The short answer: it depends.  Ever since 1981 or so, stocks and interest rates have mostly been inversely correlated — which makes sense. There are a number of obvious ways lower rates should benefit equities.

For instance, lower interest rates mean cheap leverage, which can amplify corporate earnings and thus increase stock prices.  They are also thought to divert some would-be bond investors to potentially higher-return alternatives such as stocks.  And, they can benefit the general economy by reducing consumers’ interest expense, resulting in greater disposable income.

Rate declines instigated by the Fed as it attempts to stimulate the economy through quantitative easing are considered positive for stock prices.  But, lower rates can also reflect increased fear in the markets — a sign that investors are pulling money from stocks and piling into bonds.

Looking at the chart below, we can see that many sharp declines in TNX (10-yr treasury yields) accompanied strong rallies in SPX (S&P 500), particularly between 1981 and 1998.  But, two other sharp interest rate declines, from 1999-2003 and 2007-2008, preceded significant market crashes.Note that the two worst crashes as well as a number of significant corrections occurred when TNX dropped below trend — either the red trend line connecting the 1986, 1993 and 1998 lows or the resulting falling red channel bottom.

So, what does it mean that TNX has recently plunged below the channel bottom while stocks are on the rise — a divergence of the type that accompanied past corrections?  It’s an important question, as other patterns are arising that smack of the calm before the storm.

I’ll be posting throughout this week about a new analog [what’s this?] that, while in its early stages, could portend a significant move in the markets.

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June was a very tricky month, yet we managed to rack up a gain of 17.21% versus the SPX, which was virtually unchanged.  But, that description doesn’t due the month justice, as it contained both the biggest 2-day drop and the biggest 3-day bounce back in years.

The reason for all the excitement was, of course, the British referendum to exit the EU.  We were fortunate enough to have anticipated the extent of the sell off (within 9 points), and the events that would signal the subsequent rebound.

Our forecast the day before the vote was known, as posted in The Eve of Destruction:

Our big red target near the intersection of the .618 Fib line and the falling yellow channel would put SPX at 2010-2020, a modest 3.6% decline. An overshoot to test 2000 is also a good possibility.

The actual extent of the sell-off, with a low of 1991:The plunge went even further below the yellow channel top than expected, exceeding our downside target by 9 points.  The rebound was even more vigorous than anticipated.

All in all, the dip and recovery provided a nice bumper to an already successful month.The monthly average for pebblewriter.com dips slightly to 17.70%, and the monthly average for the S&P 500 increases slightly to 0.16%.  That’s the good news.  The bad news is that SPX recently pushed above 2134 to set new all-time highs.

Never mind that the rally was the result of expectations for expanded QQE by the BoJ, and the usual intraday ramping of CL and USDJPY.  And, never mind that it occurred in spite of disappointing economic and earnings data.  The reality is that the chart and harmonic patterns will become even trickier now that SPX has topped a key Fibonacci extension level.  As always, I’ll do my best to stay ahead of the game.

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In yesterday’s post The BoJ’s Turn I left off with the suggestion that the BoJ would disappoint and the USDJPY would initially tumble to 102.87, followed by a drop to 101.618.  In the subsequent Update to USDJPY, I laid out my reasoning — which is no different from what I’ve been posting for the past year or so.

Japan’s economy has failed.  The only thing keeping it alive is the massive amount of money being thrown at it and very low — now negative — interest rates to pay for it all.

For years, the continually devalued yen supported the yen carry trade, which guaranteed that stocks in Japan and in key markets around the world would continue to appreciate.

The yen bottomed out (USDJPY peaked) last year because Japan could no longer afford higher oil and fresh food prices, which produced real inflation without any economic benefit. Both are almost entirely imported; fresh food prices soared over 12% between November and February.

If the BoJ were to further weaken the yen, it could only do so if oil prices were to continue falling to compensate.  Since lower oil prices could ruin banks and big oil companies, TPTB had to make an unpleasant choice:  support Japan’s exporters and the yen carry trade with a lower yen (higher USDJPY) or support banks and oil companies.

