Housing starts and permits both fell, with starts missing expectations by a mile. Philadelphia Fed index also fell and saw a big miss. Capacity utilization and industrial output both missed and fell. So, naturally, the OPEX-obsessed S&P 500 futures are up 10 points.
If things seem a little upside down at this point, know that this will pass very soon. If only Grandpa Kudlow’s diatribe would…
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Some friends of mine recently came into some pretty serious money and asked me about investing. Since I don’t invest other people’s money, I’m a safe person to ask.
There are plenty of good stockbrokers, insurance agents, RIAs and mutual funds out there. But, most of them have one thing in common. Almost without exception, they will recommend that you put your money into whatever it is they happen to offer and leave it there for a long time. If they’re really great at what they do, it’s good advice — right?
Not necessarily. Many studies have shown that the average investment manager underperforms the broad market. But, let’s suppose for a moment that yours is capable of keeping pace year after year, even after fees and taxes. What then?
There’s still the problem of history. Even if you had nerves of steel and didn’t touch the money you invested in October 1929, it would have taken 25 years to get back to breakeven after the initial 89% loss. That’s a very long time for big institutional investors with liabilities into the next century. It’s an unbearably long time for people with bills to pay and retirements to fund.
Twenty years later, investors were again put the test with the 50% crash beginning in January 1973. This time, it took about 7 1/2 years to recover. But, if you didn’t cash out in 1980-1981, you would have been underwater again till October 1982 — a total of 9 1/2 years. Ouch.
Most of us remember the most recent crashes. The first began in March 2000 and saw the S&P 500 lose 51% before climbing back to even in July 2007. If you were lucky, you cashed out during the 5 days it topped the 2000 highs instead of watching your portfolio lose 11.9% over the next month.
If you weren’t, perhaps you were lucky enough to hold on and get back to the 2000 highs in October — when you had another 7 days during which you could have broken even. If you breathed a sigh of relief and went on a long vacation instead, your portfolio would have lost 58% over the next 17 months.
It didn’t recover its value until April 2013 — 5 1/2 years after the 2007 peak and 13 years after the first peak in 2000.
Admittedly these data don’t reflect the value of dividends, which have averaged about 3.9% since 1929 and 1.7% since 2000. Taxes and fees would have consumed most if not all of that, so we’ll call it a wash.
And, I know very few people who could have sat on their hands while their portfolio lost 20-50%. The average investor would have pulled the plug somewhere along the way, likely producing even worse results.
Is there a better way? Absolutely. Simply selling every time SPX closed below its 200-day moving average and buying when it rose above it would have resulted in much better results. And, there are plenty of models that far outperform such a simple algorithm.
The point is that relying on the market coming back around “because it always does” sounds fine in theory, but at times has involved very long periods of substantial losses. Be sure that your financial plan can accommodate such downturns.
The one thing this market has that past ones haven’t, of course, is the ability to ignore horrible economic news such as this morning’s disappointing retail sales miss. As all the talking heads remind us daily, the retail consumer has been driving the economy and the market. In September…not so much.
Looking at ES, you’d never guess that the expected 0.3% gain came in at a 0.3% decline. Will investors care or will they interpret it as an even stronger argument for more rate cuts and QE? 
Naturally, algos will come to the rescue. ES’ only blip below the red TL earlier this morning was instantly resolved by VIX reversing and heading lower.
We’ll see if the algos can pull the same trick if carbon-based discretionary investors, outnumbered as they are, decide that economic data matters.
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Today’s charts… The only thing stopping ES from a sharp downturn is OPEX on Friday. If it dips below the red TL again…
…it will be saved by a further decline in VIX (which is very close to a 10/20 cross in the bulls’ favor)…
…a bounce for no particular reason by CL… 
…and, off the TL by RB…. 
…as well as more ramping by USDJPY…
…and/or a further “breakout” by NKD.
Remember, the EIA crude inventory report won’t be released until tomorrow due to the federal holiday on Monday. So, bears shouldn’t expect much help from oil and gas. If we get the downturn the analog suggests, it’ll be because real, live investors get nervous and rein in their equity exposure.
UPDATE: 10:20 AM
VIX just reversed at this little TL which, in an unmanipulated world, would be irrelevant. 
But, it’s not that kind of world. ES is backtesting the red TL, now off only 7 points after testing the overnight lows at 2984.75. It’s awaiting further instructions regarding a breakout.
The way this would usually play out is VIX dips just enough to get ES back on top of its overhead resistance, making it support. Meanwhile, SPX’s SMA5 200 will rise to a level at least as high as this morning’s low of 2985.20 at which point it will become the new floor.
Bears should be concerned at this point as one or two more days of this kind of ramping will result in VIX and SPX both experiencing a 10/20 cross which tends to unleash more buying.
There have been some notable exceptions since the January 2018 highs: 2/27/18, 5/14/18, 11/9/18 and 12/10/18. It reinforces the notion that we are at an important inflection point. SPX has less immediate downside potential unless it gets started by Monday at the latest. To compound the risk, we are fast approaching the next FOMC meeting on Oct 29-30. As members well know, we typically see a significant ramp job in the runup to these meetings.
Bottom line — another important test for the analog.
UPDATE: 3:55 PM
Lots of noise, but not much resolution yet.
One of the more interesting charts I’m watching…
The 25.50ish target represents the intersection of the .382 Fib, two red TLs and the midline of the white channel seen below. If 25.50 should ever be broken, things could get very interesting very quickly.
GLTA. (more…)
More fun and games from the market-rigging department…
If SPX’s rally has impressed you, check out the Nikkei. Since its Aug 26 lows, NKD is up a whopping 13.8% — more than twice SPX’s impressive 6.0%.
