The market isn’t even open yet, and already the administration is starting with the algo-inspiring messaging.  A China deal is imminent!  Actually, quite likely.  Well, there’s a decent chance…

Playing this outcome is no better than a roll of the dice — which is why the VIX gamesmanship has already begun.  Note that ES’ two threatened dips below the 2.24 extension at 2728… …were promptly met with VIX smackdowns.  As Blondie would say, “one way or another.”Speaking of which…I went in yesterday for a simple extraction of a tooth which had been bothering me for quite a while.  It was time to think about an implant.

The procedure ended up taking four hours, involving three oral surgeons, three assistants, a tech, and 22 injections.  Damn tooth had three roots, two of which were hooked at the end and refused to let go.  So, they essentially drilled the tooth out.

I learned two important lessons from the experience.  First…brush and floss. Duh.  Second…some conditions which seem simple and straightforward can become excruciatingly complex in a hurry.  So it is with QE.

Ten  years ago, when central bankers first delved into the suppression of interest rates and accumulation of trillions in assets, it probably seemed like a fairly simple way to protect the stock market and economy from ruin.  Now, the market hangs on every Fed utterance to find out when the party might truly be over.

But, like tooth # 19, easy money is proving to be darned near intractable.  Consider the complex relationship between rates and the US dollar.Since the April-May equity plunges, DXY and TNX have been rising in lock step.  A strong dollar kept inflation under control while oil and gas prices soared.  Rising 10Y rates helped prop up the dollar, and kept the yield curve from inverting while the Fed worked the short end higher.

It’s hard to say, but I imagine they didn’t anticipate the aggressive manner with which Trump attacked high oil and gas prices and interest rates.  With November CPI due to tumble, the 10Y is finally tumbling — which means the Fed must stop hiking or face a yield curve inversion.

This has been the basis for our inflation and interest rate forecasts since mid-April [see: Oil & Gas, Inflation and Interest Rates: A Delicate Balance or Goal Seeking.]  In it, we forecast a sharp decline in oil and gas prices and a lid on interest rates and inflation.

We also forecast that stocks would follow suit unless USDJPY angled higher and VIX came under attack.  Not surprisingly, all of these things have come to pass.

Oil has plunged 35% from its recent highs.  The 10Y briefly punched above 3%, but is about to drop below it as the 2s10s lingers in the low 20s.  USDJPY, which plunged to 104 in March, is about to test 114 again.  CPI, which reached 2.95% in July, could test its 2.07% 2018 lows for November.

Unless oil and gas suddenly spike higher or Trump’s tariffs are expanded, the Fed can’t justify further rate hikes.  The “market” is just fine with that.  Central banks can still buy stocks, hammer VIX, toy with the yen carry trade, etc.  And, politicians can still cut taxes so corporations have more money with which to buy back shares.

But, it remains to be seen whether USDJPY can hold its uptrend in the face of stable or declining interest rates.Remember what happened the past couple of times USDJPY threatened to break down.

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Unless he publicly walks back yesterday’s widely misquoted comments, Powell has officially joined the club of Fed chairmen with unquestioned allegiance to a rising market.  The actual quote:

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.”

Note, this is not the same as “just below neutral” as most of this morning’s headlines state.  Nevertheless, it’s a huge divergence from comments in October that the rate was “a long way from neutral.”

The 2Y dipped a bit.  But, the more interesting move IMO was the 10Y — which continues toward our long-held downside target. One might think this would mean DXY is finally breaking down.  But, USDJPY — which managed to nail both of our intraday targets — has clung stubbornly to channel support.  Until it breaks down, the downside case for equities is iffy.Even more interestingly, yesterday’s short squeeze occurred without VIX dropping through its SMA50, which we identified as an important line in the sand for bears.  So, things aren’t as clear cut as one might think after such a massive meltup.

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My favorite Trumpism of the week:

“I’m doing deals and I’m not being accommodated by the Fed,” Trump told the Post. “They’re making a mistake because I have a gut and my gut tells me more sometimes than anybody else’s brain can ever tell me.”

If Trump could just shut his big yapper for a few days (very difficult, I know) he’d probably find that the Fed is fairly unsure about additional rate hikes.  But, by targeting Powell and the gang with incessant criticism, he paints them into a corner.

Now, if they slow or stop the hikes to accommodate slowing growth and lower inflation, they risk the appearance of taking orders from Trump.  The repercussions would be devastating to the Fed’s reputation.  If they stick to their hiking schedule, they risk choking off whatever momentum the economy might be able to muster.

Meanwhile, the quite overextended DXY continues marching higher…… despite the EURUSD’s unwillingness to penetrate the channel backtest.Combined with VIX’s deft dip below its most recent straw-man trend line (but, failure to drop through its SMA50)…… it’s enough to send futures through their SMA10 which had previously represented resistance.  Can it hold?  A great deal depends on what Mr Powell has to say today.

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Continuing yesterday’s theme of Mixed Messages, futures have been all over the map since yesterday’s close – sinking as low as 2626 on more tariff troubles and soaring up to 2684.50 (and, coincidentally, the SMA10) on tariff hopes.