Judging from the fact that USDJPY continues to tumble and oil futures are up strongly off our downside target, it’s apparent which choice they’ve made.continued for members…

I charted CL and USDJPY extensively in last nights update on USDJPY.  So far, CL has rebounded nicely after overshooting the SMA200 a bit. But, I don’t believe it’ll be a straight shot to 45 for it or a straight shot to 2138 for SPX.  Rather, the 2157.38 target will have to be tested first.  And, even that’s no guarantee today, as TPTB might try to keep things from deflating too much in the hours before the weekend.  Today is the last day of the month.

The fundamental basis for a modest decline will be today’s GDP report, which puts a damper on the notion of a September rate increase.  And, let’s not forget that the BoJ’s most significant action was an increase in ETF purchases.  So, we can expect support through that algo transmission line as well.

Our downside targets for SPX remain unchanged.UPDATE:  10:26 AM

Things are pretty much on track.  USDJPY’s falling white channel has broken down, and it appears to targeting 101.618 around 11:45am – 12:00pm — timing which jibes with SPX’s 2157.38.  It’s unusual timing for a bottom, so I don’t read too much into it — especially as VIX is being heavily suppressed this morning. ES, on the other hand, suggests the bigger drop (all 13 points of it) won’t come until late Monday.  So, we’ll see.UPDATE:  11:07 AM

Thanks to a strong spike in CL and a strong smack-down in VIX, SPX just posted a new high.  This, despite USDJPY making lower lows.  This technique has been quite effective for the past several weeks.  So, there’s no reason to expect that they’ll abandon it now — particularly on the last day of the month. 

Remember, we do have an upside target at 2180-2185 — the top of the rising purple channel — depending on how aggressively they want to force things higher.  At this point, I’d say there’s nothing wrong with riding along on the upside with tight trailing stops.  Once these algos get going, it’s very hard to turn them off.  And, if USDJPY reaches and reverses at 101.618, it would likely add fuel to the fire.

But, my expectation remains for a sell-off on Monday or Tuesday of next week.  So, the sidelines is a safer place to be at this time unless you’re willing to hold short over the weekend.  For those thinking about it, I can only recommend it if you’re able to stomach a potential gap up or can hedge your position.  Fortunately, there’s an easy way to do so at this time — using CL, VIX or USDJPY.

UPDATE:  12:12 PM

This would be the logical place for SPX to reverse if it’s going to.  Note that VIX completed a deep retracement and is on the way up, CL appears to be consolidating, and USDJPY is till edging lower.   Anyone who’s tagging along on the breakout should consider taking profits or establishing a short position. UPDATE:  3:55 PM

End of the day coming up…VIX and CL still driving stocks higher.  Don’t see any fundamental change in what to expect.

I’m taking a stab at USDJPY’s likely course tonight, given what I expect to be disappointment over the BoJ’s QQE actions (or, lack thereof.)

We left off earlier this afternoon with this chart.  It seemed a little silly at the time, given that the pair spiked into the US equity close.  But, of course, that close was all about ensuring a positive day for SPX, courtesy of the (still occasionally effective) yen carry trade.And, you could see it coming from a mile away.  SPX was sliding, after having bounced up to backtest the SMA5 200 and a channel top……when suddenly — and I’m sure quite by coincidence — USDJPY started spiking.  The pair not only broke a trend line connecting yesterday’s phoney-baloney spike, but soared out of the falling white channel for good measure.If that weren’t enough, VIX picked that exact moment to take a dive.And, wouldn’t you know it, CL decided it was a great time to pop up out of the falling white channel it’s been locked in (except for yesterday’s clumsy, but effective, ramp job) for over a week. Instead of continuing lower, SPX spiked up through the channel top and its only remaining moving averages.  Mission accomplished — for the eleventy billionth time this year.Given that stocks are still susceptible to USDJPY’s gyrations over a year since USDJPY topped out, and given that the BoJ has painted themselves into a corner so tight that not even Picasso could find a way out, what does the path ahead look like?

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The FOMC announcement came and went with less excitement than usual.  Most market participants expected no change, and that’s essentially what we got.  Aside from a 13-pt VIX-induced spike in SPX which fizzled into the close, there were no fireworks.

