The algos have been working overtime this holiday weekend. CL is threatening another breakout, VIX is back below the two-month old bullish (for stocks) channel, and USDJPY is potentially staging a comeback.

It was enough to prompt a 5-pt bump in the futures which, while not much, is enough to keep the trend alive…for now. The problem comes in when you consider the longer-term economic implications of the above: higher inflation, higher interest rates and mounting fiscal problems. But, those concerns are being set aside in order to pursue a critical breakout in equities.

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The good news is that California’s drought is officially over.  The bad news is that  the storm that hit the central California coast last week continues to rage.  Our power is still out, and now we’re getting word that we might have to evacuate.  Apparently, the one bridge connecting us to civilization is on the watch list.

The updates I had hoped to post today will have to wait until the power comes back on.  It will give me much-needed time to noodle over the market craziness while enjoying cold, canned baked beans.

My hotspot is still getting cell service and there’s enough juice in my laptops and cell phones to last 4-5 hours, so I shouldn’t have any trouble posting an update tomorrow morning.  Beyond that, it’s wait and see.

Thanks for your understanding…and, you can stop praying for rain!

Yesterday morning started out promising for bears.  But, the downdraft in CL that allowed a 13-pt decline in SPX was quickly erased.  From then on, SPX had a great deal of difficulty reaching even obvious levels of support.  Instead, we saw yet another insufferable meltup.

CL took the opportunity to gap higher overnight.  So, what does it mean that futures are off 7 points?

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This morning looks a lot like the last two, with one notable exception.  VIX has risen sharply over the past 24 hours.  No surprise, then, that CL has spiked in order to offset it.  The net effect: ES and VIX rising in lockstep — as if things couldn’t get any weirder.

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Did you like yesterday?  We have futures off 4-5 points this morning on higher inflation (+2.5% yoy), lower real earnings (-0.5% mom), surging oil inventories, hawkish Fed testimony, etc.  But, we also have retail sales and Empire Fed popping and, of course, another day of Yellen testimony.  So, a mixed bag.

The one key difference chart-wise is VIX, which has popped up above its SMA10, SMA20 and SMA50.  This makes sense, as SPX has very specific targets in mind.

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With an economy bumping along, stagnant in most respects, and inflation on the rise, it’s getting harder and harder to avoid the stagflation diagnosis.  Let’s see what Ms. Yellen comes up with later this morning.

For those who missed it, PPI was up a blistering 0.6% last month — largely on the sharp rise in energy prices.  Ironically, it is oil futures which are spiking higher this morning in order to mitigate the data’s effect on equities.

It didn’t start out that way.  Moments before the PPI number was released, VIX did a 0.25 plunge — a shot across to bow, as it were, to remind everyone that it can and does drop to whatever extent necessary to keep stocks from falling.

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In our last update on RUT [see: Dec 8 2016 Update on RUT], we noted that RUT had almost reached a potentially important turning point.

If it follows the same general pattern as SPX (as guided by our analog), it’s getting fairly close to its next turning point at 1392.

As it turned out, RUT tagged 1392 the very next day and reversed as expected.  But, those licking their chops over a great shorting opportunity were disappointed.  After six long weeks of chop, it managed a miserly 3.6% decline.

Three weeks later, we’re right back to 1392 — begging the question: what’s next?

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Another ramp job is underway, this time led by a resilient USDJPY.  Though CL is in a position to be the spoiler as it might finally recouple with the incredibly bearish fundamental picture.

A reminder: this is a big week for economic data — with PPI, CPI, retail sales, housing starts and permits, Philadelphia Fed and leading indicators all on deck.  The most important, IMHO, is CPI.

Though the Fed supposedly doesn’t use it, and though it woefully understates the true state of affairs, a significant headline beat of the 0.2% expected could be the tipping point for the Fed’s March meeting.  We’ll look for some hints in Yellen’s testimony on Tuesday.

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Over the past two days, I suggested the USDJPY was breaking out in anticipation of weakness from another algo driver — CL.

We’ve seen VIX do a pretty good job of preventing big sell-offs.  If a rate rise seems imminent, we should see the dollar strengthen and, potentially, a breakout in USDJPY — which would help…. Rest assured, when CL finally does start plummeting, USDJPY will be spiking higher to try and compensate. The yen carry trade has been dormant, but is far from dead.

Indeed, the USDJPY has broken out of the falling channel it’s been in since last November (even as Japan’s Abe — accused of being a currency manipulator — pals around with his accuser over the next few days.)  But, CL has continued to rally, too — in the face of huge inventory builds as reported by both the API and EIA.  And, of course, VIX is also setting records (for the level of intraday absurdity and manipulation  – more on that later.)