Virtually all of our targets remain the same, though clearly we face substantial headline risk for the next few days.  From Powell: Slowing Global Growth two weeks ago…

I’m currently following a model which suggests that SPX will gap down on Monday or Tuesday to 2648ish, bounce for a few days, then down to 2608 around the 27th. This is a little earlier than the COMP chart suggests, so I’ve moved the COMP target to 6736 on Nov 27…This is where I think we’re headed.

This morning’s setup offers a clear path to 2608.  But, as usual, it will depend on USDJPY’s “breakout” and VIX’s apparent indecision.

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A 30-pt bounce in futures over a long holiday weekend is nothing new.  But, when it happens in the midst of longer-term bearish patterns which have yet to fully play out, it delivers very mixed messages.

Our yield curve model continues to point to lower stock prices, so we’ll regard this ramp as a likely pop and drop — at least for now.continued for members… (more…)

In our Nov 9 Update on Oil and Gas, I reiterated the importance of the support that had just been reached.

CL just reached our next downside target of 59.47 and RB has reached our target range of 1.58-1.62. This is important support for both which, if broken, would portend much more downside.…the charts show [RB] could really benefit from tagging 1.58ish. There, it would enjoy not only red .786 Fib support, but channel line support as well. If that support doesn’t hold, there isn’t much help until the purple channel bottom at 1.48, followed by the previous low and yellow channel bottom at 1.3847.

Virtually all analysts have fixated on supply and demand, shifting geopolitical currents and OPEC’s end game. But, for many months, I have remained steadfastly focused on Trump’s primary objective: lowering gas prices to a level which would (1) favor incumbents in the midterms, and; (2) reduce inflation enough to stave off any further FOMC rate hikes.

Surprisingly, Trump substantiated my long-held theory when he took credit for having lowered oil and gas prices as discussed in Trump: “Falling oil prices…that was me”…

“If you look at oil prices they’ve come down very substantially over the last couple of months,” Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly.”

That tweet barely touches on the drama has played out predictably in the background.  It began with the murder of journalist Jamal Khashoggi at the apparent direction of Saudi Crown Prince Mohammed bin Salman.  Trump and Co. adeptly leveraged the situation to get oil and gas prices down [see: Coincidences and Consequences.]

Both MBS and Trump are now being schooled by Turkish President Recep Erdoğan who is angling to use proof of MBS’ involvement to force the return of Turkish dissident and supposed coup ringleader Fethullah Gülen (and, likely, other unnamed concessions.)

The upshot of all this drama is that RB reached 1.3847 on Friday, just in time for the final BLS energy price input which will drive November’s CPI number and could conceivably make it more difficult for the Fed to follow through on its widely expected December rate hike.

This brings our gain on shorting RB on Oct 3 to 34.7% and the YTD gain to 168%.  Our short CL position has gained 33.4% since Oct 3 and 167% YTD.

Everybody wins, except of course for Khashoggi, Gülen and the dozen or so Saudi operatives who will lose their heads for having followed MBS’ orders.

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It’s gratifying when a model plays out nicely as this one has.  But, just a reminder, it’s not over just yet.  There are plenty of ways it could go sideways.  CL and RB could continue falling after reaching our next downside targets, which could drive ES/SPX lower than our H&S targets.

From last week’s Trump: “Falling Oil Prices…That Was Me:”And, ES this morning…

We’re now seeing the unintended consequences of Trump’s mini-crash in oil prices.  Not a great mystery — though attaching his name to it might not have been the smartest move.  As stocks continue to fall, however, look for the Fed to shoulder more and more blame.

Tie in the strong decline suggested by our yield curve model, and this was not a terribly difficult forecast.  The tricky part lies ahead: what will COMP do when it reaches our 6730 target from Oct 12 [see: Are We There Yet?]

Then……and, now.

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Our forecast remains unchanged from last week — a very sharp drop this week, followed by a deeper drop the next.  Needless to say, this goes against the grain.

Holidays are usually all about senseless melt-ups.  So, I’ll look especially foolish or brilliant in the next week or so.  As always, use appropriate stops.We should get the next legs lower from RB, CL and USDJPY.  And, VIX is likely to at least test the fan line from the February highs — think 26.50ish, depending on the timing.  If it breaks that, things could get quite messy.continued for members… (more…)

Interesting pause here at support.  If a model I’m watching plays out, next week could be ugly.  On the other hand…think of all the times we’ve seen a meltup during a low-volume holiday week.

There are a few tells, as long as they’re not head-fakes.  We’ll start with USDJPY, which has done absolutely nothing to support stocks lately.  It’s clearly headed for 112.71.  If it were to drop through to the SMA100 or SMA200, we could see some ugly fallout.Then, there are all the FAANG stocks – each one of which is either in trouble or about to be.

First, GOOGL recently broke down from a 10-year rising wedge.Yesterday, it experienced a death cross… …the first one since June 2016.  Being GOOGL, it bottomed the very next day.

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One glance at the Philadelphia Fed Index this morning, and you could find yourself wondering whether Powell was really talking about the “rest” of the world.Yet, the Fed supposedly remains hawkish.  Never mind that the 10Y and the yield curve are telling us the rate hikes are drawing to a close. continued for members… (more…)