pebblewriter

Author: pebblewriter

  • Powell: What Did I Say!?

    I saw an interesting interview on CNBC this morning where the guest observed how important overnight trading was to the market’s overall performance. Andrew Ross Sorkin offered data that if one bought the S&P 500 at the close of each day of trading and sold at the next morning’s open, they would be up 650% since 1993.  If, instead, they bought at the open and sold at the close, they would be down 3%.

    This observation won’t surprise any of our members, who are well-versed in the market’s increasingly endemic ramp jobs over the past 12 years. So far so good. The problem with the interview came when a rationale for the effect was offered: one should be compensated for taking overnight risk.  Mike Santoli then chipped in, adding another explanation: more news happens outside of market hours than during.  Ugh. And, it was going so well…

    Let’s be clear about one thing: markets are manipulated, and it’s almost always intentional. Sometimes it’s quite obvious and effective, such as the announcement of a enormous new round of QE on March 23. This particular one was ridiculously obvious, as it came at 8am on the day the Dow would complete a 38% crash to test its Nov 9, 2016 lows (the day after the presidential election.)

    The rest of the time, it’s done so discretely that most observers are unaware of the actual machinations. We discuss the whys and wherefores every single day, as understanding the motives and means provides an excellent road map for our forecasts.

    A great example is our VIX chart, which has exhibited an orderly collapse since it reached our Fibonacci .886 target at 80.3 on March 16.The declines most often come in the after-hours, before the cash market opens. This prompts the algos to buy futures, which results in a gap higher on the open as the rest of the machines kick into gear (index funds, ETFs, quants, etc.) The fundamental crowd, which accounts for only 10% of volume, brings up the rear.

    It’s notable then that after bouncing at its 200-DMA and a trend line off its 2018 lows, VIX finally departed from this channel (the yellow arrow above) last night.

    This allowed our favored scenario to play out as described yesterday.

    I’m leaning toward a correction beginning today, but am unsure whether the channel bottoms at ES 3076 and 3122-3135 will hold or not.  It depends a great deal on what Powell says later today.

    Bottom line, Powell’s comments weren’t terribly uplifting as he essentially confirmed that a rebound is not just around the corner. The problem is the fallout from the coronavirus – which the rest of the world is beginning to understand has not gone away — not even with the Fed’s best efforts.

    As to the markets… so far, so good. The key, of course, will be what happens if/when it reaches the 2.618 Fib extension at 3076.93.

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  • OECD: Worst Global Recession in Nearly 100 Years

    The OECD reports that global economic output will fall by 7.6% if another wave of coronavirus arrives in 2020, by 6% if not.  US GDP will fall 8.5% if a second wave occurs, and 7.3% if a second wave is avoided. If Dr. Fauci is right, a second wave is likely. I’m almost certain of it.

    Also out this morning, US CPI – which came in roughly in line with consensus and registered the third monthly drop in a row.

    CPI fell 0.1% in May versus the 0.8% drop in April – the biggest since the GFC. YoY, CPI inched up 0.1% versus April’s 0.3% gain.

    Core CPI, which excludes food and energy, also fell 0.1% following a 0.4% drop in April. Annually, core CPI rose 1.2% in May – the smallest rise since 2011.
    But, the big news today will be the Fed.  Will they or won’t they expand the massive stimulus seen over the past two months? Inflation is low and unemployment is high – both cause for additional stimulus under normal circumstances.
    But, the FOMC certainly realizes they have reinflated markets beyond what the economic circumstances would dictate – zombie companies and all. The disconnect is so stark that even permabulls are attributing new all-time highs to the Fed’s actions.
    There are many, but one of my favorite frothiness indicators is Citadel’s report that Russell 2000 stocks priced under $1 (penny stocks) are up 79% in the past five trading days. Nothing weird about that, right?  Wouldn’t it be cool if one of the reporters covering Powell’s press conference asked him about market integrity and equity bubbles?
    Nothing much new in the futures. We still have the .886 just overhead, with OPEX on the 19th and Q2 closing out on the 30th.  Both are typically bullish.  But, the downside potential is significant.
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  • A Big Squeeze

    ES has given back yesterday’s gains after bumping into the top of the rising channel which has guided it since late March. A large sell off would be unusual for the days leading into a Fed decision, let alone OPEX and the end of Q2.But, then again, there’s nothing normal about the market these days – which is why we need to keep a very close eye on VIX.

