The past few days have seen an escalation in the battle between market forces and Trump’s tweet-driven algos.  Trump and his minions are desperate to see stocks make new all-time highs and have issued a steady stream of breathless trade and tax-related pronouncements possessing little substance but great influence on the algos.

The algos have, so far, been happy to ignore stronger than expected economic data which would ordinarily argue against an FOMC rate cut next week.

With futures backing off their earlier highs, it remains to be seen whether Trump’s campaign can prevail.  If not, it’s a very long ways down.  About 200 points, to be precise.continued for members… (more…)

It is perhaps fitting that SPX has waited until today to peak again.  Today is Mario Draghi’s last press conference as president of the ECB but also as presider over the great monetary experiment which has kept the euro zone on life support for the past 10 years.

SPX is poised to reach 3004.51, our favored upside analog target which I had all but given up on.  The futures already reached it and, then some….  …tagging the highest of the targets we set back on Aug 27 [see: Analog on Track.]

Yes it’s very late.  But, as they say…better late than never.  SPX’s version is 3004.51.Whether or not the futures can cling to a small gain until the cash market opens is irrelevant to.  From a Fib standpoint, yesterday’s finish is close enough.  What matters is whether we get the swift downdraft to new cycle lows that the analog forecast in July.

Meanwhile, core CPI just topped estimates, reaching levels not seen since September 2008.  More fuel for the no-rate-cut camp.  With the Fed unlikely to unveil any dovish surprises next week, stocks will have to rely on Trump’s next trade-related-say-whatever-it-takes-to-reach-new-highs tweet.  It has always worked before. How many times, however, will the algos fall for this crap?

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Continuing the string of data arguing against a rate cut, PPI and Core PPI both came in hotter than expected.  Core increased 2.3% from August 2018.Futures, which are in levitation mode after a sharp intraday recovery yesterday, barely noticed.  Virtually nothing has changed from yesterday’s forecast.  Though, we have an important EIA report coming out at 10:30am which should help determine whether oil can continue its improbable bounce following John Bolton’s resignation.

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Most of the signs are not very bearish.  We haven’t had a decent reversal candle.  VIX is in the basement. The moving averages are all wrong.  But, our analog says otherwise.  So, let’s be bearish, shall we?

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The last time I felt compelled to use this title for a post, SPX plunged 105 points off its intraday highs within the next 24 hours.  This one should be more violent.

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All the talk about the necessity of a 50 bps rate cut (100 bps according to the president) got me to thinking about the history of such a drastic move. What were the circumstances under which the FOMC cut rates by 50+ bps in the past, and how did they stack up to today’s?

First, a quick history lesson. There have been seven such cuts since the tech bubble burst in 2000-2002. As the chart below shows, they all took place in 2007 and 2008 during the Great Financial Crisis. Most of them took place after the S&P500 had dropped precipitously from its October 2007 all-time highs.

The cuts, along with a handful of the more significant events occurring at the time, can be seen in the chart below.

The only 100 bps cut was in December 2008, a few days after QE1 was launched. By then, the S&P500 had plunged 45% from its highs. Q3 GDP had contracted -2.1% on its way to -8.4% in Q4. Almost 900,000 families had lost their homes to foreclosure and unemployment was 7.3% on its way to 10%. No one doubted the nation was in crisis.

As of Friday, the S&P500 is 1.6% off its all-time highs. GDP has grown 2.0% over the past year. Unemployment is 3.7%. I can’t remember the last time I saw foreclosure headlines. Interest rates are at historic lows, and the president insists the U.S. economy is “the best it has ever been.”

Is it really the right time for a 50 bps rate cut?

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With yesterday’s VIX algo-driven eruption in the rear view and this morning’s disappointing jobs report in hand, all attention now turns to the Fed.  Will they or won’t they cut rates?  And, if they do, will it top 25 bps?

Consensus still seems to be for a 25 bps cut.  But, Powell will be pressed later today for his thoughts on the matter.  So, get ready for some volatility – especially if he disappoints the market.  At least that’s what our analog says to expect.

SPX reached our secondary target yesterday and, so far, the futures seem content with this morning’s highs.

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On Day 427 of the “good and easy to win” trade war with China, we get news that the parties will sit down again sometime in October.  Naturally, there has been no deescalation of any kind lately.  In fact, the actions and rhetoric have increased over the past week.

But, the algos could care less.  VIX has dropped below its SMA200 and nothing else really matters. I wonder if anyone will notice that its SMA10 has pushed above its SMA20 again, the first time since July 30 — Day 0 of our analog.For our analog, it means the rally up to our next higher target — which was scheduled for last Friday — will occur three sessions late.  This continues the trend of rallies being weaker and slower than anticipated.

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Futures ramped higher overnight……purportedly on a perceived reduction in risk from Hong Kong, Britain and Italy.  The primary drivers of the algos, however, were a sharp bounce in oil and a gap lower in VIX — neither of which should have much staying power.  Hence, just another head fake that should be faded.

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All in all, it’s been a pretty good first month for our analog.  Rallies have generally fallen short of projections, but declines have more than compensated.

The initial drop was faster and farther than expected, which was somewhat unnerving and threatened to wreak havoc with the timeline. But, we’re back on track thanks to last Friday’s stunning (just-in-time) 87-pt plunge.  Overnight gaps have been quite common, making the analog that much more beneficial.  Being able to anticipate turning points in advance presents excellent trading opportunities — as evidenced by this morning’s nice gap lower after Friday’s feeble attempt at higher highs.

It’s worth reiterating that we’re very early in what should be a 9-month process. If it’s anything like the 2011 analog, the correlation will strengthen over time.

We’ve had one 7% move and five 4% moves in the first month. Though it has seemed volatile enough, volatility will continue to increase.  Over the next month, we should see three swings of over 7% and one of about 23% (in addition to the garden variety 5% swings.)

Buckle up!

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