pebblewriter

Author: pebblewriter

  • Update on Oil and Gas: Jan 13, 2021

    The last time we were this bearish on oil and gas was on October 3, 2018 [see: VIX Takes the Plunge.]  Our reasoning at the time:

    CL and RB [have] not only reached overhead resistance by our measure, but must deal with inflation that’s too high, bearish API data, another round of Trump tweeting, and a large build in EIA inventory. I think the time has finally come to revert to short…

    WTI and RBOB both tumbled about 40% over the next three months.

    At nearly 3%, inflation had been too high – sending the 10Y to 3.5%. Highly correlated, both had recently broken out of long-term downtrends: CPI above the black dotted line and the 10Y above the blue dotted line.Historically, this might have been perfectly acceptable. But, as we were shouting from the rooftops at the time [see: Why Rising Rates Are a Problem This Time] rising rates with a $1 trillion deficit and debt soaring past $20 trillion was completely unacceptable.

    And, inflation was too high primarily because energy prices were too high. The correlation with the YoY rise in gasoline prices, in particular, has been quite strong over the years.

    No doubt the Fed saw the writing on the wall – as did the White House. Trump had been tweeting about oil prices being too high for months. His tweets had taken on a decidedly desperate tone.

    Yet Saudi Arabia politely ignored him, and oil prices continued higher – until Crown Prince Mohammed bin Salman slipped up in a very big way.

    It took about 5 minutes for virtually everyone to connect Khashoggi’s murder with MBS – who suddenly found himself without friends.  Except for one who, coincidentally, needed a favor.  As we wrote in Coincidences and Consequences at the time:

    It’s interesting how Khashoggi’s murder top-ticked oil and gas prices…and, so soon after Trump’s latest demand that OPEC lower oil prices. As Churchill famously said, “never let a good crisis go to waste.”

    Some were aghast that we would insinuate such a thing.  But, Bob Woodward’s excellent Rage recently shed some light on the topic…But, we digress.  Oil and gas prices crashed 40%.  Inflation and interest rates receded.  The story might have had a happy ending, but the Fed and White House had apparently forgotten about the strong correlation between oil/gas prices and the stock market. When RB plunged 42%, SPX gave up 20%.

    Not coincidentally, they both bottomed on Dec 24 (when Treasury Secretary Mnuchin convened the Plunge Protection Team – but that’s another story.) Trump probably texted to MBS…something to the effect of “jk!!! LOL!!!  ” because oil and gas prices rebounded sharply.

    Wait, you’re probably wondering, what about interest rates?  Bond yields drop for all kinds of reasons. Sometimes it’s because inflation is dropping. Other times, it’s because a stock market crash scares the crap out of equity investors who sell everything that isn’t nailed down and pile into bonds.

    While the PPT’s volatility crush gathered momentum, the Fed announced that the recent round of rate hikes was kaput and began cutting. Stocks were thrilled.

    The occasional mini-crashes in the stock market helped drive rates even lower, until the 10Y finally bottomed out at 1.43% on Sep 3, 2019 – down sharply from its 3.25% October 2018 highs.

    Oil and gas, which had nudged stocks back to their September 2018 highs, could take a breather. Their ascent had been way out of line with the fundamentals, and the charts strongly suggested a reversal.  As we wrote on April 22, 2019 [see: Oil Fails to Rally Stocks]:

    One of the more effective factors in prompting algos to buy stocks is the price of oil. Yet, as we’ve been discussing, higher oil prices are a double-edged sword as they can drive inflation to levels which prompt uncomfortably high interest rates. The oil and gas picture shows RB and CL have both run out of room. It’s time to short again.

    CL, which closed at 75.04 that day, fell 15% over the next six weeks. It bounced around in  in the 60-70 range until January 2020, when it finally broke down.  RB, which closed at 2.13 on Apr 22, fell 32% before stabilizing somewhat. It finally broke down in March 2020.

    The culprit this time, of course, was the coronavirus pandemic. As we noted on February 20 [see: Buckle Up] the stage was set for the algos to keep pushing stocks higher. But, as we had discussed on January 6 [see: Middle East Tensions Escalate] the repeated failure to break out in response to numerous opportunities was itself a strong sell signal.

    CL has tagged its white .886 and, having broken out above the red TL, will threaten the April highs if it breaks 64.77.  If it can’t break the April highs, it will be very susceptible to a downturn. Remember, if the rising white channel breaks down, we could be looking at a major crash. Meanwhile, RB failed to break out past either its SMA200 or the red TL from the April highs. For those not already short, this is the place.

    It certainly was.

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  • Saved by the Bell

    It was a close shave, but ZN’s falling red channel has survived – at least so far. The runaway 10Y yield gave up all of its gains – and not a minute too soon for the bears.

