The interplay between USDJPY and oil has been fascinating to watch.  The yen carry trade used to be the primary driver of algos and, thus, equity prices.  But, CL officially took over on Feb 11, 2016 and, despite the inflation complications it has engendered — not to mention a bearish channel breakdown and some of the worst fundamentals on record — it’s having a hard time letting go.

With CPI reaching 2.5% in January, and the year-over-year numbers set to look worse for February, what can we expect from oil and, thus, equities?

Can USDJPY find its feet, and can VIX be hammered strongly and frequently enough to offset the impact?

continued for members…

Our thesis has been a breakdown in oil to coincide with an offsetting rally in USDJPY up to 120.11.

USDJPY does appear to have found horizontal support here at 111.60-80, especially now that the SMA100 has arrived.  There is wide open space above to rally the 7.5% up to 120.11 — but, just as obvious a path to the SMA200 if the SMA100 doesn’t hold.

For its part, CL has clung stubbornly to the 50-54 level ever since pushing above 51.88… …even when it appeared its momentum had broken down.

The reason and the methodology have been obvious.  The rally in equities has been maintained at all costs — even though it puts central banks in a bigger predicament with respect to inflation and heavily conflicts with inventory data and very clear fundamentals.

And, CL and USDJPY have both been instrumental in keeping stocks on the rise — along with very heavy VIX manipulation, of course.  Friday saw another sharp deflation of prices during trading hours, followed by the now typical reset after the close.

It was enough to get ES up and out of its falling white channel, with the nice touch of a backtest last night to emphasize the “breakout.”

But, it has left ES and SPX without any meaningful backtests for over three months.  Even the bulls are starting to look sideways at the “markets.”  So, for now, I’ll stick with a backtest of the 1.618 (of the drop from 2134 in May 2015 to 1810 in Feb 2016) at SPX 2335.  It’s a very minor drop from here: 1.5%.  But, it would go a long way towards preserving what little integrity is left.  And, if SPX could hold it, it would be net bullish in the medium term.

SPX still has that gap at 2153.31 from last week.  If it can break below that, the SMA10 is at 2348.89 and the 1.618 Fib at 2335.34 — at which point it should bounce unless CL breaks down.  If CL breaks down, I don’t think they could ramp USDJPY or depress VIX strongly enough to offset the impact.

Will it happen?  I’ve toyed with the idea of gasoline prices dropping to impact CPI while CL held steady.  A casual comparison of gasoline and CL prices supported the idea.  Clearly, the gains in gas prices haven’t kept up with crude’s, and the divergence is growing.

February data hasn’t been released yet, but we can draw some conclusions based on estimates based on the M-T-D data that I’ve been crunching.

NOTE:  I’ve deleted the RBOB charts posted earlier, as eagle-eyed member JK noticed they included continuous contract prices and inferred a gap higher that didn’t really occur.

The EIA reported a 24% YoY gain from Jan 2016 to Jan 2017.  If Feb holds its 1.85% loss from Jan, then the YoY gain in Feb should be around 34%.

The BLS data used in CPI for gasoline showed a 22.5% YoY gain in January.  I’m projecting a 35.2% gain for Feb.

Gasoline itself is a relatively small component of the overall CPI calculations at 3.257%.  But, it feeds into many other prices such as food, housing, clothing, and public transportation expenses.  Given the impact it had in January, I’d not be surprised to see CPI top 2.7 or 2.8% for Feb.

With Feb’s numbers one day away from being in the bag, we should get the bad news and renewed focus on CPI on March 15.  If investors don’t panic over the YoY data, then we can assume that a stable rate of increase in CL won’t be a problem.  A 22% increase over last year’s average price of around 37 would yield CL 45.  While, a 35% increase would yield 50ish — only a few points below current prices.

If investors do panic over higher inflation, a reasonable reaction given the poor macro data lately, then a 35% YoY increase would be very problematic indeed.  CL might finally crack.  If the red channel breaks down (currently 52ish), CL has support at the SMA100 at 50.75 and the SMA200 at 48.56.  If those break down, then the next support isn’t until the purple TL at 44.32-45.31 and the gray channel bottom around 42.  Note that at 42, CL’s YoY increase would be only 13% or so.

UPDATE:  3:50 PM

VIX’s initial plunge and USDJPY’s subsequent spike was enough to send SPX and ES to new intraday highs, though we’re getting a bit of a sell-off at present.

If VIX closes at current levels, it’ll be the third such time in the past week it closes above the white channel top.  With Trump’s address coming up tomorrow and the drop I’m expecting in CL, I’d be okay holding short overnight.  As always, it’s only recommended for those who can hedge or deal with the possibility of another ramp job.

Bottom line, that was a lot of VIX bashing and USDJPY ramping to produce a 2-pt increase in SPX.  Could it be that traders are finally considering the possibility that a huge increase in spending, while decreasing tax revenue, is politically impossible?  Maybe the true believers in the Trump rally are having second thoughts?