Calm Before the Storm?

There are many parallels between yesterday and Jan 26, 2018 – the calm before a vicious 10-day 11.8% storm.  The obvious one is that SPX is back to the top of the large yellow channel dating back to the 2009 lows.  Then, as now, this occurred shortly after SPX had bulled its way through a notable Fibonacci extension.There are other significant similarities.  Recall that then, as now, inflation was running hot due to a dramatic, extended rise in oil and gas prices which accompanied a dramatic, extended drop in the US dollar.  From US Dollar: Capitulation posted on Jan 26, 2018:

…inflation fears remain a problem. In order to relieve those fears, oil and gas would need to drop — especially from the BoJ’s perspective. …they’re both far enough above Jan 2017’s prices to have generated adequate inflation for Jan 2018.  Needless to say, a 10-15% decline in CL/RB would be a drag on stocks, which are no doubt considering a backtest of the 2.24 Fib extension.

The “inflation problem” in January 2018 was somewhat different from the one facing the Fed now. After months of CPI exceeding 2%, rising oil and gas prices threatened to push it and the 10Y up to 3%. It finally topped out at 2.95% and the 10Y reached 3.25% a few months later.

Now, we face a dramatic spike from below 2% in February to over 3% in April unless oil and gas prices plunge right away. I remain convinced they will, but the clock is ticking.

The Fed has said it sees the rise in inflation as transitory and is thus not concerned. More importantly – we should not be concerned. True, the YoY spike in gas prices will pass as the April 2020 plunge falls out of the comps. But, thanks to the Fed flooding the zone with cash, oil and gas aren’t the only problems. Most commodity prices are back above where they were in 2018 and are still rising.

And, of course, the national debt that weighs in the balance is now over $28 trillion compared to only $20 trillion back then.

Ordinarily, I might be tempted to ignore such patterns as the rising wedge in place in ES. Maybe not this time…

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