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  • Update on Bitcoin: Jan 12, 2021

    Quick note:  BTC backtested the top of the broken pink channel as detailed in our Jan 7 post [see: Jan 7 Update on BTC.]

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  • Moment of Truth for Bonds

    ZN broke down from its rising red channel back on the 6th. Since then, it has found support in a falling channel – from which it is now threatening to break down.This is a moment of truth for bonds and the many correlated assets such as GC, shown above.  Stocks might not be amused.

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  • Charts I’m Watching: Jan 11, 2021

    Futures are off sharply this morning as expected per our yield curve model and as indicated by our currency and oil/gas forecasts [see: Run, Don’t Walk.] We should find out shortly whether this is a garden variety buy-the-dip opportunity or something more substantial.

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  • Run, Don’t Walk to the Nearest Exit

    At least that’s what RSP, the equal weighted S&P 500 ETF, is saying.  It has finally reached the top of the same channel that marked the Oct 2007 top and the Jan 2018 top.  It should also reach, on the open, the 1.272 Fib extension of its drop from Feb 2020. And, it’s doing this on negative divergence with RSI having also run into overhead resistance.  Granted, it’s not the S&P 500, which has pulled away from it on a number of occasions on the strength of the nifty 5-6 mega-caps.  But, value has caught up with growth and things are downright frothy at the moment. I’m not sure this is what the Fed had in mind…

    RSP’s channel is a stern warning that should not be ignored – especially on a day when we are reminded once again that the virus is not being dealt with effectively and unemployment is going in the wrong direction.BTW, the nearest exit…

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  • Update on Bitcoin: Jan 7, 2021

    It seems like just yesterday BTC reached our last upside target range at 29,890-30,108. Actually, it was Monday [see: Jan 4 Update on Bitcoin.]

    If it can hold these Fibs, the next major Fib target to the upside is the blue 2.24 and red 3.618 at 40,180-40,138.

    Go figure.

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  • This Is Getting Old

    Lots of calls and emails yesterday from folks wondering how the hell the market could be up so strongly in the face of the violent unrest in D.C.

    When the capitol was breached, shortly after 2pm, the S&P 500 was already up 55 points on the day.  This came on the heels of a sharp 22-point plunge on the open.  Altogether, the S&P 500 rallied 78 points from the daily lows before finally topping out.

    We know why this happened. As is so often the case, the algos were directed to erase any signs of dissatisfaction with the events of the day: an abysmal ADP employment reading, FOMC minutes, a brewing constitutional crisis, etc.

    Note the slight breakdown of the futures around the time ADP employment (-123K vs prior month +304K and +120K consensus) was released at 8:15.  Now, see if you can tell when Fed minutes, which the Fed obviously knew reflected a less than rosy assessment of the economy, were released.

    I’ve marked it in case it’s not obvious.  Note that it didn’t stop until ES had made a new all-time high (by 1.5 points at 2:15.)Now, here’s what happened to VIX as the market opened and the day progressed.  The breakdown of a falling red channel and the 10-day moving average are pretty common and effective algo signals. I’ve marked the release of the Fed minutes with a yellow arrow. As fate would have it

    Sure, there’s too much liquidity in the markets thanks to central banks’ obvious agenda to prop up stocks. But, the cash on the sidelines we always hear so much about didn’t suddenly materialize yesterday at 9:30.

    Let’s be honest about what’s really moving markets like this: the systematic and deliberate crushing of volatility which, in turn, signals the machines to buy anything that isn’t nailed down. It happens over and over – and especially when the market’s protectors fear a potential downturn.

    As I wrote yesterday…

    Either this is the start of a chart-busting rally, or things are about to get very ugly right as ES’ 50-day SMA has reached its Dec 21 lows.

     

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  • The US Dollar’s Big Day

    The EURUSD, which bottomed when stocks did last March, has officially reached potential reversal territory at our 1.2336 target.

    At the same time, the 2s10s has bounced off support and shot higher. Per our yield curve model – which has been early but never wrong – this is a quite bearish development.And, oil – which jumped the shark over the past 24 hours – has tagged our 50.22 target.Even XLF is due to reach a reversal zone today (29.8) as rates have shot higher in the wake of the Georgian runoff.

    Either this is the start of a chart-busting rally, or things are about to get very ugly right as ES’ 50-day SMA has reached its Dec 21 lows.

    And, it all comes down to whether the USD can hold its recent lows.

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  • Charts I’m Watching: Jan 5, 2021

    ES backtested its SMA10 overnight and is back in the red with a potential bearish 10/20 cross in the works.  The last one (in late October) fueled a swift 9% correction. Our downside targets remain unchanged.

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