ES managed to hold those higher lows yesterday, bouncing 46 points from its 4am daily low. Both SPX and ES managed to close well above their SMA10s again.
The usual factors were at play. At one point, VIX was off by 18.4%. But, the real action came when, as we discussed, VIX dropped through TL and SMA200 support. The algos are still very much in charge and haven’t yet been given the green light for a meaningful backtest.
Could it come today?
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Not too surprisingly, the Iran problem didn’t go away over the weekend. If anything, both sides are making threats that would significantly expand the conflict. What’s more, Trump’s unilateral actions have resulted in Iraq’s parliament calling for all US troops to withdraw from Iraq – without question an important win for Iran.
Trump’s 2011 predictions of a politically-motivated attack on Iran by Obama (which obviously never came to pass) are causing many to question the timing and motivation of his own actions, not to mention the existence of a coherent Middle East strategy.
So far, equities’ reaction has been contained. Though, gold and bonds are providing a less filtered reaction to the escalating risks. Gold popped up to tag our next upside target…
…and, 10Y notes broke out.
Past Trump-related emergencies (trade war, impeachment, etc.) have been easily downplayed or explained away. I can’t imagine that Trump or his sycophants will be able to spin this latest series of missteps as unimportant.
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WTI futures spiked nearly 5% overnight in the wake of a US drone strike on Baghdad Airport which killed Iranian military commander Qasem Soleimani. It is a dangerous escalation in the US conflict with Iran which broadened when Trump alarmed US allies by pulling out of the Iran nuclear deal last May.
We argued at the time, as did many, that Trump’s actions put the US on the path to a potential shooting war. The assassination of Soleimani clearly amplifies the risks. So far, oil prices have pushed only slightly above the levels reached after the nuclear deal pullout and the Saudi Aramco plant was attacked in September. But, this is obviously a more serious geopolitical development. 
From an economic standpoint, a sharp rise in the price of oil further complicates the already thorny inflation problem facing markets – setting up a showdown between Fed hawks and doves in January.
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In our Aug 28, 2019 Update on Gold I noted that although GC had just reached our 1560 target, ZN had also reached our 132’100 target. The picture was further muddled by the fact that DXY and GC had been moving in unison – an unusual occurrence, to say the least.
ZN’s resistance could put the brakes on, meaning rates would rise and GC would theoretically fall. But…I expect ZN’s pullback to be modest — possibly only 3-4% — suggesting GC’s pullback would also be fairly modest.
As it turned out, GC and ZN both reversed. Although DXY made a half-hearted effort to break out, it was limited to 1.5% and GC’s reversal was limited to 1446.
DXY’s rally stopped making any sense at all once FOMC members began hinting at additional rate cuts. When the Fed resumed QE (QE-not as we like to call it), the market knew what to do: DXY has been steadily selling off and GC has climbed back to within $30 of its August highs.
Does this mean more upside ahead?
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With futures up 18 points and the S&P 500 closing 17.37 points below last week’s all-time highs, we should know pretty quickly which way the winds will blow today. As is often the case, VIX has been driving the algos with shots across the bow as needed — three so far. It’s enough to establish an obvious trend line which could easily be broken.
We got the test of the SMA200 we expected on Friday, and the subsequent very precise test of the red channel bottom from Nov 2017 at 8AM this morning. At this time, however, the key will be whether that little red TL from the overnight lows can hold.
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When Phase One was announced, stocks established a new steeply rising channel that aimed straight to 3300. When the channel was repeatedly tested, a new, steeper channel was established. 
Watching Peter Navarro this morning on CNBC, I hear that Phase One is really, truly, definitely, almost, pretty much sort of in the bag. Or will be soon. The more relevant factoid is that the end of the year is finally here.
The algos, having produced some pretty impressive numbers, can take a breather. From the looks of VIX, USDJPY and CL, they will.
The question is: Might it turn into more than that?
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One of the more interesting price cycles I’ve worked on over the years is that of oil. Oil and gas have proven to be lucrative trading vehicles, and their price movements have been extremely helpful in forecasting interest rates, currencies and inflation.
The most fascinating cycle I’ve discovered is the periodic peaks and crashes in WTI. The chart below shows that important highs (highlighted) have occurred like clockwork.
2003 – 2008: 1961 days
2008 – 2013: 1874 days
2013 – 2018: 1862 days
The last three important lows have been just as consistent and illustrate the on-again, off-again correlation between oil prices and equities. [The strong, positive correlation was marred by a significant divergence between June 2014 – Mar 2015.]
The chart begs some very important questions: will the cycle continue and, if so, will equities follow suit?
2001 – 2009: 2614 days
2009 – 2016: 2583 days
2016 – ???
In my opinion, this is the most important chart to watch over the next year or two.
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The fourth of December’s five gasoline price readings hit EIA’s website yesterday. The average stands at 2.47, 9.1% above 2018’s December reading. Unless another large component of CPI takes a nosedive this month, CPI could top 2.3 or even 2.5%. 
This is a level not seen since Oct 2018 (the shaded area below) when the 10Y averaged 3.15%. It’s currently at 1.95%, so something is clearly out of sync.
The Fed has been saying they’re going to allow inflation to run a little hot. And, it has, with Core CPI running 2.3-2.4% since August. The 10Y has responded, rallying from 1.43% in September to its current 1.95%.
All year long, YoY declines in oil and gas prices have kept headline CPI below 2%. It finally crept above 2% in November. December will represent a very substantial departure, with a YoY increase adding to rather than throttling back Core CPI. Is the bond market ready? Are investors listening?
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Traders have disappeared from sight this morning. Volume is about as low as it could be, despite a big miss (which didn’t even make the front page of CNBC.com) in Durable Goods new orders: -2.0% vs +1.2% expected. YoY, the drop was 5.7%, the worst since Jul 2016.
Futures plunged all of 4 points which, of course, sent VIX to the rescue with a compensating plunge.
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