Futures ramped higher overnight, continuing to dance to the tune of VIX’s smackdown and ongoing rumors of a fiscal stimulus deal…
…and ignoring troubling pandemic facts.
But, we’re finally into October and Q4. And, as we discussed yesterday, things are about to get very interesting.
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If our charts are to be believed, we are on the cusp of a significant move in currency pairs and the bond yields.
10Y yields plunged back in March, then began rebounding via a long, drawn-out flag pattern that broke down in late June. Since then, it has been tracing out an equally long, drawn-out triangle pattern that has also broken down.
It has correlated nicely with DXY, albeit with a 2-3 day lead. If TNX’s latest breakdown holds, we might finally see the next leg down in DXY and the long-awaited, significant moves in USDJPY and EURUSD.
Needless to say, the dollar’s demise hasn’t helped the trade deficit, which just reached all-time highs despite White House’s claims to have strengthen the trade picture.
It also doesn’t bode well for stocks. If the past is any indication, October could be a very difficult month.
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As Congress dithers over a stimulus bill, the part of the economy not reflected by the stock market continues to suffer. How long before the market takes notice?
Most factors driving stock prices are currently tracing out triangles – a chart pattern marked by lower highs and higher lows. It’s the go to pattern for marking time before a big event such as an important economic data point, a Fed meeting or an election.
WTI is a perfect example.
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A new week, a new breakout in the after-hours for no particular reason.
And, just when the ramp job started to waver, a 5.6% smackdown on VIX – no news, just a reminder not to focus on the pandemic, the millions out of work, our dysfunctional Congress, the coming election battle, Trump’s tax troubles, etc.
Why? Because they can.
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Durable goods orders gained a disappointing 0.4% MoM in August versus expectations of a 1.5% gain. This follows an upwardly revised 11.7% in July and 7.7% in June. Ex-transportation also came in at 0.4% versus 3.2% in July. YoY, total orders are still down 11.3%.
Futures responded by slightly trimming their modest losses after bouncing 27 points from overnight lows.
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ES is reaching our next downside target right on schedule.
Note that if ES hadn’t spurted past its February highs in late August, falling to our 100-DMA target would have involved a fairly shallow drop of 5.5% and would have preserved the rising white channel.
Instead, we have a 10.8% loss so far and face much greater technical damage if support isn’t retaken – all for the sake of completely unjustified higher all-time highs.
Fear and greed. It’s the same old story when it comes to markets, even in the age of algorithms and central bank interference.
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One of the signals which convinced us to call a top a few weeks ago [see: Correction Warning] was the bullish (bearish for stocks) 10/20 cross in VIX. Should bears be concerned that the cross just unwound?
And, in an attempt to answer the many questions raised by my observation that SPX’s bounce at a 10.0056% decline from its recent highs – 19 cents away from exactly 10% – I offer the following charts. Note that VIX collapsed seconds after SPX reached the 10% correction mark. Coincidence? I think not.
Note that ES has formed another rising wedge that should see SPX open modestly higher. But, it would take more fancy footwork to keep the bounce going. 
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If a stimulus deal was unlikely before Justice Ginsburg’s death and the current SCOTUS battle, it’s all but impossible now. Given that the stimulus payments and enhanced unemployment were largely responsible for the economic bounceback, this makes for a very downbeat economic forecast between now and election day.
Throw in the prospect of renewed/increased shutdowns in key parts of the world, and it’s hard to imagine the market rebounding from here.
But Powell will get another chance to convince investors that the future isn’t quite so dire. Something about tools, yada yada yada. While Mnuchin will likely say very little of anything (it’s his boss who has amped up the stakes in an obvious and understandable attempt to save his political skin) he’s very well versed in happy talk.
Anyone else notice that SPX reversed yesterday at 10.0056% off its recent highs? That’s 19 cents away from exactly 10%. Probably a coincidence…
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ES is now off 9.3% from its recent top (-7.8% from our Correction Warning), nailing our 3253 target overnight. The decline has broadened from the overpriced tech stocks to include banks, energy and cyclicals.
The factors we’ve been watching for the past three weeks are all bearish now, and bulls are starting to acknowledge the fundamental risks inherent in the economic and political landscape – not to mention an obvious uptick in coronavirus cases in many significant countries around the world. Contrary to politicians’ cheerleading and assurances of a successful vaccine just around the corner, the pandemic is still very much with us.
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After a precision tag of its channel bottom yesterday, SPX has an important decision to make. It’s complicated by today’s quad-witching, sometimes the scene of a massive ramp job.
This one is different, however, as we’ve detailed in studying the price action of multiple important factors. With six weeks to go until the election, we’ll take a look forward at the most likely scenarios for stocks, bonds, currencies and oil/gas.
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