VIX and CL are giving the algos plenty to love this morning. VIX is plumbing new, all-time lows and CL continues yesterday’s rebound on its way to our upside target.
Yesterday, VIX’s actions were enough to break SPX out of its falling purple channel and close a minor gap. This morning, there’s a good chance of higher highs — depending on what the Fed has in store.
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What a difference a week makes. I was hoping that taking a week off would see some semblance of sanity return to the markets. Apparently, that was too much to expect.
A week ago, the US dollar pairs had reached long-term objectives, SPX was running out of steam and VIX’s all-time low was set way back in 1993.
Today, the dollar is running for cover, SPX has broken out yet again, and VIX set new all-time lows — having spent all but 4 sessions of the past three months below the bottom of our long-term rising yellow channel.
We’ll look at the repercussions of all the above, and what to expect next.
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In our last update on the Nikkei [see: Mar 23 Update] with NKD at 19190, we called for a 3% drop to support at 18631 and a subsequent 9% rise to 20286.
As it turned out, the drop was a little deeper than expected. But, the subsequent rebound nailed our upside target, reaching 20320 on Jun 20 and making a series of lower highs and lower lows since then.
For years, I have found the Nikkei to be a great indicator of the extent to which central banks (in this case, the BoJ) will go to manage stock prices. It continues to offer very strong signals about what to expect, next, from equities in general.
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If the algos had their way, the economic data might not even be reported.
As expected, inflation is still nowhere to be found. The USD, which was doing its best to hold its ground on the back of recent hawkish Fed comments, has plunged below key support. Yet, futures are still in the green.
Is this a turning point, or are we really going to see new highs on lousy economic data yet again?
As long as VIX has room to maneuver lower — which it does — there’s a very good chance.
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If you enjoyed watching Janet Yellen spend several hours avoiding saying anything remotely interesting yesterday, you should love today’s Senate Banking Committee testimony.
In the meantime, EURUSD has reversed at our upside target and broken trend to the downside…
…even as USDJPY makes a feeble attempt at stabilizing.
The net result is a dollar index which seems utterly confused.
There are two clues, however, that should not be missed. One is that PPI came in at +2.0% YoY, a very questionable number given the actual sharp decline in oil and gas prices. But, not surprising, given that the Fed is trying to defend the USD here…
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On May 16, we adopted the position that weak inflation – driven primarily by oil prices that we expected to plunge after a brief rally – would lead the EURUSD to rally sharply [see: May 16 Update on EURUSD.]
Our forecast, shown below, also required DXY to make new lows — which most analysts derided as unlikely in a rising interest rate environment.
Sure enough, WTI spiked for about a week, then plunged right to our downside target over the following month.
This took the wind out of inflation’s sails, leaving the Fed’s rate hike argument looking more than a little iffy.
The net effect? Yesterday, EURUSD nailed our upside target.
With Yellen’s testimony coming up, it’s an opportune time to review the overall currency picture and its likely effect on equity prices – and, by that, I’m not talking about the latest VIX-driven ramp job.
I’ve been promising a turning point for the past several weeks, and it’s finally here.
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Everywhere you look, another hedgie is throwing in the towel — pronouncing the market overbought and susceptible to a big drop as a result of Fed normalizing.
I agree that rate normalization would be devastating for stocks. But, folks, an additional 1/4% in Fed Funds is far from normal. Call me when the 10-year gets back over 6%. In the meantime, all the gnashing of teeth should just stop — at least as far as rates are concerned.
Investors should, on the other hand, be concerned about the veracity of information pouring out of Washington, the quality (and lack of) earnings growth, and the ability of central bankers to keep all the plates spinning a little longer.
The apparent equilibrium is tenuous at best, and largely relies on the inability or unwillingness of the few remaining active, fundamental investors to recognize the tricks and gimmicks being used to keep equities on the rise.
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With oil sliding and the USD on the ropes, equities are having a tough time maintaining the exuberance of Friday’s snap-back rally. ES has given up a 7.5 point rise and is trading slightly in the red.
This leaves SPX with an opportunity to extend last week’s slump, but only if currencies cooperate. As we’ve discussed the last few weeks, several pairs are on the cusp of a major move.
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To everything (turn, turn, turn)
There is a season (turn, turn, turn)
And a time to every purpose, under heaven
The dollar’s dip has been a headwind for the markets, but it’s served a purpose: resetting various carry trades and putting things on firmer footing for the next stage. I don’t know whether central bankers will be able to pull it off. I don’t even know how they’ll attempt it (though I have some suspicions.)
I only know that EURUSD’s reversal at our 1.1470 target from Jun 13 [see: The Rally That VIX Built] is quite important. And, if DXY should slip below its recent lows, equities are not going to take it well.
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