Tonight, the BoJ is likely to upstage the Fed.  The yen carry trade, the principal driver of higher stock prices since 2011, officially ran out of juice over a year ago.  Intraday rallies have been quite helpful on a regular basis.  But, the USDJPY has been locked in the same falling channel since October 2015.With SPX at new all-time highs and CL no longer providing much algo support, will the BoJ finally take widely expected action to weaken the yen?

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The article below was just posted to Zerohedge.  As a CFA charterholder, I’m alarmed that a fellow CFA is being criminally prosecuted for telling the truth.  As an American, I’m disappointed that US authorities haven’t had “the talk” with Erdogan. 

We’ve been in bed with plenty of despots and tyrants over the years.  But, we’ve usually managed to convince them it’s in their own best interests to reign in their more egregious abuses.

Firing most of the university presidents and tens of thousands of teachers, policemen, civil servants and military personnel was bad enough.  Jailing many of them and abusing them while in custody clearly went beyond the pale.  Even so, Erdogan was able to get away with it. The EU needs Turkey, so was willing to look the other way.

This latest action, however, will turn the markets on Erdogan.  With no one to bully, hold accountable or throw into jail until he gets his way, this will cost him dearly.  Unfortunately, it will be the citizens of Turkey who ultimately pay the price.

I urge those in the financial services industry, international trade and the CFA Institute to use all forces at their disposal to vigorously support Mert Ulker as he defends himself against these preposterous charges.  Further, I urge our elected leaders to do what they can to get Erdogan under control.  We don’t need allies like this.

Latest update – Jul 28:  Erdogan shutters most media outlets, arrests expanded.

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The next several days will be completely under the control of central banks.  Whether that comforts you or makes you nervous says a lot about your faith in central planning.  Are you comfortable constructing a diversified portfolio with loads of potential alpha and staying long through whatever economic headwinds lay ahead, knowing that central banks will prevent any serious downdrafts?  Then, this is your market.

If, on the other hand, you have your doubts about the effectiveness of their strategies and see them as having painted themselves into a corner, you’re right to be more than a little nervous.  A quick glance at USDJPY’s schizophrenic behavior last night shows that you’re not alone.

We’ll take a look at the various tools they’ve used to influence equity prices and see if we can divine their next moves.  We’re on a bit of a roll following yesterday’s tag of our downside target from Monday morning.

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With the US presidential election only 4 months away, few expect the FOMC to do anything to rock the boat.  The BoJ, on the other hand, is threatening to capsize it.

Note the USDJPY’s overnight plunge, all based on the expectation that the BoJ won’t expand QQE at all later this week.  If not, what ‘s to become of the 184-pt post-Brexit rally that was based on the expectation that they would?While on the topic of politics, I’ve had a few inquiries as to where I stand on the upcoming elections.  I’m usually annoyed when celebrities or business luminaries act as though their insight is of any particular importance to voters.  Thus, I have no intention of wading into those same waters.

I dislike most politicians, as I believe they are products of a system that is hopelessly flawed.  Money rules, and it’s become notably worse over the last decade — particularly with the Citizens United ruling.  Until money is somehow removed from the process — and, I see no hope of this any time soon —  I expect candidates to continue to do the bidding of those who donate the most.

I’ll watch the election closely for its impact on financial markets, but will keep my views of the candidates where they belong — to myself.

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“You have brains in your head.  You have feet in your shoes.  You can steer yourself any direction you choose.  You’re on your own.  And, you know what you know.  And YOU are the one who’ll decide where to go…”            Dr. Seuss

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Lately, the markets are so nonsensical that they might have been lifted straight from a Dr Seuss book.  We’ve had manipulation all along, but it’s been quite a while since it was quite this bad.

SPX spiked up through its 10-day moving average on Jun 29, two days after the post-Brexit lows, and hasn’t tagged it since.  It hasn’t gone that long between SMA10 tags since November 20, 2014.  Then, the 14% spike following Bullard’s hints re new QE kept it above the SMA10 for 23 sessions.

Will we finally get that long-overdue pause, today?

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SPX had no trouble reaching our initial downside target yesterday, thanks in large part to CL’s cooperation.  CL plumbed new lows, as expected, bringing the total decline (so far) since our top call at 50 to 11.5%.USDJPY was no slouch, reacting to the (withheld) news that Kuroda has (had?) no intention of unleashing a massive addition to its already ineffective QQE program.

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