The algo-driven meltup continues, with ES currently showing a 24-pt gain primarily on the back of CL’s bounce off its SMA20 and VIX’s gradual asphyxiation.As ES approaches the neckline of the H&S Pattern it completed and paid off so handsomely, we’re left to wonder whether SPX will ever pay its off. continued for members.… (more…)

Following Friday’s algo-inspired spike, futures have been settling gradually lower. Over the past several hours, though, ES has rallied back into the green.  VIX continues to drive much of the action, ramping overnight just to have a place from which to dive the following morning. With CL and RB consolidating and the dollar under pressure, will it be enough to keep the rally going?

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…and, the market soars!  Just because.

There’s another old economics joke:

Q: How many central bankers does it take to change a light bulb?
A: None.  It’s getting brighter, see?  It’s definitely getting brighter!

The brain trust which has overseen the Fed since 2006 assembles today at the American Economic Association’s annual meeting. We’ve all seen the data: expansion of the Fed’s balance sheet from $800 billion to $4.4 trillion; a stock market which rallied 340%; 10Y notes which fell from 5.3% to as low as 1.3%; fed funds rate which fell from 5.25% to as low as 0.04%.

Bernake and Yellen obviously oversaw some sizeable market declines – Bernanke’s 57% 2007-2009 freefall obviously dwarfed Yellen’s carefully managed 15% swoon in 2015-2016.

But, it’s Powell’s 20% (so far) 2018-2019 correction that is attracting all the attention, as it is viewed by many as the result of a policy mistake. During his short tenure, Powell has already presided over two breakouts in rates (the solid red trend line, followed by the dashed purple trend line) and, in the past couple of weeks, a breakdown in rates (the dashed red TL.)

The breakouts alarmed many as they had a significant and immediate impact on industries which rely on low rates for prosperity: housing, autos, etc. They also refocused attention on the US’ disastrous debt imbroglio.  The increase in rates (the black line) will be enough to help turn a 5% increase in federal debt into a 13% increase in interest expense.The problem is that thanks to the algo-inspiring spike in oil and gas prices last year, inflation was becoming a problem and justified higher rates.  Since October, oil and gas prices have tumbled. December CPI will likely come in near 2% or even less.  Both extremes were manipulated, as even Trump has now admitted.So, what metric should the Fed pay attention to in deciding the course of future hikes? Slumping real estate sales and ISM surveys?  Strengthening employment figures? It seems Powell is damned if he does and damned if he doesn’t.

I suspect we’ll see smiles of relief from Bernanke and Yellen who got out while the getting was good.

Last night we got a pretty typical pre-Fed ramp job. When you see the futures do this……there’s usually a reason, such as the corresponding ramp job in oil. The momentary hiccup when the 312K jobs number was announced was easily offset by hammering VIX from where it was when I began this post two hours ago… …to here.

And, suddenly, everything is getting brighter! If you’re wondering why the ramp job stopped after 37 points, it’s pretty simple.  That’s all that was needed to get SPX up to and over its SMA5 200 at which point the algos will have free rein.  If Powell’s comments aren’t dovish enough, stocks will have a nice cushion.

I wonder if all those people who were complaining about algorithms deflating the stock market will be upset when they produce a rally?

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Following last night’s plunge in AAPL shares to our 144.48 target [see: Jan 2 Update on AAPL] the S&P futures plummeted as much as 58 points from Wednesday’s highs. There, the tightly correlated pair went their separate ways.

ES is off only 25 points (1.1%) while AAPL is indicating an 8% loss. Blame the majority of the divergence on VIX, which is undergoing the same kind of operation that rescued stocks yesterday.The other dramatic rescue was in USDJPY, which plunged to levels not seen since the night of the 2016 presidential elections (the yellow arrow.)  As occurred then, and in Brexit before it (the other yellow arrow) USDJPY has recovered most of its losses as the opening bell approaches.Can the market shake off this latest crack as it did both of those times?  A critical test lies ahead.

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On Nov 1 [see: All Eyes on AAPL] I noted that AAPL, then at 219.55, was likely headed for its 200 DMA down around 192.17. 

I argued that if the 200 DMA didn’t hold, the stock’s nearest significant support was at 144.48. I felt a little silly suggesting such a thing.

After all, the company has announced massive expansions of its buyback plan every time the stock gets the sniffles [see: Engineering AAPL’s Breakout.]

The laughter died down when the stock closed below the SMA200 on Nov 13 [see: AAPL Discovers Gravity.]It came within 2.11 on Dec 24, which was close enough to touch off a 9% bounce.  Tonight, however, it got that much closer: 144.51.  We’ll call this a tag.What happens if the stock bounces here?  And, more importantly, what happens if it doesn’t?

