It’s easy to get lost in the weeds when looking at the broad markets. The one unmistakable trend, however, is that SPX has been on a purposeful path to erase any signs of weakness at every turn.

The brief violations of the rising yellow channel’s midline in December 2018 and its bottom in March 2020 yielded enormous liquidity-stoked and virtually uninterrupted rallies which saw ES rise 47% and 72% respectively. Fibonacci levels which posed little overhead resistance on the way up were assiduously defended once they became support.

The same algo-baiting tools were used in each instance: ramp up oil prices, power up the yen carry trade, and crush volatility every time stocks drop to dangerous levels (or just need a little boost.)  It has worked, by and large. Most indices are at all-time highs.

While this has been a stellar year for equities, we have to wonder whether it’s sustainable – particularly since we face the greatest global disaster of the last 70 years. Have global markets gone the way of Japan’s carefully managed and government supported Nikkei?  Have things changed so fundamentally that downside risk has been eliminated?

The Fed, ECB and BoJ expanded their balance sheets by over $8 trillion this past year. Consider that it took them almost 8 years to expand by that same amount following the GFC.  Future growth of their balance sheets is essentially baked in.Their bond buying has driven over $18 trillion in global debt to negative yields.  That’s somewhere between $500 billion and $1.5 trillion in interest that might otherwise have been earned by pension funds, insurance companies and retirees. Instead, it has been lost and, more importantly, has forced a flood of investment funds into equities.

Central banks will swear they yearn for higher inflation. Yet, higher inflation has always led to higher interest rates. Given the explosion of debt on their books, few nations could withstand a return to normalized rates.

Low inflation and low interest rates are no longer optional. The Fed had no choice this past year to follow the BoJ and ECB’s lead in crushing interest rates.

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With currencies, commodities and yields coiling, it’s hard to shake the feeling that we’ve entered into a countdown of sorts.

While there’s reason to be optimistic from a pandemic standpoint, markets are making new all-time highs even though many important sectors of the economy are far from having recovered their mojo.

What gives?  What awaits us on the other side of New Years?

If I’m right, we face a major regime change in the currency markets which will have important implications for stocks.

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The rally-that-central-bankers-built continued overnight, with the BoJ winning the booby prize. As the largest owner of Japanese stocks, eclipsing even the Government Pension Investment Fund, the BoJ forced the NKD 2.7% higher on the day and a ridiculous 6% higher since last Monday.

This is how it’s done in Japan. As money supply expands at an astounding rate……the government is shoveling trillions into stocks.

And, it’s coming soon to a market near you.

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Not one to be left out, ES also rallied to new all-time highs.

Thank God we don’t have to worry about bubbles.

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ES edged slightly closer to our 3730.29 target at its 1.272 Fib extension overnight, this time coming within 3.79.  Unless it reverses prior to the opening bell, this complicates things.continued for members... (more…)

Wishing everyone a very, Merry Christmas and a New Year of peace and prosperity.

In another demonstration that the market and the economy are two very different animals, Personal Income dropped 1.1% MoM and Personal Expenditures dropped 0.4% MoM.YoY, Spending fell 1.3% and Incomes rose 3.8% – but to a lower low. Naturally, futures yawned and are back above their SMA10.

Needless to say, tossing out $600 stimulus checks like so many rolls of paper towels isn’t going to make a difference. Of the 100 most populous cities in America, only Toledo offers median rent of less than $600 per month.

There are still 11 million unemployed Americans, only some of whom will be afforded eviction/foreclosure protection under the latest stimulus bill (if it is signed into law.) The latest is that Trump wants Congress to up the stimulus checks to $2,000 per person.

Of course, he’s announcing it now without any Senate Republican support and when half of Congress has already left town. But, hey, it’s the thought that counts.  Merry Christmas indeed.

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As virtually all of our models have been warning, stocks are taking a big hit this morning. The tension has been building, simply waiting for a catalyst. With OPEX/Quad-Witching in the rear view, the UK virus mutation certainly fits the bill.

ES, off 128 points a few hours ago after coming within 6 points of our 3730 upside target, has rebounded sharply from its lows as algos cheer VIX’s pullback after testing its 200-DMA.

But this appears to be just the start of a very rocky road for markets which have previously ignored the worst disaster in any of our lifetimes. Can anyone really be shocked?

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Almost four months ago [see: Aug 24, 2020 Update] we noted that the next overhead resistance once ES broke above its Feb 3397.50 highs was the 1.272 Fib extension at 3730.37.

Seeing ES pop above its former highs means there is no specific overhead Fib resistance until the 1.272 extension at 3730.29 (SPX 3720.37.)

I didn’t consider gaining another 10% all that likely, so didn’t even bother showing it on a chart at the time.  In fact, ES’ first two pushes above 3397.50 failed miserably. It wasn’t until Nov 4 that it finally left the former highs in its rear view mirror.

Last night ES got within 7 points of that resistance we discussed all those months ago, reaching 3723 on quad-witching eve – begging the question “has the rally run its course this time?” It certainly appears so.continued for members… (more…)

DXY tagged our 89.88 target overnight, capping off a nice short that dates back to March 18 [see: Currencies to the Rescue.]With so many other instruments watching its every move, we’ll dig into whether the correction might have run its course and what it means for equities.

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