The last time I felt compelled to use this title for a post, SPX plunged 105 points off its intraday highs within the next 24 hours.  This one should be more violent.

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All the talk about the necessity of a 50 bps rate cut (100 bps according to the president) got me to thinking about the history of such a drastic move. What were the circumstances under which the FOMC cut rates by 50+ bps in the past, and how did they stack up to today’s?

First, a quick history lesson. There have been seven such cuts since the tech bubble burst in 2000-2002. As the chart below shows, they all took place in 2007 and 2008 during the Great Financial Crisis. Most of them took place after the S&P500 had dropped precipitously from its October 2007 all-time highs.

The cuts, along with a handful of the more significant events occurring at the time, can be seen in the chart below.

The only 100 bps cut was in December 2008, a few days after QE1 was launched. By then, the S&P500 had plunged 45% from its highs. Q3 GDP had contracted -2.1% on its way to -8.4% in Q4. Almost 900,000 families had lost their homes to foreclosure and unemployment was 7.3% on its way to 10%. No one doubted the nation was in crisis.

As of Friday, the S&P500 is 1.6% off its all-time highs. GDP has grown 2.0% over the past year. Unemployment is 3.7%. I can’t remember the last time I saw foreclosure headlines. Interest rates are at historic lows, and the president insists the U.S. economy is “the best it has ever been.”

Is it really the right time for a 50 bps rate cut?

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With yesterday’s VIX algo-driven eruption in the rear view and this morning’s disappointing jobs report in hand, all attention now turns to the Fed.  Will they or won’t they cut rates?  And, if they do, will it top 25 bps?

Consensus still seems to be for a 25 bps cut.  But, Powell will be pressed later today for his thoughts on the matter.  So, get ready for some volatility – especially if he disappoints the market.  At least that’s what our analog says to expect.

SPX reached our secondary target yesterday and, so far, the futures seem content with this morning’s highs.

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On Day 427 of the “good and easy to win” trade war with China, we get news that the parties will sit down again sometime in October.  Naturally, there has been no deescalation of any kind lately.  In fact, the actions and rhetoric have increased over the past week.

But, the algos could care less.  VIX has dropped below its SMA200 and nothing else really matters. I wonder if anyone will notice that its SMA10 has pushed above its SMA20 again, the first time since July 30 — Day 0 of our analog.For our analog, it means the rally up to our next higher target — which was scheduled for last Friday — will occur three sessions late.  This continues the trend of rallies being weaker and slower than anticipated.

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Futures ramped higher overnight……purportedly on a perceived reduction in risk from Hong Kong, Britain and Italy.  The primary drivers of the algos, however, were a sharp bounce in oil and a gap lower in VIX — neither of which should have much staying power.  Hence, just another head fake that should be faded.

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All in all, it’s been a pretty good first month for our analog.  Rallies have generally fallen short of projections, but declines have more than compensated.

The initial drop was faster and farther than expected, which was somewhat unnerving and threatened to wreak havoc with the timeline. But, we’re back on track thanks to last Friday’s stunning (just-in-time) 87-pt plunge.  Overnight gaps have been quite common, making the analog that much more beneficial.  Being able to anticipate turning points in advance presents excellent trading opportunities — as evidenced by this morning’s nice gap lower after Friday’s feeble attempt at higher highs.

It’s worth reiterating that we’re very early in what should be a 9-month process. If it’s anything like the 2011 analog, the correlation will strengthen over time.

We’ve had one 7% move and five 4% moves in the first month. Though it has seemed volatile enough, volatility will continue to increase.  Over the next month, we should see three swings of over 7% and one of about 23% (in addition to the garden variety 5% swings.)

Buckle up!

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In our last update [see: June 28 Update on Currencies] we noted that EURUSD had broken out and was headed for a backtest of the neckline of a Head & Shoulders Pattern.  The breakout seemed significant, as the pair had not only popped out of a channel dating back to Jan 2018 but had spiked above its 200-DMA too — the first time since May 1, 2018.

I anticipate DXY finding support at 95.469, EURUSD finding resistance at 1.1447, and USDJPY testing 105.48.

EURUSD never quite made it to 1.1447; the breakout was a headfake. The pair reversed at 1.1413 and dropped 4% to tag our 1.0988 target earlier today.

For its part, USDJPY easily dropped to 105.48 and reached the next downside target at 104.74 on Monday, a drop of 3.7% from its Jun 28 highs.And, DXY bounced at 95.843 and has since rallied 3.7% as of today.These are all fairly sizeable moves for currencies in two months’ time.  Needless to say, the political turn of events in the UK has played an important role in the acceleration of EURUSD’s drop.  But, it’s safe to say that interest rates and equity volatility have also contributed.

As our analog unfolds, we should see more volatility — an expensive pain in the neck for hedgers but an excellent environment for traders.

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With a positive August within its grasp, ES is bumping up against its SMA50 again. Only this time, it has DJIA’s completed IH&S and VIX’s breakdown on its side.

Our analog remains on track, with another potential turning point today its next test. Bottom line, don’t go into the holiday weekend without protection.

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And, of course, the algos are eating it up.  VIX finally dropped below its SMA10… …and, ES finally pushed above its.The biggest story from a charting standpoint, however, is the Dow.  As we discussed on Tuesday, it has the opportunity to complete an Inverted Head & Shoulders pattern at 26,360 this morning.  Given where the futures are, keep an eye on this important test.

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It’s only been three weeks since our last update on Gold, but I’m getting so many questions about it that it seemed like a good time to opine.

In our last update [see: Aug 8 Update on Gold] I noted that it had reached our 1484.60 target and wouldn’t face overhead resistance until 1560 — which it tagged on Monday, right on schedule.

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“There’s a world of difference between truth and facts.  Facts can obscure the truth.”
— Maya Angelou

For over a year, now, the market’s rallies have been motivated by periodic announcements that the China trade dispute/war was resolved.  When that particular narrative faltered, there was often a dovish FOMC-related news blurb of some sort.

At this juncture, neither appears likely to come to the rescue of an ailing market.  Through a series of tactical errors, Trump has squandered any advantage he might have enjoyed in negotiations with China. And, investors loudly called BS on the latest report of a “very positive phone call.”  Two of them, actually.  Yeah, that’s the ticket.

Then, just yesterday, ex-Fed President of NY Bill Dudley suggested that the FOMC should avoid any rate cuts that might “bail out an administration that keeps making bad choices on trade policy.” I was astonished — not that Dudley felt this way, but to see it in print.

As long-time readers know, I have expected for quite some time that the global financial establishment, concerned about the uncertainty that four more years of a Trump administration would entail, would temper or even withdraw its “support” from the market since a correction back to November 2016 levels would neutralize some very important bragging rights.

Whether or not you support Trump or believe he’s on the right path with China, the truth is that a great deal of uncertainty has been injected into the market.  Markets dislike uncertainty, as do business owners and managers who have to make decisions which could prove disastrous depending on what the next tweet says. All the “adjusted” earnings reports, massaged economic data and other convenient “facts” can’t change that simple truth.

Trump has a difficult choice to make: go to the Chinese, hat in hand, and beg for a deal that will allow him to announce a victory and save face with his base — many of whom have suffered enormously throughout the trade war — or, be prepared for another 14 months of economic water torture.

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Our analog has been eerily accurate over the past month.  When it wasn’t, it was because stocks fell short of upside targets and declined more sharply than expected.  We should be in the midst of a multi-day bounce after bottoming where expected on Friday.  But, yesterday was a struggle.  Can the algos produce higher highs?

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