Based on how the market is reacting, inflation is no longer a concern. The Fed will pivot and easy money will be back in no time. Except, as we’ve been discussing, this is one of those weeks which almost always overreacts to the upside: FOMC meeting, OPEX, end of year, etc.
As noted yesterday, the dreaded bearish signals such as a simple 10/20 cross have been averted – at least for now – and the algos are throwing a party.
Yesterday’s gap higher in VIX (in conjunction with a 1.4% rally in stocks) was indeed a massive head fake in light of this morning’s 13% smackdown. Talk about closing a gap…
From where I sit, however, the Fed’s job just got tougher. While monthly CPI came in slightly lighter than expected, we still have problematic wage and rent inflation, and financial conditions are getting looser, not tighter.
Remember Jackson Hole? Maybe it’s VIX’s 13% plunge which is the headfake…
continued for members…
I think this puts additional pressure on the Fed to slow the taper, not speed it up.
The 10/20 cross that almost was:
The rest of the equity charts: ES reached the red .786 – a common reversal point – and is currently backing off,
Interestingly, a 4180 high in ES would put its 1.618 right on top of the yellow 2.618 extension at 3076.93. Had the falling purple channel not been busted in July, it and the bottom of the rising yellow channel would have crossed 3076 in November – our original target from many months ago.
The strongest bear case relies on SPY closing at or under 407.23ish (4084ish on SPX)…
…and COMP meandering up to the white target but remaining below the SMA200 around the end of the year.
The bears would really benefit from a 75 bps rate hike tomorrow. But, in any case, they need this spike in EURUSD and dip in DXY to unwind muy pronto. 
CL still hasn’t pushed above its SMA10 and RB still hasn’t reached its SMA200. Until they do, I’d remain cautious.
This puts TNX a little closer to its SMA200. Again, I’m still looking for a tag in the next couple of weeks.
Note that the widening gap between the 10Y and 2Y might continue to shrink if the 10Y holds its current levels.
Remember, a sharp rebound in 2s10s is very bearish for stocks.
Bottom line, I think this is probably still an interim top that will yield lower stock prices in January.
Comments
5 responses to “Crisis Averted”
Hi Michael.
So, what’s the outlook on gold (GC)? In your forecasts last week, you had it declining significantly early next year. Are you still expecting it to drop?
Thanks,
Hi Rob, Thanks for the good question. Right now, GC is responding to the sharp decline in USD which is a function of what I believe is an unjustified rise in EURUSD. While unjustified, the rebound in the euro is really happening and having broken above the SMA200, is putting pressure on the dollar. Today, GC is pushing above its SMA200 yet again. It has done so 8 of the last 9 sessions and, until today, had failed to make new highs. I think this is a headfake and, as inflation moderates, will eventually unwind.
Hi Michael, appreciate the prompt response. I’m probably not the only one who sees an escalation in major geopolitical issues beginning early next year. But you’re probably right- maybe its still early for GC right now and the movement up is only a headfake based on strengthening EURUSD.
The way things are going, a major escalation sure looks like a possibility. Of course, if the conflict is centered around Russia/Ukraine/Europe, I would expect more euro weakness and USD strength, which historically has not been great for gold. Praying for peace…
Yes, you’re right, historically this has been the case- strong USD = weak gold.
Though I guess the game changer would be if Russia/Iran/China decided to start doing bulk purchases of gold above and beyond what they normally do. That would be hard to track, though..