poised between a strong rebound and a significant selloff. Its next moves are critical not only from an investment standpoint, but in terms of what to expect from the broader economy.
Now that yields have broken out and prices and spreads have broken down, we’re already beginning to see the effects on the market and the broader economy. Bottom line, they aren’t good.
The Fed is bent on (1) creating more headroom for easing the next time it’s needed, and (2) dealing with an inflation problem that the official data don’t reveal but which is very real and getting worse. They are also wary of allowing a 2s10s inversion because it would portend a recession. Last, they are trying to prop up the USD because it helps stave off inflation that would pressure rates higher.
They can’t very well come out and say inflation is really pushing 6 or 10% without panicking the bond markets. So, they’re talking yields up slowly and, more importantly, not pressuring them lower as has been the case for the past decade.
The repercussions, though, are already being felt domestically in the overinflated housing market, in the auto market, basically anything which relies on low interest rates for sales. But, the most serious repercussions are in emerging markets, where huge amounts of dollar-based debt must be repaid with appreciating dollars. The defaults could be catastrophic.
The critical question is how high rates might eventually go. Here, the view is hopeful. Members might recall we had two potential channels for ZN, the price of 10Y notes. 
I never liked the white channel that much because the midline was all wrong. The yellow channel worked perfectly except for the slight overshoot in 2012 – which was a year of heavy, heavy manipulation.
So, I’ve always been inclined to believe more in the yellow channel — which says that 10Y yields have now topped and ZN has bottomed.
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I use scores of chart patterns, Fibonacci grids, technical indicators and proprietary models in my daily attempts to forecast various markets. Some are fairly complex, multivariate models that involve a half-dozen inputs. Others are quite simple.
One of my favorite simple indicators is the well-known 10-day/20-day moving average cross. It maintains that when the SMA10 crosses below the SMA20, it’s generally bearish. When it crosses back above, it’s bullish.
Of course, in a heavily “managed” market such as the one I’ve been posting about for the past 7 1/2 years, the crosses are occasionally head fakes. The cross is well-known and a component of many algorithms. So, it’s not unusual for markets to reverse rather soon after such a cross. Sometimes, markets even reverse just before a likely cross in order to avoid one.
The yellow arrows below mark the various bearish crosses so far in 2018. The thin red line is the SMA10 and the white line is the SMA20. Other moving averages are the 50 (purple), 100 (yellow) and 200 (thick red.)
Only a couple 10/20 crosses were followed by significant sell-offs: Feb 6 and Mar 22. The others produced either moderate or modest declines (i.e. head fakes — the purple arrows) or near misses (the white arrows.) I mention it this morning because we’re experiencing another 10/20 cross in the pre-market.
There is much bearish commentary out there. VIX just broke out of a 8-month trend, tagging our next upside target yesterday. SPX and ES have both tested the critical support we identified last week [see: The 10Y Breaks Out.] And, the usual suspects involved in a rescue operation are, so far at least, MIA.
Will this be another head fake/near miss — or the real thing?
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My best guess continues to be that if 2878.50 (SPX 2872.87) doesn’t hold, we’ll see the white channel get fleshed out. If the white channel doesn’t hold, it opens up the SMA200 and, ultimately, the 2.24 at ES 2728.79 (SPX 2702.78.)
SPX wouldn’t flesh out its white channel until reaching 2800 – the white .786 Fib. Again, if the white channel fails, we’re looking at the SMA200 at 2765 and the 2.24 at 2703.62.
CL and RB are getting a little bump from Hurricane Michael and the usual MENA-based speculation.
Note that RB, in particular, has clung to a smaller rising channel. It won’t last.
USDJPY still looks likely to backtest its SMA100 at 111.19 or .500 at 111.78 — which lends credence to the downside case – at least on an intra-day basis.
VIX continues to be the big question mark. It has clearly broken out of the falling white channel. If given free rein, it still has plenty of upside potential with 24.20 looking very reachable.
I’ll be out all day today. More later this evening or in the morning.
GLTA.
It’s been a long, slow decline for VIX. It’s been locked in a falling channel ever since the Jan-Feb correction. As we noted last week, a breakout could be troublesome for equities.
SPX closed about 12 points above important support on Friday, but futures are currently off about 12 points. In other words, today is a critical test for bulls.
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Well, that was fun. Just when I was wondering if investors had abdicated all decision making to bullish algos, they woke up and decided that things are a little more complicated than market conditions have been indicating.
Powell says the economy is so great that rates can continue to rise. This is clearly a double-edged sword, as the 10Y has aptly demonstrated. Members will remember the flattening of the yield curve poses little threat to stocks. It’s the rapid steepening that does the damage.
It’s pretty obvious, therefore, that Powell is blowing smoke and that interest rates have topped out. Why? Whether of not he employs any chartists at the Fed, I think he’s fully capable of doing the math.
Those who took an economics class or two (or even elementary algebra) can see that a continuing increase in interest rates poses serious problems for this “wonderful” economy of ours. The tiny increase we’ve seen to date (the black line below) has contributed to a massive increase in interest expense.
Something has to give. And, by “something” I mean interest rates.
SPX reached our initial target with ease yesterday, bounced for an hour or so, then tumbled to within 12 points of our next downside target before the obligatory last-minute recovery.
This is where things get interesting. Because, while a tag of the SMA50 and backtest of the January highs would make perfect chart sense, it would mean VIX breaking out of the falling channel it’s been in for months.
While I was wondering whether TPTB would allow such a thing, the employment figures came out and we got one of those trademark VIX plunges we’ve all come to expect. The message of such a shot across the bow is clear: it can go lower, a lot lower. Be bullish!
Was yesterday’s plunge in equities close enough, in which case the more aggressive channel is in play? Or, should we expect more fireworks today? Not to worry. Once VIX breaks out, things will get much uglier.
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