The headlines on June 29, 2006 were fairly unremarkable.  The House voted to end the offshore drilling ban.  The Devil Wears Prada was being released in theaters.  And, the Senate confirmed new Treasury Secretary Lord Voldemort Hank Paulson — who was paid $48 million to take the job and subsequently ushered in the worst financial crisis since the Great Depression.

It was also the last time the FOMC increased the Fed Funds rate (the 17th hike in a row, to 5.25%.)  I’ve scoured the news, and can’t find a single headline from back then warning of impending financial armageddon from the increase.

In fact, the market rallied 2.1% over the next several days — before shedding 4.4% a week later.  But, beyond the immediate effects, two things stand out from the historical data:

• the S&P 500 gained 26.5% over the next 16 months as the FOMC reversed course and lowered rates through the peak in Oct 2007 (and, of course, throughout the subsequent crash)
• the FOMC had no frikkin’ idea how to manage the economy via rate changes.

Now, 3,451 days later, we’re told the Fed might raise rates again.  How can we expect the “markets” to react?

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In our most recent update last week, we noted that NKD was approaching key support at its SMA200 and rising channel bottom.  It was an important line in the sand that, surprisingly, didn’t hold.

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Are The Powers That Be losing control, or are they merely fine tuning the “markets” in preparation for the Fed’s rate hike next week?  Conventional wisdom says equities won’t fare well in a rising rate environment.  But, how do the currency pairs figure into that assumption?

We’ll take a quick look at the big picture this morning, focusing in particular on currency pairs and oil.

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Anyone else getting tired of SPX being propped up all day long, only to tag our target on a gap down the following morning?

It’s great if you play the futures and can manage the overnight risk.  But, for cash investors, it’s just one more way that TPTB are preventing you from participating in the gains while sticking you with losses.

USDJPY and CL are leading the way this morning, with ES currently off 25 points — but, more importantly, one point below the daily SMA200.

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As the “markets” position themselves for the Fed’s rate hike on the 16th, one can only speculate as to which levers will be pulled in order to convince investors that higher interest rates are a good thing.

Oil, for instance, has undergone a massive slide since early October, and now sits at the lowest point possible for a potential rebound that wouldn’t break all the rules. As we’ve noted many times, it’s the overnight drop that sets up the bounce that helps stocks rise during the trading session.  The key is knowing when and where the bounce will occur.

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In our last update on COMP [see: Oct 28 Update] we pointed to 5124 as the next likely turning point.Sure enough, 4 sessions later COMP reached 5124 and…stopped.  Thanks to DX breaking out, it spent the next week criss-crossing 5124.  Finally, on Nov 9, it began a slide down to 4908 — a 4.2% drop.

In an unrigged market, there would have been more downside.  But, as we’ve seen countless times, COMP holds a special place in the hearts of market riggers.  Well, at least where their hearts would be if — you know — they had them.

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Our theme song for the day is the pop song What’s Up? from 4 Non-Blondes in 1992 — not for its title, but for its popular refrain “what’s going on!?”

It’s a bit of a departure from my usual jazz or standards, but I think it perfectly captures the mood on the Street right now.  With a rate hike now virtually certain (according to Fed presidents and pundits), do current valuations make any sense?

If they’re to be believed, the rate increase is a done deal.  Will Wall Street throw another fit like yesterday?  More importantly, will TPTB do a better job of propping things up?  They’ve been trying their best to convince the muppets that higher rates are a good thing.  Here’s their chance.

We’ll start with DX, which fell precipitously yesterday after Draghi’s flopped attempt to cheapen the euro.continued for members…

As we pointed out yesterday, it fell to the red .618 – Fib support.  There’s better support where the SMA100 and 200 sit, but the .618 could hold.

And, the USDJPY could well push back into the broken red channel.

And, the NKD’s rising red channel and red TL and moving averages could hold and see it push through overhead resistance at its SMA200 at 19515. And, CL could get a strong bounce from current levels or, better yet, the purple .886…If all that happens, then SPX could hold at the white channel .236 line, or failing that, the SMA50/100 combo just below at 2034ish.

