ES’ original recovery channel officially bit the dust yesterday. This morning, we have a new, less ambitious one offering to take its place.
However: the SPX problem persists: What to do about SPX 2703.62? ES’ new channel will also need to break down if we’re ever to reach the strongest support possible.
Spoiler alert: nothing I’ve heard out of D.C. thus far suggests otherwise, while the growth of the Fed’s QEnot continues to speak volumes.
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It’s been a while since we took a big picture look at VIX. Since it reached levels not seen since the GFC yesterday, this seemed like as good a time as any.
VIX is an interesting instrument. Once a reliable measure of volatility in the market, it was used by many to hedge risk. As equity corrections became an endangered species, however, fewer investors bothered.
Eventually, VIX became a source of income for those willing to take a chance on selling vol. It might have seemed risky at times, but every one of the six times VIX exceeded 46 since 2010 was followed by a collapse to below 15. Actually, make that 5 out of six times.
On Feb 28, VIX shot up to 49.48, but it only dropped as low as 24.93 before bouncing up to yesterday’s high of 62.12. The price to which it rallied was significant.
Eagle-eyed members will note it’s been one of the higher targets on our charts for years – but, one we seldom mention as VIX is always smacked down upon reaching a lesser Fib level and a price between 46 and 54. From the post Market Timing, a Bad Thing? last October.
The 25.50ish target represents the intersection of the .382 Fib, two red TLs and the midline of the white channel seen below. If 25.50 should ever be broken, things could get very interesting very quickly.
The 62.12 high was very close to the .618 retracement (58.6) of the drop from 89.53 in 2008 to 8.56 in 2017.
Now, it was no surprise that VIX stopped rising once ES had dropped to our 2728 target. But, the breakout begs the question: What do the charts say about the even higher targets?
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Big storms are always scary. But, it’s usually the day after when we get the chance to assess the damage and count the casualties. So, here we are.
I’ve been yacking about ES 2728 so often and for so long, I’m sure a few of you were starting to tune me out.
Yet, the logic of this target was too compelling to ignore, as we’ve shown on every daily chart for the past several months.
Take this one, for example, from Feb 14 [see: A New Day] when ES came within 9 points of its eventual high a few sessions later. The red channel, which had broken down once already, was trying to get to 3600. If it failed, the white channel would then offer doubters a clear warning.
The final line of defense was the yellow 2.618 extension at 3076. If you ignored all those warning signs, then you probably had a pretty miserable day yesterday.
I think we can safely put the ES 2728 argument to rest now.
But, what about SPX 2703?
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After weeks of gathering clouds, the storm we’ve been watching has finally arrived. S&P futures are lock limit down just a few points above our next downside target.
Not surprisingly, all of our other targets across currencies, commodities and fixed income have either tagged or exceeded our next downside targets, with more to go once the cash market opens.
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Once upon a time, a few boys whose families owned the biggest lemon groves in town got together and opened up a lemonade stand. It was a very hot summer, so they sold an enormous amount of ice-cold lemonade. Since they controlled the supply of lemons, they were able to quickly raise prices from 10 cents per glass to as much as $1.50. Their customers didn’t mind as they could afford 1.50, it was excellent lemonade, and there were no alternatives. They like it so much, in fact, they invested $2 trillion in shares of the stand.
One day a freak storm hit town, and the temperature dropped from 95 to 25 degrees in a matter of hours. The weatherman said it could last for months. Not many people were interested in ice-cold lemonade, even though the boys frantically dropped their prices. They even tried cutting back on the amount of lemonade they made. For some reason, this had no effect on sales, and prices continued to drop. A few boys split away from the group and tried selling cheaper lemonade on their own, but this further depressed prices. Soon, the lemonade stand went out of business. The end.
And that, boys and girls, is how OPEC came to be in their current predicament.
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You may wake up and see futures down 60 points only to find they’re bouncing off the bottom of a rising channel and backtesting the (now) support of the 200-DMA.
You may find that VIX remains very much under control even though a global pandemic that central banks can’t “fix” is ramping up.
