Buy-and-hold investors are no doubt pleased with today’s new all-time highs.  A review of the past two years, however, shows that traders who are tempted to chase stocks here should be very careful.

This is the 4th breakout to new highs since January 2018. The figures below show limited upside in the days following each breakout compared to the losses incurred once the breakout failed.  The average cycle gains averaged only 1.29% while the subsequent losses averaged 8.30%.

If ES were to top out here at 3083.75, it would represent a 1.79% gain above the Jul 26 highs — right in line with previous breakouts. A drop to the TL connecting previous lows, slightly below the SMA200 at 2891, would produce a 5% loss — the smallest of the four previous cycle drops.

There’s something different about this breakout, of course.  ES just completed an Inverted Head & Shoulders Pattern targeting 3717 — a 20% gain from here, if today’s new highs hold.

So, what happens next is critically important to the outcome for the coming year.  Is the market really breaking out in pursuit of another 20% gain, or is this merely an exercise to ramp the Dow up to new highs?  There are a lot of folks who need such a headline.

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This rally isn’t going down without a fight.  The better than expected jobs report is this morning’s catalyst, sending S&P futures 13 points higher to break out of the little channel from which they broke down yesterday.

Yes, it’s all very confusing – especially since the Fed just cut rates based on what is ostensibly pretty decent data. And, with a little more of a push from algos, SPX could make new highs this morning.What isn’t confusing, however, is that VIX has held important support and our 2s10s model is still signalling a downturn — meaning this pop should be faded.

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The pieces are falling into place for a downturn.  We begin with USDJPY, which popped above its SMA200 but failed to make a new cycle high in the wake of yesterday’s FOMC decision. It’s on its way to our 107.88 target.

But, if the latest rising channel breaks down, there is much greater downside potential.  Note that the BoJ declined to follow the Fed’s lead last night and is standing pat on rates.

Thanks to corroborating price action on CL and VIX, which completes the bears’ hat trick, futures are already off about 10 points.continued for members… (more…)

Once again, the FOMC will have the opportunity to demonstrate their priorities.  Will they cut rates again, ostensibly in an effort to stave off a recession?  Or will they keep their powder dry and risk a market meltdown?

Mohammed El Erian, in a wonderful moment of truthiness this morning on CNBC, argued that cutting rates is a bad idea.  Referring to the ECB’s experience:

It is not only ineffective, it is actually harmful to the long-term stability of the economy.  It is undermining the financial sector; it is undermining the provision of long-term protection services; it is allowing zombie firms to survive; and, it is contributing to resource misallocation.  On top of that, we see an increase in the saving rate in Germany, because people are compensating for the low rates. I don’t understand why it is we’d want to follow the path of the ECB.

Of course, one person’s resource misallocation is another’s reasonably priced bull market. Like a insecure lover, the market desperately needs the Fed to continue showering it with compliments (the latest iteration of not-QE) lest it look in the mirror and discover the extra pounds and wrinkles which time has wrought.

Nothing has changed in our outlook from Monday.  Unless the Fed manages a dovish surprise, which is highly unlikely, yesterday’s highs should stand for quite a while…… and volatility should spike much higher in the days ahead.continued for members… (more…)

The meltup continues as we approach the next FOMC meeting. This time, we also have a slew of earnings reports — which have largely been ignored in the quest for new all-time highs.Would the Fed’s failure to cut rates again make any difference?

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More dismal earnings and outlook from a market “leader, more stoic nonchalance from the futures.

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Unlike BA and CAT, TWTR is not seeing an immediate bounceback following its dismal earnings, revenues and guidance released earlier this morning.  Is this the disaster it seems to be?  It depends.  Note the purple line running through the middle of the chart.This is actually the bottom of a channel which has been in place since the 2016 bottom.  What’s more, the channel bottom is a smidge below TWTR’s 200-day moving average at 36.93.  If it recovers to 36.93 by the end of the day, no problem.  If not, things get very interesting.

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Watching earnings roll out this morning, I’m reminded of the great line from Shakespeare’s As You Like It:

“I must tell you friendly in your ear…sell when you can, you are not for all markets.”

Caterpillar earned $2.66 versus estimates of $2.88 (and we all know the 2.66 was adjusted out the wazoo.)  Revenue also missed at $12.76 B versus $13.57 expected. One-off miss? Hardly. The company also slashed its outlook by about 12%.

As one would expect, the stock plunged sharply – shedding over 10 points, a loss of 8.2% from yesterday’s highs. An hour later, all was forgiven and the stock had regained all of its losses and then some.

Madness, right?  Especially as these prices already represent serious resistance.

CAT could do no wrong from Jan 2016 through Jan 2018.  Then both the market and CAT stumbled.  After 9 months of steady decline (the channel shown in purple below) the stock broke out on announcement of a share repurchase plan…but broke down again on disappointing earnings. An expansion of the share repurchase plan briefly put things back on track, but by Aug 2019 it was testing its former lows again. It was time for a new channel.

Enter the more generous white channel which could accommodate all those pesky swings. This is the 8th time since Jan 2018 that CAT has tested the top of that channel.  Are we to believe that the stock should break out based on these results?  That’s where we are now: on the brink of madness.

I drive past several farm equipment dealers on occasional visits to my daughter in college.  Each one has a lot overflowing with inventory that no one wants to buy because prices are in the toilet — much of it due to the trade war which, last time I checked, has not been called off.

When fundamentals no longer matter and stocks rally on dreadful financials which are much worse than anyone expected, what does that say about market integrity?

Meanwhile, all the algos care about is that USDSJPY is “breaking out” again……and that VIX is conveniently being crushed.To think, futures are almost back in the green and Trump hasn’t even commented yet on how well the trade negotiations are going nor why mortgage applications plunging 12% is a good thing.

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Another day, another early morning ramp job — brought to you this morning by VIX and CL — which broke down yesterday for all of 45 minutes and broke out overnight the very moment that ES threatened to drop back below horizontal support.Ditto for VIX, which has seen its neckline backtest turn into a trend breakdown. Nothing new, of course.  The algos were listening and, so far at least, have obeyed. Same as it ever was…

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