Another day, another after-hours ramp on trade deal rumours…

This time, the news is out of China.  Last night’s news, however, was more convoluted than usual.

China says that it has agreed with the US to remove tariffs in phases.  But, it also said that the deal would require that both countries simultaneously cancel tariffs on each other’s goods in order to reach a “phase one” deal.

The China spokesman said the proportion of tariffs canceled for both sides must be the same, but the number to be canceled can be negotiated. “In the past two weeks, the lead negotiators from both sides have had serious and constructive discussions on resolving various core concerns appropriately. Both sides have agreed to cancel additional tariffs in different phases, as both sides make progress in their negotiations.”

Maybe it’s just me, but that does not sound like a deal is in place – phase one or otherwise.  In fact, it sounds exactly like the type of news blurb which would have been released months ago: “We’re working on it.”

But, please, don’t bother the machines with the deets.  ES made new highs……while VIX has collapsed again (to its previous lows of course)…  …USDJPY has popped up past its SMA200 again……and, CL has topped its SMA200 again. These are repeats of moves that have all previously failed. But, hey, we have new highs in the S&P500!  So, what’s not to love?

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When the market hangs around an important level of resistance day after day, without breaking out or breaking down, it usually means something important. is in the works.  We’ve seen it in the S&P futures, loitering around the 2.618 Fib extension (of the 2007-2009 crash) at 2076.93.  We’ve seen it in VIX, bouncing repeatedly off a trend line of support dating back to Nov 2017.

And, we’ve seen it in AAPL, one of the poster children of the market’s latest rally and one of my favorite stocks to chart and trade. It has been very, very good to us.As we discussed the other day [see: Chasing Highs] the broad market has made a habit of disappointing those who blithely chase after each breakout to new all-time highs.  Is this also true for AAPL?  And, if so, what does it tell us about the broader markets?

We should start with the observation that it has essentially repeated the pattern it exhibited this past May – backtesting the channel from which it broke down a year ago.  This, in itself, suggests trouble ahead.

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Yesterday delivered the initial stages of a potential downturn.  The after-hours action, again, threw it into question after — you guessed it — more whispers of progress on the trade front.Naturally, we also saw more algo-baiting nonsense in VIX, USDJPY and crude.The record books will reflect that the market continues to hit new all-time highs.  But, what about price discovery?  Is it still a “market” when prices are manipulated so easily every single day?

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Buy-and-hold investors are no doubt pleased with today’s new all-time highs.  A review of the past two years, however, shows that traders who are tempted to chase stocks here should be very careful.

This is the 4th breakout to new highs since January 2018. The figures below show limited upside in the days following each breakout compared to the losses incurred once the breakout failed.  The average cycle gains averaged only 1.29% while the subsequent losses averaged 8.30%.

If ES were to top out here at 3083.75, it would represent a 1.79% gain above the Jul 26 highs — right in line with previous breakouts. A drop to the TL connecting previous lows, slightly below the SMA200 at 2891, would produce a 5% loss — the smallest of the four previous cycle drops.

There’s something different about this breakout, of course.  ES just completed an Inverted Head & Shoulders Pattern targeting 3717 — a 20% gain from here, if today’s new highs hold.

So, what happens next is critically important to the outcome for the coming year.  Is the market really breaking out in pursuit of another 20% gain, or is this merely an exercise to ramp the Dow up to new highs?  There are a lot of folks who need such a headline.

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This rally isn’t going down without a fight.  The better than expected jobs report is this morning’s catalyst, sending S&P futures 13 points higher to break out of the little channel from which they broke down yesterday.

Yes, it’s all very confusing – especially since the Fed just cut rates based on what is ostensibly pretty decent data. And, with a little more of a push from algos, SPX could make new highs this morning.What isn’t confusing, however, is that VIX has held important support and our 2s10s model is still signalling a downturn — meaning this pop should be faded.

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The pieces are falling into place for a downturn.  We begin with USDJPY, which popped above its SMA200 but failed to make a new cycle high in the wake of yesterday’s FOMC decision. It’s on its way to our 107.88 target.

But, if the latest rising channel breaks down, there is much greater downside potential.  Note that the BoJ declined to follow the Fed’s lead last night and is standing pat on rates.

Thanks to corroborating price action on CL and VIX, which completes the bears’ hat trick, futures are already off about 10 points.continued for members… (more…)

Once again, the FOMC will have the opportunity to demonstrate their priorities.  Will they cut rates again, ostensibly in an effort to stave off a recession?  Or will they keep their powder dry and risk a market meltdown?

Mohammed El Erian, in a wonderful moment of truthiness this morning on CNBC, argued that cutting rates is a bad idea.  Referring to the ECB’s experience:

It is not only ineffective, it is actually harmful to the long-term stability of the economy.  It is undermining the financial sector; it is undermining the provision of long-term protection services; it is allowing zombie firms to survive; and, it is contributing to resource misallocation.  On top of that, we see an increase in the saving rate in Germany, because people are compensating for the low rates. I don’t understand why it is we’d want to follow the path of the ECB.

Of course, one person’s resource misallocation is another’s reasonably priced bull market. Like a insecure lover, the market desperately needs the Fed to continue showering it with compliments (the latest iteration of not-QE) lest it look in the mirror and discover the extra pounds and wrinkles which time has wrought.

Nothing has changed in our outlook from Monday.  Unless the Fed manages a dovish surprise, which is highly unlikely, yesterday’s highs should stand for quite a while…… and volatility should spike much higher in the days ahead.continued for members… (more…)

The meltup continues as we approach the next FOMC meeting. This time, we also have a slew of earnings reports — which have largely been ignored in the quest for new all-time highs.Would the Fed’s failure to cut rates again make any difference?

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More dismal earnings and outlook from a market “leader, more stoic nonchalance from the futures.

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