You may even find bond yields at all-time lows, but the “talking heads” insisting it’s “different this time.”
You may ask yourself, how does this keep happening? You may ask yourself, what would it take to break the cycle? You may ask yourself, will the crash ever arrive? Glad you asked. Please read on, as this is probably the most important post I’ve written in a while.
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I’ve done some calculations on the spread of the coronavirus in Italy, which has presumably learned a thing or two from China’s experience but suggests a path for other countries just now coming to terms with their own exposure.
Granted, Italy’s quarantine and aggressive treatment might put a dent in the exponential rate at which it’s expanding. But, it’s not a pretty picture.
Here’s where things are through Mar 4 with an exponential growth rate in cases I’ve calculated at f(t)=2.423e0.5013t (t = the number of days since Day 1 on Feb 20.) The growth rate in deaths as of today is f(t)=0.4575e0.3909t .
Cases as of 1800 CET today are at 2,706 and deaths are at 109.
Obviously, exponential formulae are very much subject to change. At this rate March 11 would see 90,428 cases and 1,681 deaths. March 16 would mean 1,108,819 cases and 11,866 deaths. Let’s pray they get a handle on things very soon.
We called the top for 10Y yields on October 10, 2018 [see: Plan B] with rates at 3.24% and ZN at 117’230. Since then, prices have rallied about 15%.
…I’ve always been inclined to believe more in the yellow channel — which says that 10Y yields have now topped and ZN has bottomed.
The price chart has been clear ever since December 2018 [see: December 26 Update on Bonds] with a critical target of 130’200 – 130’230…
…updated to 133’025 in August 2019 [see: Aug 7 Update]… 
…and adjusted to 132’100-135’155 in January 2020 [see: Bonds: More Turmoil Ahead.]
Yesterday, it reached and pushed past our 135’155 target – the highs last seen in July 2012.
With both the 10Y and 30Y tumbling to all-time lows, what might lie ahead for bonds? Is this an important alarm? And, what does it mean for stocks?
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The rescue operation we detailed on Monday [see: Rescue Operation Underway] is taking another stab at the 200-DMA this morning after the Fed’s ill-advised emergency rate cut nearly unraveled the progress the algos had already made.
Again, it’s a battle between the algos and fundamentals with numerous factors lining up to nudge stocks past important overhead resistance as though there’s really nothing to worry about.
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My daughter is enjoying a semester abroad in Rome, a metropolitan area of 4.3 million people with virtually no coronavirus cases and a sponsoring college which has urged but not required students to leave.
Only 350 miles away, in the area around Milan, cases have increased 10X in the past week – with 2,036 cases, 52 deaths (2.6%) and 149 recoveries (7.3%) as of last night. The markets have decided the coronavirus isn’t that big a deal. But, think about it.
That 2.6% mortality rate is important. But, what about the fact that one person has died for every three who recovered? Shouldn’t we be concerned? I sure as hell would be.
If 2-3 of the students at your kid’s high school died, would you shrug it off? If one died for every three who recovered, would you feel any better about it? Would you send your kid to school tomorrow? What if 2-3 coworkers died? Would you be eager to return to the office, hold meetings there, frequent the local sandwich shop or pub?
Over 20,000 people ride the train every day from Milan to Rome. What are the chances that no one who was infected traveled back to Rome, not realizing they were infected and contagious? Remember, you can be infected and contagious for weeks without even showing symptoms.
I think about these things as more and more cases are being discovered and schools shut down in the US, even though testing has been laughably inadequate. The latest occurred in metro New York, where 21 million people are suddenly very nervous.
The market has totally missed the boat on the seriousness of the coronavirus, egged on by politicians who think their primary duty is to keep optimism and stock prices elevated. It is not. Their primary duty is to do everything in their power to help protect those whom they represent. Period. Full stop.
The market has not grasped the reality that neither the Fed nor its counterparts can cut interest rates low enough to make the coronavirus go away. This won’t necessarily stop them from trying, which means the algos could continue to rally enthusiastically – even as doubts increase among carbon-based investors.
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