The Fed saw the current wave of inflation coming. After all, they created it, fed it, and cheered it on as it enriched investors while threatening the finances of everyone else. Those few who questioned their actions were assuaged with economics doublespeak, assured that this new inflation policy was more logical, that inflation was transitory, and that the economy/market was doing so well that everything must be just fine.

Anyone who puts gas in their car or buys groceries knows better. When the stimulus payments and enhanced unemployment benefits ran out, consumers hit a wall. We’ve seen the proof in retail sales and consumer sentiment.Anyone buying a used car, leasing an apartment or contemplating buying a house knows it too. Prices have soared, leaving an entire generation with little hope of ever owning a home.

It’s just as bad or even worse all over the world, as central banks everywhere have embraced what was billed as the ZIRP free lunch. To characterize it as such, however, gives them too much credit.

More accurately, it’s a transfer of wealth: from the lower and middle class to the wealthy; from savers to spendthrifts; from the prudent to the speculator. At best, it pulled price appreciation and profits forward. At worst, it has created a price bubble that exceeds the worst in recent history.

In trying to insulate the markets from business cycles and the effects of a global pandemic, central bankers have paradoxically increased the risk of a crash.  The Fed knows this, which makes today’s Fed meeting all the more important.

Bulls are praying the Fed will extend and pretend. Bears are hoping Powell will cop to a monumental policy mistake and immediate tapering.

Futures ramped higher overnight in typical pre-FOMC announcement fashion. Though ES has stalled at a backtest of the white channel, the bigger prize is a backtest of the broken yellow channel and the 10 and 50-day moving averages at 4424ish.

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ES nailed our next downside target yesterday, bouncing exactly where it needed to in order to avoid a panic.But, there’s more to this downturn than meets the eye. And, it changes everything.

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Welcome to another day of churn, with breakdowns averted and breakouts merely head fakes (at least so far) as we continue to play cat and mouse with the 50-DMA.

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As we wait to see if the latest tag of the SMA50 results in yet another bounce (8th in a row) to new highs……or is just another head fake, with lower prices to come……we turn our attention to currencies, gold and silver – which are all at inflection points. Gold, for instance, is threatening to break down again.

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ES tagged our 50-DMA target late yesterday.

It was one of the least surprising outcomes one could imagine. In fact, SPX and ES have tagged or come close tagging their SMA50 (the purple line below) eight times over the past eight months.

Central banks have practically guaranteed this outcome ever since they enabled the market to become untethered from the real economy.

Could this time be any different?

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August CPI came in slightly below expectations, with the monthly headline figure at 0.3% versus last month’s 0.5% and the annual figure at 5.3% versus July’s 5.4%. To be clear, these are still problematic numbers and remain completely out of sync with artificially low interest rates.

Only two categories in Schedule A came in at or below the Fed’s stated objective of 2% annually, reinforcing the fact that inflation is widespread and, aside from the YoY effect in oil/gas prices, is anything but transitory.

Futures reacted by racing toward the top of the falling channel as VIX predictably gapped lower.continued for members… (more…)

On March 18, 2020, VIX topped out at 85.47, the highest level since the GFC.  It didn’t stay there long, as central bankers around the world swung into action to save their respective stock markets.

But, its peak was to become the start of a well-defined falling channel (below in white) which has consistently marked turning points for each subsequent rally in the “fear index.”

Given that VIX is perhaps the most important element in signaling buy/sell decisions for algorithmic trading – and all the passive strategies which follow algos’ lead – these reversals have become relatively foolproof all-clear signs to buy the dip. It is no surprise, then, that futures are up over 30 points after VIX reversed at our latest upside target on Friday.Could VIX’s latest reversal be any different from all the rest?

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