Our advice yesterday was to ignore Draghi and focus instead on oil.  It was headed for an important support level which would determine whether or not stocks could bounce.

Oil did, in fact, reach our 50.63 target, at which point it tried, but failed, to rally.Fortunately for bulls (or market makers positioning for OPEX), VIX came to the rescue – repeatedly tumbling just enough to prevent the backtest I had anticipated. It was just Wednesday [see: True Colors] that we discussed how effective it’s been, lately, at propping up stocks.This morning, investors are correct to focus on Kuroda’s comments which are, in a word, absurd.  Saying that the BoJ is open to 3-4% inflation is like me saying I’m open to adding a 360 to my slam dunk.

USDJPY has given up on the ramp it started yesterday.  Along with CL and VIX, it is positioned to allow our next downside target to be hit — probably in the opening hour.  From yesterday’s Ignore Draghi, Watch Oil:

If ES’ channel breaks, SPX should at least get a backtest of the broken white channel at 2130ish.

Of course, by delaying the decline for a day, SPX’s backtest could be even lower.  We remain short from 2143. (more…)

So Draghi and the ECB didn’t discuss tapering or extending QE.  Hmmm… a little hard to imagine.  What’d they talk about, the weather?

Futures, which know where their bread is buttered, ignored Draghi and followed oil’s lead instead.  CL nailed our 52.21 target yesterday, and has been reversing ever since.  It’s now closing in on the red channel bottom again — which will determine whether stocks can maintain the latest bounce.  The key level to watch is right around 50.63 — the SMA10 and red channel bottom.continued for members… (more…)

Yesterday’s rally was so lackadaisical that it was hard to see it as having much staying power.  Today we’ll find out, as USDJPY has already broken down and CL has reached another potential turning point.

In fact, the only thing reliably driving the futures higher at the moment is our old friend VIX.

A Bloomberg article published yesterday talked about how unreliable VIX has become as a measure of risk.  True, but I look at it differently.  I see VIX as a very good indicator of where central planners are trying to push the market.

Formerly an indicator, it has become yet one more tool with which they can goose stocks — often in contradiction to the news flow.  One of our astute readers pointed out yesterday that a red candle in VIX matched up with a red candle in SPX.  Unfortunately, this has become a common occurrence.

But, rather than bemoan the market’s brokenness (busted…I still do a lot of that), I see it as a tool with which to discern TPTB’s intentions.  Deny it if you like, but there is very obviously a script that central bankers and their lackeys tinker with on a daily basis.  Their one imperative: a happy ending.

If we can sneak a peek ahead at the next few pages, we’ll continue to do well even as fundamentals and formerly reliable indicators fail us.

continued for members… (more…)

The quandary central banks have been facing can be summarized as follows:

1. stocks can’t move higher without the support of higher oil prices; and,
2. oil prices can’t move higher without triggering inflation; and,
3. central banks must tighten if inflation surpasses their target thresholds; and,
4. the mere mention of tightening sends stock prices lower.

As CL neared critical support (after having reached our upside target last week) stocks were looking decidedly nervous.  Clearly, something needed to give.  Hence, Janet Yellen’s suggestion that inflation would be allowed to run a little hotter.

Yellen laid out the deepening concern at the Fed that U.S. economic potential is slipping [ed. note: this means lower stock prices] and aggressive steps may be needed to rebuild it.

Yellen, in a lunch address to a conference of policymakers and top academics in Boston, said the question was whether that damage can be undone “by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market.”

In fact, the BoE’s Mark Carney said the same thing on the very same day.  From the Telegraph:

Mr Carney told an audience in Nottingham that the current environment of low inflation was “going to change”, with the drop in the value of the pound likely to push up prices across the economy.

He said food prices were likely to be affected first, signaling that the situation was “going to get difficult” for those on the lowest incomes as the UK moves “from no inflation to some inflation”.

Fed followers will find this pivot familiar.  Remember when reaching 5% unemployment was the bogie for discontinuing accommodative measures?

continued for members…  (more…)

It was an interesting weekend.  Futures sold off as much as 8 points yesterday, but were right back to green on this morning’s open.  It remains to be seen whether they can remain in positive territory as CL sells off again.

We remain short from Friday at 2146, but there are plenty of trip wires ahead.

continued for members… (more…)

Yesterday’s decision to go long at SPX 2115.74 paid off in spades, even more so if you held on through the close.  CL, which backtested the white channel top as expected, verified the falling purple channel on the bearish EIA data dump and then proceeded to break out of that same channel overnight.

