With futures up 18 points and the S&P 500 closing 17.37 points below last week’s all-time highs, we should know pretty quickly which way the winds will blow today.  As is often the case, VIX has been driving the algos with shots across the bow as needed — three so far.  It’s enough to establish an obvious trend line which could easily be broken.

We got the test of the SMA200 we expected on Friday, and the subsequent very precise test of the red channel bottom from Nov 2017 at 8AM this morning. At this time, however, the key will be whether that little red TL from the overnight lows can hold.

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When Phase One was announced, stocks established a new steeply rising channel that aimed straight to 3300. When the channel was repeatedly tested, a new, steeper channel was established. Watching Peter Navarro this morning on CNBC, I hear that Phase One is really, truly, definitely, almost, pretty much sort of in the bag.  Or will be soon. The more relevant factoid is that the end of the year is finally here.

The algos, having produced some pretty impressive numbers, can take a breather. From the looks of VIX, USDJPY and CL, they will.The question is: Might it turn into more than that?

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One of the more interesting price cycles I’ve worked on over the years is that of oil. Oil and gas have proven to be lucrative trading vehicles, and their price movements have been extremely helpful in forecasting interest rates, currencies and inflation.

The most fascinating cycle I’ve discovered is the periodic peaks and crashes in WTI.  The chart below shows that important highs (highlighted) have occurred like clockwork.

2003 – 2008:    1961 days
2008 – 2013:    1874 days
2013 – 2018:    1862 days

The last three important lows have been just as consistent and illustrate the on-again, off-again correlation between oil prices and equities. [The strong, positive correlation was marred by a significant divergence between June 2014 – Mar 2015.]

The chart begs some very important questions: will the cycle continue and, if so, will equities follow suit?

2001 – 2009:    2614 days
2009 – 2016:    2583 days
2016 –  ???

In my opinion, this is the most important chart to watch over the next year or two.

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Wishing everyone a very, Merry Christmas and a New Year of peace and prosperity.

The fourth of December’s five gasoline price readings hit EIA’s website yesterday. The average stands at 2.47, 9.1% above 2018’s December reading.  Unless another large component of CPI takes a nosedive this month, CPI could top 2.3 or even 2.5%.  This is a level not seen since Oct 2018 (the shaded area below) when the 10Y averaged 3.15%.  It’s currently at 1.95%, so something is clearly out of sync.The Fed has been saying they’re going to allow inflation to run a little hot.  And, it has, with Core CPI running 2.3-2.4% since August. The 10Y has responded, rallying from 1.43% in September to its current 1.95%.

All year long, YoY declines in oil and gas prices have kept headline CPI below 2%.  It finally crept above 2% in November.  December will represent a very substantial departure, with a YoY increase adding to rather than throttling back Core CPI.  Is the bond market ready?  Are investors listening?

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Traders have disappeared from sight this morning.  Volume is about as low as it could be, despite a big miss (which didn’t even make the front page of CNBC.com) in Durable Goods new orders: -2.0% vs +1.2% expected.  YoY, the drop was 5.7%, the worst since Jul 2016.

Futures plunged all of 4 points which, of course, sent VIX to the rescue with a compensating plunge.

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One of the market’s favorite tricks is to close right below resistance and blow through it the following morning on the “strength” of the overnight ramp in the futures.  SPX came within 0.67 of our next upside target yesterday, suggesting a potential downturn, but will blow right through it on the open.  This morning’s ramp job is brought to you by VIX which, despite not making lower lows, has timed its daily collapse perfectly.

The only downside of such maneuvers is that they frequently result in a “pop and drop” – where stocks backfill the newly created gap. It’s a source of irritation to those who bought the open.

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No, I’m not talking about Philly Fed Index, which at 0.3 versus 8.0 expected and 10.4 prior, is really stinking up the joint.

instead, I’m talking about the 2s10s breakout which, as we’ve discussed countless times in the past, spells serious trouble for equity markets. This is exactly the scenario we discussed earlier this week and is a direct result of the brewing inflation problem which is also not being discussed in polite company.continued for members… (more…)

I spend a lot of time and energy trying to spot potential downturns.  I think the average buy-and-hold investor needs to know when downside risk is elevated and when events occur that could trigger a substantial drop.  Even when things are apparently going well, I always post support levels just in case.  While there’s a cost to missing the best rallies, there’s also a cost to getting caught in the biggest plunges.

Traders, of course, see big downside plunges as potential opportunities. Whether they short the market or merely step aside, turning points are vitally important to their success.  This leads us to the current setup.

Stocks broke out of a falling channel two months ago when Trump held a big press conference in the Oval Office to announce the Phase One deal (it wasn’t) with China [see: Melting Up.]  Since then, the market has been, well, melting up — paying little attention to overhead resistance and making higher highs seemingly every other day.

The rising red channel above ran into the top of the (less aggressively) rising purple channel  on Nov 19.  It wasn’t until Dec 12 that it finally punched through – a breakout which leads to 3300 by year-end.  In the process, it reached our ES 3175 target well ahead of schedule.

The downside risks certainly haven’t gone away. From all appearances, though, they have been back-burnered for the remainder of 2019 – 10 more sessions.  We’ll review our upside targets and see if we can spot any potential bumps in the road.

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