Do what I did and google “Japan” and “economy” for the past month and you’ll see nothing but negative stories including this one which confirms a “worsening economy” even before the effects of the recent 25% increase in the consumption tax have been absorbed.
So, why the 13.8% rally? Unlike the Fed, the Bank of Japan makes no secret of the fact that it buys stocks. In fact, the BoJ and the government pension fund are the two biggest owners of stocks in the Nikkei 225.
Thanks to negative rates, investors pay the BoJ to hold their cash. So, it costs the bank nothing to buy up everything in sight. All they have to do is make sure the stocks never decline in value. This is accomplished in two ways: (a) buying more stocks (throwing good money after bad); and, (b) by manipulating the currency (the yen carry trade.)
Lately, the yen carry trade has been working overtime. At some point the yen could theoretically get too cheap; so, the USDJPY is reset lower most nights when the low-volume futures markets are more easily propped up.
When the cash market opens, though, the USDJPY takes off. I’ve highlighted the period between 6:30am and 4:00pm in the chart below. The effects on the NKD are immediate. A few nanoseconds later, the S&P 500 futures join in. The algorithms which drive 90% of all US equity volume watch USDJPY like a hawk.
What happens if, for some reason, the USDJPY can’t be driven any higher or is busy resetting when extra assistance is needed? We’ve written often about the benefits derived from hammering VIX futures. Another favorite of central banks is oil futures.
As the chart below shows, it works exactly the same way as the yen carry trade. The only difference is that higher oil prices reverberate through the real economy, affecting nearly every business and consumer in fairly short order. So, the manipulation requires a little more finesse. 
The Fed has its own trading desk, presumably with the ability to dabble in the futures market. Their cost of funds is essentially zero as they can print money any time they like. Imagine how fun it will be when interest rates go negative and investors pay them to drive stock prices higher.
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It was a mixed morning for banks. JPM beat on the top and bottom line due primarily to fixed income, currencies and commodities. But, Jamie Dimon sounded downbeat, referring to “weakening business sentiment and capital expenditures mostly driven by increasingly complex geopolitical risks, including tensions in global trade.”
GS and WFC both missed on the top and bottom line, though WFC managed to beat on a non-GAAP basis due to having retired 9% of its common. Again, the commentary was subdued as both suffered from lower interest rates, an absence of tax breaks and a difficult trading environment.
Futures are actually 10 points higher. The algos are much more interested in the fact that VIX continues to be hammered lower, now off 35% from its Oct 2 highs and testing the top of its red Flag Pattern yet again. Of course, the previous two times this occurred, it bounced nicely and ES tumbled 90 and 150 points. In other words, it’s a good day for a pop-and-drop.
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It’s that time again. After fading Friday’s fake news trade deal, it’s time to plot out the next few weeks of our analog.
Futures are off mildly in what should be the next to the last hurrah before a substantial correction.
But, as has often been the case lately, VIX is threatening to dash the bears’ hopes — this time with a plunge below its SMA200. Can the bears finally maul the algos?
The only person who seems all that excited about the trade deal is Trump. Mnuchin was completely unconvincing and couldn’t even muster a lie on CNBC this morning. And, Liu He practically rolled his eyes during Trump’s self-congratulatory announcement on Friday. No one was fooled, and hopefully no soy bean farmers have rushed out to buy new acreage as Trump suggested.
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Once again, we reach an upper target for our analog without having tagged the downside target. It’s not that there weren’t opportunities. But, the cheerleading has been loud and long, with winks and nods over the last 12 hours as to how well both the Brexit and China trade deal negotiations are going.
Then, of course, there’s been the incessant algo-baiting, with VIX again threatening to abdicate its breakout.
There’s an old saying that says “buy the rumor, sell the news.” There’s another admittedly less well-known one that says “fade important Fib and channel tags, especially when there’s an obvious rising wedge in the midst of a short-squeeze.”
Will this be one of those times when one should sell the rumor?
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The market remains in maintenance mode — meaning only positive headlines are permitted to register.
Futures plunged 48 points from yesterday’s highs on news from the South China Morning Post that talks weren’t going well and the Chinese delegation would be leaving Thursday.
They rebounded on a CNBC report that talks would continue through Friday. They plunged again on a Fox Business report that the talks would end Thursday. They rose again on algo-bait releases regarding US concessions.
Speaking of algos…USDJPY, CL, RB and NKD are all being pressed higher in service of stable stock prices. USDJPY, for example, has rallied into the close most every day and is shooting higher this morning to get ES back to green in time for the open.
VIX, of course, remains under heavy pressure. Every attempt to break out has been hammered back below a recently-completed line in the sand. It’s silly, but it’s enough to impress the very impressionable algos.
Naturally, the financial press remains focused on basketball.
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Another day, another China trade deal rally. Futures are up about 21 points but the ramp job really started shortly after 7pm last night and peaked on “news” of a supposedly more conciliatory attitude on the part of the Chinese.
Wasn’t it Trump who wasn’t previously open to a “partial deal?”
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Futures were already off 20+ points even before the big miss in PPI: -0.3% vs +0.1% expected. This is the worst print since Sep 2015.
The YoY picture continues to look bleak, with PPI and Core continuing to roll over.
It’s an excellent metaphor for the overall market — which makes me wonder when the next Kudlow soundbite will hit the wires. Could Trump stifle himself as SPX reaches 2900, 2840 or 2820? Remember, last Thursday [see: Did Kelly Evans Just Take the Red Pill?], it happened when SPX reached a 1% loss.
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Despite an impressive meltup over the past two sessions, bonds continue to warn of another plunge in equity prices. Which is correct?
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