pebblewriter

Year: 2018

  • The US Dollar: Time’s Up

    Yesterday, we asked in the lead-up to the FOMC announcement and presser:

    Is there [a Fed game plan] which can keep inflation high enough (but, not too high), prop up the US dollar, keep interest rates under control, keep the market elevated and actually improve the economy?  Not likely.

    Today, we have a definitive answer: no.  The 10Y is plunging……so, the US dollar is finally cracking. As expected, this is doing a number on USDJPY……which is doing a number on futures, currently off about 30 points.  This will put SPX back below its 2.24 and at a critical support point.

    If you’re looking for a silver lining, don’t look at FB.  After ping-ponging between the channel line, the H&S neckline and its SMA200, it’s faltering again after Zuck’s fumbled apology….…which means COMP’s sharply rising channel will break down on the open.  Fasten your seat belts, folks!

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  • FOMC Day: Mar 21, 2018

    All eyes are on the FOMC’s upcoming rate announcement and press conference today.  The slumping yield curve, buoyant 10-yr and lethargic dollar are testament to investors’ angst over the Fed’s game plan.

    Is there one which can keep inflation high enough (but, not too high), prop up the US dollar, keep interest rates under control, keep the market elevated and actually improve the economy?  Not likely.  Meanwhile, politicians have tripled the degree of difficulty by approving a sharp increase in deficit spending.

    I suspect we’ll see the usual mumbo jumbo regarding a steadily improving economy, tightening employment without wage pressure, and additional rate hikes being data dependent, etc.  In the meantime, our analog just keeps chugging along.  SPX’s latest dip was halted at the important 2.24 Fib extension as expected.  But, a big part of the equation continues to be Facebook, which nailed our white channel line and rebounded to the neckline of a bearish H&S Pattern.continued for members… (more…)

  • Update on COMP: Mar 20, 2018

    Facebook is only 5.5% of the Nasdaq Composite (COMP), but yesterday’s plunge [see: Facebook Flops] was a good reminder to update our outlook.

    In our last update [see: Nov 6, 2017 Update] we identified 7619.37 as our next upside target.

    At this point, it’s pushing into the top quadrant of the rising white channel where it will soon reach the top of the rising purple channel — currently at 7260.

    It probably won’t stop there, though, as the 1.618 and the rising white channel intersect at 7619.37 at the end of the year. It’s too convenient a target to ignore. And, I fully expect it to reach it unless we get a nasty surprise on the geopolitical front.

    As it happened, COMP’s tag of 7619 was delayed by the February correction. It topped out last week and has since retreated 352 points — about 4.5%.  Since COMP reached its important 1.618 Fibonacci extension and the top of a well-formed channel, it’s fair to ask whether there’s more downside ahead.

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  • Facebook Flops

    Everyone’s asking about Facebook, today.  The stock, off as much as 8% earlier, is currently down 6.5%.  It has the dubious honor of leading the FAANG stocks on a pretty rough day.

    The last time I devoted a post to FB was over five years ago on Jan 16, 2013 [see: Should We “Like” Facebook?]  The stock had recently reached 32.21, retracing about half of its tumble from 45 to 17.55.

    Fun fact from the post before that one, on Oct 24, 2012: none other than Donald Trump had been touting the stock, repeating 5-6 times during a radio interview that he’d amassed a large position.  That day the stock gapped from 19.5 to 24.13, a 24% pop.  It’s interesting that Donald Trump and Facebook are back in the news together today…

    But, I digress.  Some key highlights from the 2013 post:

    The stock has retraced about half the losses since its 45 high…Unfortunately, it’s also traced out a Rising Wedge — not to mention a Bat Pattern from its June highs (the purple Fibs above.)

    As such, it is likely to weaken considerably here — with a drop to at least the bottom of the rising wedge — currently at 27.75 or so.  Often, this results in a new channel [the midline of which] is at 27 (a 10% drop from current prices), and the bottom is way down at 22.75.  Bottom line, the road ahead should be very bumpy.

    As it turned out, FB eeked out a slightly higher high, reaching 32.51.  From there, it was a slow, painful decline to the channel bottom at 22.67 — a nice 30% shorting opportunity that was marked by heavy insider selling.

