Black Ice

We had a lovely snowfall Sunday night. The Monday morning landscape was exquisite, with a beautiful frosting adorning the pines lining our street. There was just enough snow underfoot to look charming, but not enough to require shoveling.

Unfortunately, there was also just enough to hide the dangerous black ice lurking below. As I lay on the couch later that day, trying to recover from the inglorious splat I executed on our driveway, I realized I had happened upon a pretty good analogy for the current state of the markets.

Everything is indeed gorgeous on the surface. Just this morning, we are reminded that some retailers such as WMT are doing wonderfully (even if they’re just stealing market share from the multitude of retailers that are closing up shop.) But, what about the dangerous undercurrents that no one notices until it’s too late?

One of my favorite chart patterns is the consolidating triangle, seen this morning in the 10-year note futures (ZN.) In a way, it’s like black ice — lulling investors into a false sense of security that everything is contained.

Readers will remember that ZN came up just short of our 123’100 target on Jan 3. It would have capped off a lovely 5% rally since our bottom call (top call on rates) in October.

As rates plunged toward our 24.98 target on Jan 3, stocks took notice. The Dec 24 rally began to falter. The DXY began to falter. Our yield curve model woke up. Clearly, something had to be done. The charts show the resulting triangles which formed in the aftermath of a bounce in yields, droop in prices. The targets are still there. But, now they’re waiting for the triangle to break out or break down and — more importantly — for stocks to build a little more cushion before playing out.

With SPX and DJIA well above their 200-DMAs, they’re in the clear. COMP, however, has struggled to reach its 200-DMA, let alone push above it. Recall that it faced similar problems in November, when a push above its 200-DMA faltered, and again in December when it failed to reach it at all — producing a 17% plummet.With the 10Y triangles about to break out or down, CL and RB at or near our upside targets and VIX having reached our next downside target, is the market about to go splat?