Twelve days ago, we noted that the equal-weighted S&P 500 had reached important resistance at the top of a channel dating back to the 2007 top [see: Run, Don’t Walk.]At the time, RSP hadn’t quite reached the 1.272 Fibonacci extension. Now it has. The only reason futures are up 23 points is because, as we discussed yesterday, VIX has experienced a bearish (bullish for stocks) 10/20 cross. Can the algos push to new highs, or is this the final warning to head for the exits?

continued for members…

Right now, ES has broken out of its sloppy falling channel. Can it hold this breakout and make new highs?VIX hasn’t yet broken down – though it’s back to test the white channel bottom as it has 8 other times since it completed a .886 retracement on Nov 27.  Even though it plunged to 22.12 at 8:30 (no news, just out of habit?) its previous low was 21.66 on Jan 14.  It wouldn’t be difficult to make new lows…Other signs to watch…XLF still hasn’t broken out of its potential triple top.HG (highly correlated with stocks) is still stuck at its channel midline.And AMZN’s pennant pattern seems to have broken down.The main algo signals are also helping a little bit.

CL and RB are threatening new highs on the day – but still can’t afford to go any higher unless it’s very brief. DXY continues to show signs of life and a potential pop… …as USDJPY vacillates after testing its channel top and SMA50……and EURUSD continues to look weak after experiencing a bearish 10/20 cross last week.There’s no question that the combination of a dovish Fed and a dovish Treasury will go a long way toward continuing the ultra-law interest rate and easy money policy that has supported stocks at every turn. I am optimistic that the infrastructure spending being contemplated will be a productive boost to the economy. And, of course, there is good potential for vaccines and focused federal policy to effectively deal with the pandemic.

On the flip side, income and capital gains taxes are clearly going up and the deficit and debt will continue to rise, even with ZIRP. Many sectors in the economy will continue to struggle for at least another six months: travel, live entertainment, commercial real estate, in-person retail, etc. State and local governments will continue to be under pressure from a depleted tax base. And, some of the regulatory rollbacks which were favorable to businesses will likely be reversed.

Ideally, government will be less divided and confrontational.  So, we could see more cooperative, accommodative legislation – even if it does accelerate deficit spending.  We should also see an improvement in relations with many international trading partners – some of whom have been ostracized over the past four years. This should be beneficial to stocks, which obviously thrive when central banks cooperate.

UPDATE:  5:30 PM

The algos had quite a day.  VIX not only broke through the channel bottom at 21.74ish, it dropped lower than the last two tests of the channel bottom.  Altogether, it shed 7.14% and the bearish 10/20 cross persisted through the close.

Recall that the last time it experienced a bearish cross was on Nov 11 after VIX had reversed at 41.16 on its way to 19.51. I’ve highlighted the time period on the SPX chart below. That cross lasted until Dec 15, during which time SPX rose from 3572 to 3694. At 3.4%, it wasn’t that big a move. But, it got SPX above its Sep 2 highs, kept it above its SMA10, and got it close to its 1.272 extension.  Baby steps, but very effective baby steps.

In addition to VIX’s theatrics today, some very big cap stocks made huge moves. SPX was up 1.39% and COMP was up 1.97%. But, some of their bigger components did much better.

Today’s price action:

AAPL +3.29%
MSFT +3.65%
AMZN +4.57%  (Bezos’ arch enemy no longer in office, pennant bust was premature)
FB: +2.44%
GOOG +5.36%
NVDA +2.61%
NFLX +16.85%