Right now, the futures are saying a 2-pt gain.  So, I’ll assume SPX is heading higher — with our initial goal the SMA200 at 2064.83 and secondary goal the purple midline around 2076.  But, I’ll be watching like a hawk for the first signs of weakness.

UPDATE:  9:38 AM

So far, so good.  If/when SPX gets to 2064-2066, I might go to cash — at least initially.  I think this initial push is mostly short covering, and could fall apart quickly.

But, it could just as easily push through on strong support from CL and USDJPY — which have been pretty quiet thus far.Another key chart to watch is EURUSD, which is fast approaching its 100/200 day MAs. UPDATE:  9:48 AM

SPX pushed through the SMA200 — mostly on NKD futures and VIX — and is nearing the purple midline at 2076.  Not convinced it’ll get there, so I’d recommend extremely tight trailing stops here.CL is starting to weaken, and USDJPY is going nowhere, so we’re probably close to the first pullback.  The purple midline would make perfect sense (see 60-min chart above.)

UPDATE:  9:55 AM

I’m assuming it’ll either pop on up to 2076-2080, or backtest the SMA200 at 2064.83 first.  If it reverses and finds support at the SMA200, I’d be comfortable taking another long position for the next 12-15 points.

Note that this push was all short-covering, stop-running on the backs of NKD and VIX.  CL and USDJPY have been extremely quiet.  So, if/when they wake up and start moving, we’ll have a better sense of what to expect.

UPDATE:  10:12 AM

I’d keep a tight leash on this, as CL is still very non-committal and might want to drop down and tag that .886.We’re in melt-up mode here, and I’ve never been real comfortable with this kind of algo-driven rally. UPDATE:  10:31 AM

UPDATE:  11:07 AM

If it reacts, odds are it’ll dip down to the rising 5-min SMA20 — currently at 2071.  If it punches through, then the white channel midline at 2089ish would make sense.

UPDATE 12:04 PM

Pushing a little lower here.  Decent chance it’ll decline to the 5-min SMA100 or 50  — though will perhaps wait until they cross the SMA200 at 2064.83.UPDATE:  1:12 PM

SPX just reached the white channel midline at 2089 — my highest target for the day.  If you’re still along for the ride, I would strongly suggest selling here and going to cash for the weekend.Stocks are supposed to reverse lower after a bounce from the .236 to the midline.  Ideally, they’d drop all the way to the channel bottom.  In this case, it would suggest 2019 or lower.  But, we’ll not make any such assumptions at this time.  It should be perfectly clear to everyone just how easily TPTB can prop up this “market.”

From now on, we’ll post a summary of results from our daily long/short calls on our Results Page.  It’ll help us track how things are going relative to the S&P 500 during the month, as opposed to end-of-month only.

Here’s the first installment through today, Dec 3.  To see the reformatted page, click HERE. 

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These results are not necessarily indicative of those that current or future
subscribers might achieve.  For full disclosures and details, please click here.

When we noted that TNX had reached important support a couple of days ago [see: Is DX Really Breaking Out?] we had no idea it would only take two days to return to important overhead resistance.  Yet, here we are.

As usual central bankers are doing their best to manipulate the symptoms of a faltering economy — in the hopes that investors will mistake this for a cure of the actual ailment.continued for members…

Will TNX punch through this time?  Since Janet and I don’t talk that much anymore, it’s anyone’s guess.  But, if TPTB want to stop this correction dead in its tracks, the opportunity has arrived.  A push through the red, dashed TL would do the trick.

Remember, a retreat from the red TL from June 2007 means a correction.  Pushing above it — which hasn’t happened since, well, ever — presumably means a rally.

The Nikkei 225 is a great indicator of what’s happening with the yen carry trade.  It’s a “first derivative” of sorts that reflects the degree of yen bashing that’s going on, and also whether or not the BoJ is stepping in to prevent further losses.

So, when it approaches a potential bottom, like it is today, I always pay attention.

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