Since the top came two sessions earlier and 0.6% lower than our original forecast called for, I’ve spent the weekend adjusting the price and timing targets for the next 9 months.  If it continues to play out as it has so far, the total drop will be greater than anything we’ve seen since the GFC.

It will feature 9 peak-to-trough moves of over 10%, 3 of which will exceed 20%. I’ve mapped out 23 significant turning points which average almost 300 points each.  In short, it will be a trader’s market.  It will test the resolve of buy-and-hold investors and trash the returns of momentum investors.

Buckle up.

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Futures have been all over the map since yesterday’s close.  SPX bounced slightly below the initial downside target from our analog first mapped out on July 15 and confirmed on July 30 [see: Ringing the Bell] — but, well ahead of schedule thanks to Trump’s latest China trade salvo.

The 3% drop from the top is nice.  But, the great thing about analogs is that they offer a predictable path through the otherwise indecipherable and often illogical twists and turns.  Since the top came early, it’s possible that everything else will come early.

I’ll be working on adjusting the timeline today.  In the meantime, CL and RB bounced where expected, VIX reversed where expected, SPX and ES should test their SMA50s today and the 10Y is making a beeline for our downside targets.

For those watching them, BA just nailed our red target from a couple of weeks ago… …and, AMZN is well on its way.Should be another very interesting day.

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In the immortal words of Ron Burgundy, “that escalated quickly!”

Sure, the algos weren’t happy with the phrase “mid-cycle adjustment.”  But, you can’t help wondering how many algos and carbon-based investors were disappointed that with 3.7% unemployment and 2.1% GDP growth the Fed saw the need to cut in the first place.Maybe the Fed knows something the market doesn’t.  Maybe the rosy economic statistics don’t tell the whole story.  Or maybe, just maybe, all the market cares about any more is how vigorously the Fed will support equity prices.

In any case, futures have bounced back 27 points from yesterday’s lows and are back atop the SMA5 200.  All is well, right?

Not so fast.  The knee-jerk pop in USDJPY has already reversed, oil’s protective pop is unwinding, and VIX seems to have more room to run.

Our analog pointed to July 30 as a cycle high.  But, we’ve been within 1% of our upside target 7 of the 13 sessions since July 15 when we first pulled the trigger.

Again, when we’re only 1% away, it could turn at any time and may indeed have turned already.  I’d be very comfortable being short here at 3017.

This is not like every other “buy the dip” setup.

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It’s been a long time coming and the subject of unending debate.  Almost everybody expects a 25 bps cut — though those who argue against a cut make very compelling arguments.

Consider the last time the Fed cut rates.  It was December 16, 2008 and they cut the target rate range by 75-100 bps — the same extent that Trump is arguing for now.  The circumstances are clearly a little different this time:

Perhaps the biggest contrast between now and then is who’s running the show.It’s anyone’s guess what the FOMC will do and Powell will say.  Our analog suggests the market will be disappointed.  Our yield curve model suggests the market will be disappointed. The currency picture suggests the market will be disappointed.

Even the futures seem rather blasé following yesterday’s enthusiastic bounce on the SMA10.Most importantly, all the effort Trump has put into driving oil and gas prices lower in order to force inflation lower and pressure the Fed into more accommodative policy has: (a) already driven interest rates much lower, and (b) sends bearish signals to the algos which are largely responsible for the market’s day-to-day gyrations.

The Fed obviously knows this and has taken it into account in its rate decision deliberations.  It’s the most significant factor behind CPI dropping through Core CPI.The question remains whether or not the data they’ll depend in making their decision includes the stock market’s likely reaction — always a safe bet in the past.

We’ll find out shortly.

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Conventional wisdom says no one rings the bell at market tops.  We’re ringing it anyway.  If our analog is correct, this is about as high as stocks will go.  If SPX pops above 3047, then there’s more upside to come (with an asterisk referring to central banks of course.)  But, until then, momentum is with the bears.

“Targeting 2% inflation and bringing down unemployment” made for a nice central bank slogan. But, it’s really been all about running interest rates into the ground in order to generate higher prices.  In that sense, this has been a rousing success.

We’ll never know, however, what the economy would have accomplished without the so-called “wealth effect.”  And, we’ll never know what might have happened if prices had been allowed to clear via market forces.

Today’s poster child: McDonalds Corp.  See if you can spot the point at which the board decided to hop on the buyback bandwagon.Stay tuned.  It should be an interesting next few days.

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The wait is almost over.  Two weeks ago, I came across an analog that pointed to tomorrow, Jul 30 as a pivotal point in equities.  Analogs don’t always play out of course.  But, this one is important enough that it will tell us much about what to expect from equities, bonds, currencies and commodities — whichever way it breaks.

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In the opening scene of the wonderfully silly Scary Movie, the sultry heroine comes face to face with the masked killer.  She glances down at an array of conveniently placed objects: a gun, two knives, a grenade and a banana.  She ignores the weapons, of course, and grabs the banana.

I think the Fed is in a somewhat similar position.  They could attack the global slowdown and join with competing central banks, all of which have taken monetary stimulus to preposterous extremes.

Or, they could stick to their congressional mandate of maximizing employment, stabilizing prices, and moderating long-term interest rates. To equity investors, it would be the equivalent of grabbing the banana: a choice that would almost certainly lead to the death of the ongoing meltup.

This morning’s Q1 GDP read only increases the difficulty of their choice.  While many FOMC voters would no doubt prefer to thumb their nose at presidential interference, no one wants to be known as the one who pricked the equity bubble.

Our current analog suggests that whatever choice they make, investors will be disappointed.

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Draghi says he’s prepared to do even more (is there anything more than “whatever it takes?”) and the German 10Y continues to slump further into negative territory.

What did it accomplish, you might wonder?  While obviously not changing the prognosis that the ECB will soon be scooping up everything not nailed down, it did manage to break DB above the TL that’s been in place since Jan 2018 (whether it will stay there is another matter.)Meanwhile, the Fed’s task of justifying a rate cut just got a bit more complicated as durable goods strongly beat expectations.Stocks aren’t likely to respond favorably, though there’s now a bit of a technical buffer in the 10-day moving averages.

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The good news for bulls is that ES/SPX broke through the latest straw man trend lines yesterday and have (more or less) backtested them.  The bad news is that the Dow remains stuck below double overhead resistance and several Dow components feature charts that are anything but bullish.continued for members… (more…)