Likewise, USDJPY — which had broken down through a rising TL from Sep 26 — magically recovered overnight.

The eminis are ecstatic over these developments and have now bounced 30 points from yesterday’s lows.  There’s a dark cloud on the horizon, though, which could spoil the party.

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SPX managed to hold the key 2138 level yesterday, going into meltup mode following release of the Fed minutes and closing just above it at 2139.18 — but, just below the SMA100, thus triggering a short position.

Hawkish minutes will almost certainly result in lower prices, with downside targets of 2126.06, 2116.61 and 2102.56…any sustained drop through the SMA100 at 2138.57 should be shorted.

But, that was before USDJPY broke down, CL dipped overnight (to tag our 49.50 target) and DB continued selling off after reaching our 13.98 target [see: Deutsche Bank: Will it Survive?]

Even USDJPY is falling after a failed breakout that finally saw it tag a key midline.  There’s no doubt 2138 will be severely tested again today.  Will yesterday’s initial downside target of 2126.06 hold or will we see new lows?

continued for members… (more…)

We’ve had multiple target tags the past few sessions, with the latest being CL – which just reached our upside target.  The chart below, from our Oct 3 Update on Oil, illustrates the timing issue TPTB face with CL’s rise from February.

As discussed yesterday in Welcome to Peak Oil continued rise will certainly help support equities, but it would result in higher year-over-year inflation measurements — which would strengthen the argument for higher rates.So, from here on we’re on breakout/breakdown watch.  CL, USDJPY, VIX, DX…they’re all in a position to do one or the other.  And, don’t forget about DB, which reached our 13.88 target yesterday: the 61.8% retracement of its latest plunge.continued for members… (more…)

The term “peak oil,” per Wikipedia, is the point in time when the maximum rate of extraction of petroleum is reached, after which it is expected to enter terminal decline.

To yours truly, it refers to the point in time at which oil prices must begin to decline lest their effect on inflation become problematic. Today is that day.

To understand the significance, we have to go back to Jul 2014. USDJPY, the primary driver of stock prices via the yen carry trade, broke out (yen declined) after a protracted consolidation [for more: see What Really Drives Stock Prices?]  Having the yen rapidly drop in value might have produced inconvenient inflation in Japan, which imports all of its oil.

Fortunately, there was one simple way to cope with it: crash the oil market. As the chart below shows, the two events were simultaneous. CL plummeted from 107 in Jun 2014 to 26.05 in Feb 2016 as USDJPY shot higher.

When USDJPY reached 126, however, it ran into overwhelming overhead resistance and began a precipitous decline. Stocks, which had relied on an ever-rising USDJPY, were not amused.

In fact, every time USDJPY dipped below the critical 120.11 level (dotted yellow line below), SPX fell off a cliff.   The Powers That Be needed a new way to prop up “markets.”To TPTB’s delight, they discovered they could manipulate the price of stocks as easily with CL as they had with USDJPY.  Remember, a dropping USDJPY means the yen is appreciating.

So, rising oil prices were acceptable to both Japan and the US which, given the recent declines, had plenty of leeway to allow prices to “recover.” Indeed, a recovery was necessary in order to prevent another round of bank failures.

On Feb 11, CL bottomed as expected at 26.05 and nearly doubled over the following four months.  Stocks also recovered sharply, even as USDJPY dropped like a rock.

By now, you might be thinking “this is all well and good, but what does it have to do with peak oil?”

Simply put, today marks the one year anniversary of the beginning of CL’s last plunge: from 50.92 on Oct 9, 2015 to 26.05 on Feb 11, 2016.  Given where CL is now, every tick higher will theoretically manifest in higher inflation (year-over-year.)  Now, consider where it would need to go in order to avoid such inflation.  That’s right, back below 30 (not likely, as it would crash equity markets all over again.)

Again, inflation would be a most inconvenient development for central banks which have used the threat of deflation to justify quantitative easing and other unprecedented intervention in financial markets.From here on, TPTB must either: (1) resign themselves to higher inflation going forward, which would ultimately necessitate higher interest rates and thus crash equity markets; or, (2) rev up the yen carry trade again; or, (3) find a new carry trade to keep equity prices on the rise.

Is it any surprise that USDJPY recently broke out of the falling red channel it’s been in since Oct 2015?We remain long from 2147.65 on Oct 4, with last week’s upside target price unchanged.

GLTA.