Is this the breakout we’ve been waiting for, or is it the calm before the storm?

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It seems like I bitch about VIX nearly every day.  Once a good indicator of fear in the stock market, VIX is now used as a tool to stop declines dead in their tracks and boost stocks to new highs.

Picture a 23-year old MIT grad in a windowless room on, say, Dearborn Street in Chicago, with a big red button like the one to the left in front of him and a single monitor displaying SPX.

Whenever stocks come close to a 1% decline or threaten to make a lower low, an alarm goes off.  The kid starts mashing the button for all it’s worth, shorting VIX until SPX reverses — which it does, nearly every time.  For those who care about such anachronisms as market integrity, it’s terribly vexing.

Anyone who watches the “markets” closely every day knows the scenario all too well.  It has produced countless V-shaped recoveries and a steady string of new highs.  As of yesterday, it had been 82 days so far since a 1% loss in SPX.  The last time this happened was in 2006, when the streak reached 94 days.  Before that, it was in 1995 that it reached 105 days.

All together, there have been only 22 instances in the 17,000 trading days since 1950 (when the S&P 500 index was created) where SPX went 105 or more days without a 1% drop.  A quick glance at the chart below from the Statistical Ideas blog shows the same info in graphic form, and illustrates how negative days have become increasingly rare over the past few years.  Of course, it was during this time period that central banks became more actively involved in propping up markets.

Yesterday was one of those days that had loads of potential to break the streak.  Crude oil, another driver of bullish algos, had shed over 5% in the past two days and was being buffeted by the second worst inventory data in history.  Another favorite of the market manipulators, USDJPY, was capping off a nearly two-month decline.

Economic data has been weak lately: everything from consumer credit to construction spending.  And, the president so many expected to be lowering taxes and goosing spending by now has shown more interest in tweeting than in fixing the country’s problems.

It was no surprise that VIX started the day by breaking out of the falling channel it’s been in since the election.  But, as I noted in the daily post, it was the 6th such time VIX had broken out in the morning.  Each previous time, the breakout failed and stocks closed higher on the day.  Would this time be any different?

VIX started the session off with a 4.4% spike off the previous day’s close, which correlated nicely with SPX’s gap lower and subsequent 7-pt drop.  And, the EIA’s crude inventory report was coming up shortly.

At 9:52 AM, the VIX kid must have decided enough was enough.  Within the next hour, VIX was slammed back down to its previous close.  I didn’t think too much of it at first, as it’s not unusual to get a rally leading up to 10AM.

But, when the crude inventory data came out at 10:30 AM and CL and SPX both started selling off, VIX gapped down sharply.  The rest was textbook VIX manipulation.  Note that VIX had established a trend line, shown below in as the dashed purple line, that was swiftly broken.

VIX bounced just above the previous low (the asterisk below), which meant there was a chance that SPX  — which had rallied 9 points by then — might run out of steam.  We’ll walk through the remaining turning points, signified by letters in the charts below.

a.  SPX did sell off as VIX bounced.  SPX even broke down below trend line shown in red.

b.  As SPX broke down, VIX suddenly plunged to new lows, sending SPX back above the broken TL.

c.  VIX bounced up to its SMA10 — its second backtest — allowing SPX to decline to a marginally higher low.

d.  VIX tumbles sharply — another lower low to prevent SPX’s purple TL from breaking down.

e.  Another near breakdown of the purple TL…VIX responds with even lower lows.

f.  New lows for VIX, now off 5.2% since its earlier highs, allows SPX to break out above the neckline of an Inverted Head & Shoulders Pattern.  It’s now gained 9 points and is firmly back in the green for the day.

g.   Someone decides they don’t want SPX closing above the neckline (dashed, purple line), and VIX bounces until SPX falls back to SMA5 200 support.

h.  The usual VIX end-of-session sell off sends SPX back above the neckline.

i.   VIX’s little spurt at the close ensures that SPX finishes precisely on the neckline — leaving both bulls and bears scratching their heads re overnight positioning.

There were other things going on during the session, of course.  Despite the ugly inventory data (second biggest build in history, remember) CL was shoehorned higher — finishing with a slight gain on the day.  And, USDJPY continued its pattern of threatening to break out of the falling channel it’s been in for several months.  I count eight distinct tags of the channel top on the 5-min chart — each of them when SPX needed a helping hand, of course.

Rest assured, when CL finally does start plummeting, USDJPY will be spiking higher to try and compensate.  The yen carry trade has been dormant, but is far from dead.

Now on to this morning’s charts, which hint at somewhat more exciting days ahead.

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