If you’re wondering what the noise was, it was the Fed’s “transitory” explanation doing a big fat face plant after June’s inflation data were released.

Headline annual CPI came in at 5.4%, the highest print since June 2008 and the second highest since Nov 1990. The 0.9% MoM print (headline and core) was also the highest since June 2008. Core CPI, at 4.5%, was the largest increase since November 1991.

Importantly, the data reveals that although energy prices might have led the charge to these lofty levels…

…inflation is now both widespread and endemic.  Most categories increased by at least 4% YoY and nearly all categories increased in June at an annualized rate of over 4%.

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Seemingly every great Western has a scene when a bunch of cowboys are riding nonchalantly through an obvious place for an ambush when one of them (the dimwit) optimistically mutters, “purdy quiet.”  Our hero knowingly replies, “yeah…too quiet” at which point all hell breaks loose. The dimwit is the first one to bite the dust. This week could be a lot like that.

There are scads of economic data due out this week, many of which could move markets.

But, a few of them could result in all hell breaking loose: tomorrow’s CPI data, Powell’s testimony to Congress Wednesday and Thursday, and retail sales on Friday.

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Investors got a taste of reality yesterday, and it was a little scary. Whether COVID, inflation, tapering or just plain exhaustion from the constant meltup, markets remain very overdue for at least a pause. The charts suggest it will be significant.Of course, with ES holding its new, higher 10-day moving average overnight, we’re supposed to believe everything will be okay. Stay tuned.

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One of my favorite childhood memories was playing Gin Rummy with my grandfather who, whenever he caught me with way too many cards in my hand, gleefully cried out “timber!”

With seemingly everybody long equities and very few of them bothering with protection, this morning’s downturn has that kind of panicky feel. Sixty points on ES is a lot. The reality is it could be much more if some of the algo drivers currently hanging by a thread break down. Our favored targets are much lower.

I’m especially interested in the 10Y futures, which are nearing our upside target this morning…

…and USDJPY, which finally broke down after six months of central bank coordinated, stock-propping, ramp jobs.

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The 10Y tagged our next downside (yellow) target yesterday, the trend line from the Aug 2020 lows, trading as low as 1.352%. In reaching those lows, it actually broke below both the trend line and the bottom of the falling white channel it’s been locked in since mid-March.

This target has been on our radar since March, when we plotted it in anticipation of a blowout April CPI print. We got the print (4.16%) but the market’s downturn was limited and short-lived, resulting in a gentler, more carefully governed decline than we originally anticipated.

Yesterday, however, the decline turned into a breakdown. Today, we’ll discuss the implications.

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In a market where VIX’s every twitch can send stocks screaming higher (and, in the old days, lower) the most important chart is this one. A breakdown below the dashed line would be just as supportive for stocks as was the breakdown in late 2016.

A close second is this one, showing yesterday’s bearish (bullish for stocks) 10/20 cross.  Algos love these technical signals to go all in.WTI ranks 3rd only because higher inflation is finally being considered problematic. A breakout here would still have important implications for stocks.

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Stocks are off slightly as the 2nd quarter draws to a close. The next quarter? I’ll be watching to see whether or not VIX experiences a bearish (bullish for stocks) 10/20 cross.

Equally important: can ES really maintain its bullish 10/20 cross indefinitely?

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Futures are melting up again on yet another pre-opening lower-low plunge by VIX. With the other factors up against hard stops, all eyes continue to be on VIX – which has already spoiled the bears’ fun on numerous occasions.

The last one was this obvious backtest opportunity a couple of weeks ago. Everything was set up perfect for a backtest of SPX’s 3.618 extension…

…when VIX was unceremoniously crushed without even getting a crack at its SMA200.It was clumsy and obvious…but effective.

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