Stocks are off slightly as the 2nd quarter draws to a close. The next quarter? I’ll be watching to see whether or not VIX experiences a bearish (bullish for stocks) 10/20 cross.
Equally important: can ES really maintain its bullish 10/20 cross indefinitely?
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Futures are melting up again on yet another pre-opening lower-low plunge by VIX.
With the other factors up against hard stops, all eyes continue to be on VIX – which has already spoiled the bears’ fun on numerous occasions.
The last one was this obvious backtest opportunity a couple of weeks ago. Everything was set up perfect for a backtest of SPX’s 3.618 extension…
…when VIX was unceremoniously crushed without even getting a crack at its SMA200.
It was clumsy and obvious…but effective.
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June 21 should have been the day we saw a bearish 10/20 cross in ES yielding a backtest of the 3.618 Fib extension.
Instead, we got one of those silly, algo-feeding collapses in VIX that sent stocks screaming to new all-time highs and ES has remained in a bullish 10/20 cross. With rising channels about to clear important Fib levels, the time to backtest some of that support is here and now. It’s not as crazy as it seems.
For whatever reason, VIX hasn’t yet experienced a bearish (bullish for stocks) 10/20 cross – something that nearly always happens before an equity rally. This suggests we might finally get the pop and drop we’ve been waiting for. 
Stay tuned…
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Of all the tools central bankers use to support stocks, VIX is perhaps the most useful. Frequently, a breakdown in VIX has been used to signal algos to push major indices above significant overhead resistance such as a major Fibonacci extension or channel top.
We last noted this phenomenon back in April when SPX was pushing up against its 3.618 Fib extension at 3956 [see: Irrational Exuberance and You.] Sure enough, VIX broke down through the falling purple trend line (#3 above) and SPX sliced through the resistance.
It’s significant because once again VIX faces an important test of support, the bottom of the channel from 2017. What it does here will determine whether or not the rally can continue.
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Under ordinary circumstances, a 2.3% MoM bump in Durable Goods orders would be very welcome – especially on the heels of last month’s -1.3% print. When inflation is a growing concern due to the Fed’s largesse, however, it complicates things. For instance, might it cause the Fed to take its foot off the gas?
Not to worry, VIX was hammered sharply lower for the fourth session in a row. 
It’s now off 35% since Monday’s highs and has reached levels last seen on Feb 14, 2020, a few days before the market crashed. Note that this is the target we first charted back in early April [see: Irrational Exuberance and You]…
…when we observed that VIX was repeating a pattern seen many times over the years.
It should come as no surprise that VIX did break down and SPX did, indeed, rise above 3956. Like all the other breakdowns, this one has the potential to keep the party going long past curfew.
This time, it went a step further – breaking below a falling trend line – especially bearish for VIX and bullish for stocks. It now has the opportunity to break below the trend line from 2017 — all the reassurance algos would need in order to bid stocks even higher.
Along the same lines, RBOB futures just topped their May 2018 highs (CPI was 2.8%) and are now 27% higher than their Feb 2020 (2.33% CPI) peak – even though total miles driven in April 2021 were 10% lower than April 2020 and 11% lower than in May 2018. RBOB hasn’t been higher than this since Oct 2014 when CPI, now 5%, was retreating from its recent 2.13% highs.
If this all seems a little overdone, you’re right. The economy has rebounded. But, few responsible economists would argue that things are better than in Feb 2020 when markets crashed as the pandemic roiled the global economy.
The obvious X-factor, of course, is the massive amount of money the Fed has thrown at markets. The less obvious factor is the ease with which the Fed can manipulate algos. The warning signs which used to cause correction-causing reversions to the mean — rapidly rising inflation and interest rates, rising volatility, etc. — are no longer legitimate concerns.
Why? Because the Fed has proven that stocks can keep rising even in the face of data that would otherwise be problematic. So what if inflation is out of control? Interest rates sure don’t reflect it. Below trend GDP? All the more reason for massive QE. 
They haven’t learned how to cure the patient, let alone prevent him from getting sick. But, they’ve rigged the thermometer, the blood pressure cuff, and the stethoscope to indicate that everything is just fine.
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Last night’s ramp job is brought to you by the usual suspects: VIX, CL and USDJPY. VIX made a new low, of course, while CL pushed up to prices not seen since Oct 10, 2018, and USDJPY broke out to new highs. The Fed might be further and further up a creek with a growing chorus of critics lining the banks, but the algos could care less.
Speaking of the Fed’s creek, note that 2s10s just reached our backtest target. Will it matter?
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The folks running the “market” apparently don’t care how obvious they’re being — tossing a 28% VIX smackdown into the mix to make sure that yesterday’s preposterous ramp job can hold for one more session.
What’s their game?
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ES came within 9 points of our next downside target before getting a nice bounce motivated primarily by USDJPY, which was working flat out to save the NKD from a scary, and long overdue dive to its SMA200.
This bounce will be quite important to the bulls, who are no doubt hoping to avoid a bearish 10/20 cross.
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Not that futures needed any help melting down this morning, but Jim Bullard just poured gas on the fire. Yes, Jim Bullard! The Fed president who never had a hawkish thought in his life.
"We were expecting an inflationary impulse, but this has been more than what we were initially expecting," says James Bullard. "The ideal path in my mind would be the 3% this year will be okay, and then we'll get it down to 2.5% next year and we'll converge to 2% from there." pic.twitter.com/i9vSio57GM
— Squawk Box (@SquawkCNBC) June 18, 2021
Then, he trashed the Fed’s most nonsensical policy: throwing $40 billion per month into the mortgage market when mortgage rates are already at all-time lows.
"I'm leaning a little bit toward the idea that maybe we don't need to be in mortgage-backed securities with a booming housing market and even a threatening housing bubble … we don't want to get back in the housing bubble game," says St. Louis Fed President James Bullard. pic.twitter.com/fDMkw9ckL9
— Squawk Box (@SquawkCNBC) June 18, 2021
Bulls better hope that ES can bounce at our next downside target: the 50-day moving average currently at 4174.
It appears that algos are finally being given the green light to (drumroll please) decline.
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Neither yesterday’s FOMC announcement nor Powell’s press conference produced any meaningful surprises. Yes, the dots shifted slightly, but everyone knows they’ll shift a lot more before long.
Futures easily reached our initial downside target and came within 5 points (so far) of our second. 
But, the real action was in currencies, which were finally turned loose. Look for EURUSD to finally reach our backtest target where it faces an enormously consequential decision.
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