Despite the ample support markets are receiving from the algos (witness yesterday’s knee jerk reaction to VIX’s smackdown) our yield curve model continues to sound the alarm for equities.

The only question is how long the delicate equilibrium can be maintained.  Rates can decline for many reasons. When due to central bank easing, for example, stocks  tick gleefully higher.  When it’s a response to fear, on the other hand, we can expect additional equity market instability.

As the 10Y approaches our next downside target from Dec 26 [see: Update on Bonds] it would be wise to consider why rates are declining this time.

Of course, the decline has been postponed repeatedly over the past 4 1/2 months.

But, the bond market has a great memory.  It isn’t as easily fooled as equities.

In other words, there’s more downside ahead for yields and stocks.

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It’s been 14 months since Trump tweeted that “trade wars are good and easy to win.”  Since its close that day at 2691.25, SPX has ranged 608 points — from its Dec 26 low of 2346 to last week’s high of 2954.

We’re seen many factors play into that 608 point spread: countless breathless reports of an impending trade deal, a truly laughable GDP print, the FOMC’s humiliating retreat from normalization. The most impactful factor of all, however, was Mnuchin’s convening of the Plunge Protection Team.

Though the decisions made during that call — so important that the heads of the Fed, SEC, CFTC, FDIC and OCC were called away on Christmas eve — will remain shrouded in mystery (minutes are not released), the outcome was obvious: VIX was crushed by 70%.

Now that the narrative is fraying a bit, we’re seeing VIX regain some of its swagger.  As a result, ES is tagging successive new downside targets.continued for members… (more…)

Probably not. Although WTI got a nice bounce off our SMA200 target…

…USDJPY’s initial pop above its SMA200 has quickly faded (again) and headed for lower lows……and SPX, after tagging our target at the channel midline, is set to run into resistance on the open.VIX remains a wild card, as always.  But, if its rising channel holds this morning’s test (13ish), it will soon be testing its SMA200 at 16.54, a 22% gain from current levels.

If the channel doesn’t hold (the usual state of affairs) then we’re in for more meltup — which would shock absolutely no one.

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Today’s an important day for many reasons.  The FOMC obviously faces some important decisions regarding monetary policy – chiefly, how to maintain a dovish stance (i.e. keep stocks rising) given the recent blowout GDP data.

Another important development, however, is high AAPL can pop on the open.  It reached as high as 213 overnight, which is significant.  This would put it at the top of the channel which signaled its dramatic swoon to within 2 points of our downside target last November — producing some pretty robust trading results.

Members will recall it broke out of this channel in Aug 2018, following the steeper red channel to its Oct 3 highs [see AAPL: Engineering a Breakout.] When the breakout failed on Nov 12, it was followed by a breakdown of the red channel and the SMA200 — as strong a set of bearish signals as you’re likely to ever come across.

Given that the correlation between AAPL and SPX is obviously so high, AAPL’s return to the top of the purple channel is a watershed moment for the meltup of the past four months. I can certainly understand Tim Apple’s decision to pull out all the stops at yesterday’s pep rally earning’s call, but a failure to break out again (215ish) could be troubling for the overall market.

Meanwhile, futures are up sharply on the expectation that AAPL’s good fortune and the Fed’s infallible brilliance will goose the broader market.  It won’t…at least today.

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I can’t recall the last time we saw such a wide array of expectations regarding the FOMC’s next steps.  Like opinions, data has been all over the map.  Just this morning, Trump’s latest nominee for the Fed, Stephen Moore, insisted we could have 4% growth with no inflation going forward.  Total nonsense, of course.

Futures were off by as much as 7 points overnight before a pop in oil futures brought them back to even.  They’re currently off about 2 points — about where we were yesterday morning at this time.

If the rising wedge and SMA10 break down — likely, as the FOMC is rather boxed in — look for ES to test its rapidly rising SMA50, currently at 2846.50.Today, we’ll take a look at the big picture and try to discern what the charts suggest the Fed’s actions might be.

First, a reminder as to where SPX/ES stand. As we discussed yesterday, a drop through 2940 — which it should do on the open — is a signal to short.  From there, we have multiple downside targets starting with the SMA10 at 2919, the SMA20 at 2901 and SMA50 and small white channel bottom at 2938.

If the white channel breaks down, there’s little in the way of support until reaching the SMA200, currently at 2766 and rising slowly, followed by the 2.24 at 2703.62 in late May.

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Futures are flat this morning after coming within 0.25 of the Sep 2018 highs overnight.

The algo factors are generally bearish, but that hasn’t been enough to stop the meltup thus far.

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Q1 GDP came in at 3.2%, a big beat versus the 2.3% most expected.

Futures, which nailed our SMA10 target yesterday and had been in the process of breaking down, shot up to the top of the triangle pattern we’ve been watching — not enough to register as a breakout.

It will be interesting to see how the Fed spins the latest data to fit their dovish stance.  Our downside narrative remains intact.

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Over the last couple of years, the shape of the yield curve has provided some remarkably useful warnings of market turmoil.  There are numerous signals and nuances in our yield curve model. One of the most significant is when the 2s10s breaks out above resistance.

It can be seen below in the breakout above the blue trend line (which signaled the Jan-Feb correction) and again in the breakout above the red trend line (which warned us of the Sep-Dec correction.)

What might it mean, then, that the 2s10s is threatening to break out again?

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SPX came within 4 points of its all-time highs yesterday, a few days ahead of schedule but close enough to be considered a major victory for the bulls.  Oddly enough, the futures didn’t seal the deal after-hours.

Is it just possible that the downside case isn’t completely dead?

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