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  • VIX Rules

    VIX continues to rule the roost. Friday’s plunge below the 200-DMA was all the algos needed to justify breakouts in multiple indices. The rallies in USDJPY and oil were icing on the cake. At what point can we assume stocks will take a breather, or more?

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  • Another Yield Curve Warning for Stocks

    Two steps forward…in order to accommodate a big step back.

    We’ve seen it countless times in the lead-up to Fed meetings, GDP reports and, lately, jobs data. With May unemployment expected to top 20% (it’s unofficially already there) after another 7.5 million joined the jobless ranks……the market’s caretakers put a 58-pt cushion into the market.  ES’ 10-day moving average, for instance, is about 87 points below last night’s highs. Had ES instead fallen 87 points from yesterday’s lows, it would mean a risky test of its 200-DMA.

    It’s gratifying to see scores of analysts come to the realization that the markets are being heavily influenced (a more accurate word is manipulated) by massive Fed stimulus. But, as members know, this has been going on for years – particularly as stocks reach key levels of overhead resistance.

    With the Dow finally joining SPX in reaching its 200-DMA on Wednesday and several key components (e.g. AAPL) taking great pains not to break out to new highs, it seemed as though we might get at least a pause in the meltup, maybe even a correction.

    Our yield curve model confirmed it yesterday with the 2s10s breaking out above all recent highs except that seen in late March.Now, we’ll have to wait and see whether the algos, being directed this morning by USDJPY, VIX and CL, are intent on notching new highs or will, temporarily at least, reconcile with the real world.

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  • Falling Into Place

    The Dow finally reached its 200-day moving average yesterday, one of the targets that seemed important to the algos. Perhaps significantly, it managed the tag without AAPL and COMP reaching new highs – a nifty trick – and on the same day that ES and SPX tagged our IH&S targets from Apr 6.

    We also saw a few more pieces fall into place – particularly USDJPY. It certainly opens up some downside targets as long as VIX cooperates by bouncing at 24.52.

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  • What Resistance?

    ES closed just above the 2.618 Fib extension at 3076.93 yesterday and proceeded to conduct the usual overnight meltup, aided by a nonsensical ADP jobs report. Consequently, it is closing in on the IH&S target of 3108 from a pattern completed way back on Apr 6.

    At the same time, COMP – which has struggled to move beyond its .886 retracement, let alone make new all-time highs – just completed a golden cross, where the 50-DMA crosses above the 200-DMA.Is there even such a thing as overhead resistance any more?  We should find out today.

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  • Pop and Drop?

    There’s a lot to unpack this morning, as several targets were tagged overnight.   USDJPY finally popped up to tag its 200-DMA……which enabled ES to come within 1.43 of our 3076.93 target – the 2.618 Fib extension of the drop between 2007-2009. I thought this was going to happen over the weekend, but better late then never.

    It’s been a while since we had a nice pop and drop. Stay tuned.

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  • Mind the Gap

    In 2009, in the depths of the GFC with the S&P 500 tagging 666, about 11.9% of Americans lived in poverty.  In 2020, with the S&P 500 having recently reached 3393 after trillions in central bank intervention, the rate is estimated to be 12.4%, with projections of over 15% depending on how bad unemployment gets.Black and Hispanic Americans have it much worse.

    Is it any wonder that as the gap grows between the haves and have-nots, we’re again seeing evidence of extreme anger and despair?  With so many unable to pay their rent or buy groceries, and the lion’s share of the government’s pandemic response going to large corporations, should we be shocked that people are protesting in the streets? How about when they realize they’re the guinea pigs in the establishment’s undeclared herd immunity experiment.

    To use the talking head parlance, the market keeps “shrugging off” such economic realities. But, there’s something about protests, looting and riots that seems to get investors’ attention. Don’t be surprised if the market finally reacts.

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  • The Hits Keep Coming

    It’s the last day of a short week packed with more important economic data — which the market has managed to ignore so far. Today might be a little different, as the spike in the savings rate and the collapse in consumption confirm a troubled road ahead for the strong consumer narrative.  Gee, could 25% unemployment actually begin to matter?

    Ignore the spike in personal income, as it reflects the massive government stimulus checks sent out last month.

    The PCE deflator also surprised, plunging almost to 2009 levels. So far, the futures have managed a muted reaction, with a likely falling wedge setting up following yesterday’s reversal at our channel midline target.But, with China trouble, riots in Minneapolis, and Trump taking a swing at social media darlings, maybe the data will matter for a change.

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