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After a week-long ramp job, equities are off roughly 40 points.  Is this the end of the rally, or merely a pause before another leg up in a Happy New Year? When ES is sitting just below important moving average support (the SMA10 at 2470.28) I’m always a little circumspect.continued for members… (more…)

USDJPY recently failed, again, to break out past overhead resistance, dropped to our 110.75 target [see: Unscripted] where it momentarily bounced for a couple of days before dropping through its SMA200.  Any time the USDJPY drops through its SMA200, it’s significant.  With EURUSD also threatening to break out, this is a good time to look at both of them and the likely effect on DXY.

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If you enjoyed Wednesday, you really enjoyed yesterday’s algo-driven meltup too.

VIX, USDJPY and CL engineered a striking recovery and reversal.  ES put in a low which should help define a rising channel, then rallied strongly into the close.

The recovery was driven by VIX, which suddenly collapsed down through the red TL and SMA5 200 shown below…

…USDJPY, which spiked higher into the US equity close…  …and CL, which bounced off the channel bottom it was backtesting.

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It’s not usually so obvious. The reality is that the guys who usually push the buttons and pull the levers behind the curtain are all off on vacation.

The ones left behind lack the deft touch that’s required to manipulate the stock market without it being quite so obvious.

For you doubters, here it is in very simple terms.  We all heard about Mnuchin assembling the Plunge Protection Team as the S&P500 nuzzled up to bear market territory.  It actually closed down 20.05% from its intraday highs on Monday.

Then this happened yesterday, the very next session.  It’s what the PPT does.  It’s what they’ve always done.  As usual, it worked.  And, it had nothing to do with retail sales, presidential tweets or employment figures.  Here’s how it works.

Only about 10% of all trading volume is conducted by fundamentally-oriented, discretionary managers.  So everything else is either index, quasi-index, smart beta, trend following, risk parity, or some other quantitatively-oriented strategy.

The one thing they all share in common is that they all react to what’s happening in the market.  If you can produce conditions that cause them to react, you can be the tail that wags the dog.  And, it’s especially easy to do amidst a low-volume holiday week – a very common occurrence.

There are three primary factors which can readily cause stocks to rally: a decline in VIX, a rally in USDJPY, and a rally in oil prices.  All of these factors were instrumental in getting SPX up to 2940.  And, all were in the process of unraveling over the past several weeks.

Yesterday, they all recovered.

First, here’s what the S&P 500 e-minis (ES) looked like.  Note the labeled reversal points.The first factor was oil, which saw a channel which dates back to Feb 11, 2016 break down on Monday. It closed below the channel bottom – quite bearish.Yesterday, it recovered sharply — rallying 10.95% from Monday’s lows.  Note that it bottomed where ES did at “1”, pulled back a bit at “2” when ES backtested its SMA5 200 (a frequent support level for algorithms), and didn’t let up until it reached “3” at the same time as ES.The second was VIX, which on Monday had closed above the .618 Fibonacci retracement of the drop from 50.3 in February to 10.17 in August.  This was a potential turning point. So, the fact that it closed above the .618 on Monday was quite bearish.Despite having closed above the .618 (point 1), it dipped below it and broke below the rising purple trend line at exactly the same time that ES first climbed above its SMA5 200.  It backtested the TL when ES backtested its SMA5 200 (point 2) and plunged 18.3% over the next 6 hours — conveniently bottoming out (after breaking below the red TL as well) at the close (point 3.)

The last factor was USDJPY, which had closed below its SMA200 on Monday — again, bearish.  Yesterday, it had worked its way below the .886 again prior to the market opening, then sharply recovered by the time the market closed.  As with the others, its inflection points exactly matched those of ES.

The big question on everyone’s mind is whether the correction is over.  Have we avoided a bear market?  Our charts have shown that lower lows would come ideally in February or even March.

The fact that stocks were falling so sharply produced incongruities between Fib levels and channel bottoms that were going to be messy to resolve.  This bounce, however long it lasts, might have taken care of that little problem.  We’ll find out soon enough, as futures are currently off about 40 points and didn’t make it back into the rising channel from which they broke down last week.

I’m still on vacation, but will check in later in the session.  A reminder for members and lurkers alike…our sale on Annual Memberships draws to a close in a few days.  I suspect this will be the last time we offer them.  But, regardless, the price is right — equal to about 5 months on the monthly subscription plan.  For details and to sign up now, CLICK HERE.

GLTA.