As virtually all of our models have been warning, stocks are taking a big hit this morning. The tension has been building, simply waiting for a catalyst. With OPEX/Quad-Witching in the rear view, the UK virus mutation certainly fits the bill.

ES, off 128 points a few hours ago after coming within 6 points of our 3730 upside target, has rebounded sharply from its lows as algos cheer VIX’s pullback after testing its 200-DMA.

But this appears to be just the start of a very rocky road for markets which have previously ignored the worst disaster in any of our lifetimes. Can anyone really be shocked?

continued for members… (more…)

Almost four months ago [see: Aug 24, 2020 Update] we noted that the next overhead resistance once ES broke above its Feb 3397.50 highs was the 1.272 Fib extension at 3730.37.

Seeing ES pop above its former highs means there is no specific overhead Fib resistance until the 1.272 extension at 3730.29 (SPX 3720.37.)

I didn’t consider gaining another 10% all that likely, so didn’t even bother showing it on a chart at the time.  In fact, ES’ first two pushes above 3397.50 failed miserably. It wasn’t until Nov 4 that it finally left the former highs in its rear view mirror.

Last night ES got within 7 points of that resistance we discussed all those months ago, reaching 3723 on quad-witching eve – begging the question “has the rally run its course this time?” It certainly appears so.continued for members… (more…)

DXY tagged our 89.88 target overnight, capping off a nice short that dates back to March 18 [see: Currencies to the Rescue.]With so many other instruments watching its every move, we’ll dig into whether the correction might have run its course and what it means for equities.

continued for members… (more…)

Will Congress come up with an aid package? Unless they act now, millions of our neighbors are set to lose their unemployment benefits in the next two weeks. After the new year, they’ll also lose their eviction/foreclosure protection. “Merry Christmas” from our public servants. More like “good luck.”

Meanwhile, the market continues its meltup in anticipation of stellar retail sales and a vaccine rollout which will result in only another 100-150,000 deaths.

And the FOMC is wringing its hands, trying to figure out why historically low interest rates aren’t helping those who can’t borrow.

continued for members… (more…)

Even without a new vaccine approval this morning, futures have managed to gap back above their 10-DMA.

It’s not an unusual occurrence for OPEX week. But, note that VIX also gave up 12.6% of its recent gains overnight to test important support at its 20-DMA.

continued for members… (more…)

Though CPI came in hot yesterday (0.2% versus 0.1% consensus) it scarcely merited a mention in the financial press. In my opinion, this is a mistake. Inflation drives interest rates which, given that debt has topped $27 trillion and 136% of GDP, remains an extremely important consideration.

Though the official data is fundamentally flawed, inflation is the bedrock of my economic analysis. From it, we can forecast not only interest rates, but oil, gas, currencies and equities.  The current analysis begins with the basic assumption that the Fed, for all its heroics in “saving” the economy from the pandemic this year, has backed itself into a corner.

The lion’s share of equities’ rally has been multiple expansion prompted by both a dramatic decrease in interest rates and by plugging a $3 trillion hole with $5 trillion of stimulus.  The 10Y, hovering just under 1%, was nearly 2% a year ago and over 3% two years ago.

Two years ago, SPX dropped as low as 2346 on December 24. It recently tagged 3720, a 58% increase despite a deep recession and an incredible pandemic.  The benefit of the decline in the 10Y is obvious to a point – February 2020. Once equities crashed, yields plummeted as bonds were panic bid.

Since equities’ bottom in March, low yields have helped justify the continuing multiple expansion. The gradual rise drives the narrative that the economy is expanding again and that reflation is bullish.

A similar pattern can be seen with the 2Y, which fell from nearly 3% in November 2018 to 11 bps earlier this year.When it comes to understanding and forecasting inflation, few inputs are as important to the monthly swings as the changes in the price of oil and gas. The monthly data rarely diverge.

Nor do the annual data – though it’s impossible to ignore the divergence of the past few months. In a vacuum, this might be a non-event. But, $27 trillion in debt in a market dependent on historically low interest rates is hardly a vacuum.What the markets don’t seem to appreciate is the implication of the coming spike in YoY price changes in oil and gas. In my estimation, the 3-4% CPI it implies (so far) represents a very significant risk to markets and is the chief reason behind the Fed’s duplicitous changes in posture towards inflation.

continued for members…
(more…)

And, everything was going so well…

The algos managed to bounce just before tagging the line in the sand yesterday. So far, so good. But the overnight crew wasn’t so lucky, as ES finally dropped below a trend line dating back to Nov 6. Is this the “something bigger” we’ve been waiting for, or were the machines just caught off guard?

continued for members… (more…)

One of my favourite Yogi Berra quotes was in response to a question about a restaurant: “Nobody goes there anymore; it’s too crowded.”

Everyone seems to agree that the market is overbought, sentiment is insanely positive, leverage is excessive and that the flow of funds has been unbridled – in short, that the long trade is too crowded. If so, who’s still buying?

Stocks have ignored most every opportunity to correct – whether technically or fundamentally driven.  It’s the kind of behaviour we often see around OPEX and year end when the algo tractor beams typically take hold.Do the algos have markets firmly under control, or might investors come to their senses?

continued for members… (more…)