    It bottomed there, spending six weeks below its 200-day moving average before finally breaking out.  It was back above 45 four months later.That was the end of 2013, when the market became “the market” and BTFD went from a cute acronym to a legitimate portfolio management strategy.  All the while, FB has continued to ratchet higher, gapping up through successive Fib levels and occasionally bothering to backtest them.

    Interestingly, it still pays a great deal of attention to its 200-day moving average.  After breaking out in July 2013, it didn’t test it again until May 2015, when SPX topped out.

    FB bounced and made new highs, but was back below the SMA200 three months later when SPX plunged 12.5% from 2138, an important Fib level.  It only spent a day below the SMA200, but it was a memorable intraday dip of 16.3%.FB next dipped below the SMA200 in January 2016, when SPX repeated its swan dive — this time plummeting 14.5%.  Again, FB recovered intraday.  And, again, SPX recovered fairly quickly.

    The next trip below the SMA200 didn’t go quite so smoothly.  It was in the wake of the 2016 US election, when stocks in general needed a great deal of support.  FB fell below its SMA200 on Nov 10 and didn’t recover recover until Jan 6.

    As we’ve documented elsewhere, this was a dangerous time for stocks.  COMP, in particular, was really struggling to break out from an octo-top [see: Update on COMP, Oct 2, 2016.]  If FB couldn’t break higher, COMP stood little chance.

    Quite by coincidence (not!) Facebook’s board decided this would be an excellent time to announce its first-ever stock buyback plan.  The plan was announced on Nov 18 and allocated $6 billion for purchases beginning in the new year. Needless to say, the stock took off at the start of the new year.  By Feb 1, it had gained nearly 70%.

    I won’t go into the heavily-debated fundamental justification for the rise.  Others have done it well and, in the opinion of many, the stock remains quite overpriced.  The latest news throws more cold water on the fundamental story.

    It also puts the stock back in an interesting technical position: testing its SMA200 again (tagged it on Feb 9, too.)Many other views confirm the fact that FB is in a tenuous position.  It’s extending below its bottom Bollinger Band; it’s very near RSI support which, if broken, would be quite bearish; and, it’s MACD is close to rolling over.

    SMA200s have been excellent buying opportunities in the past.  The stock appreciated 680% from its 2013 tag, 171% since its 2015 tag, 117% since its Jan 2016 tag, and 73% since its Nov 2016 tag.  It’s obvious that buying the SMA200 dip was an extremely successful strategy, especially when the company’s billions were used to ensure a bounce.

    Think I’m being cynical?  At today’s close, the 200-day average stood at 172.54.  The stock itself closed at 172.56.  Probably not a coincidence.

    As we know, all patterns work forever… until they don’t.  If FB can recover quickly from this debacle, the next upside target is 205.69, a nifty 19% return.  If it can’t, the closest support is a channel line at 163-165, followed by the nearest Fib extension at 133.83.  Ouch.

    For my money, the stock is expensive regardless of which way it goes.  And, I just plain don’t trust companies where the revenue model is built on what many people smarter than me consider smoke and mirrors.

    Then, there’s the fact that COMP recently tagged our upside target: the 1.618 extension of its drop from its 2000 highs to its 2002 lows [see: Nov 6, 2017 Update on COMP.]  This has been a long time coming (SPX tagged its in 2015) and could represent serious overhead resistance.So, if you’re dying to take a flyer on FB, just keep an eye on its 200-day moving average.  It makes an excellent line in the sand at a time when many of our indices, currency pairs and commodities are in a precarious position.

    GLTA.

     *  *  *

    UPDATE:  Mar 20, 12:50 PM

    FB held its SMA200 yesterday, but fell through it this morning.  It dropped to the support we discussed yesterday.  Again, if the white channel line doesn’t hold, it’s susceptible to another 18.5% drop to the 4.236 Fib extension and channel midline at 133.83.

  • Charts I’m Watching: Mar 19, 2018

    Stocks are on track, progressing nicely toward our downside targets.  Keep an eye on VIX this morning, as it’s threatening a breakout.The yield curve continues to flash a warning sign as per our model [see: Yield Curve, a Closer Look.]

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  • Oil: Stocks’ Co-Pilot

    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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  • This Time It’s Different

    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.

    then…
    …now

    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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  • Day 22

    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…)

  • Growth Without Inflation

    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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  • Countdown to CPI

    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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