SPX has spent 16 sessions at or above its 10-DMA, hardly a record but definitely getting long in the tooth. For those keeping track, this latest run began the day after VIX was hammered back below its SMA200 and CL popped above its SMA200.
But, most of the excitement this morning is in currencies. DXY is testing its Dec 14 and Mar 7 highs, which has nice implications for GC reaching our next downside target.
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One of the more effective factors in prompting algos to buy stocks is the price of oil. Yet, as we’ve been discussing, higher oil prices are a double-edged sword as they can drive inflation to levels which prompt uncomfortably high interest rates.
Thus, even though the latest 3-D chess moves out of the White House have driven oil prices 2.5% higher overnight, S&P 500 futures are off 10 points.
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Futures dipped 11 points below the SMA10 overnight, only to be rescued by retail sales data that beat expectations (+1.6% vs 1.0%)
The beat was primarily attributable to soaring gasoline prices and auto sales — a double-edged sword, of course, from an inflation standpoint.
The only chart that continues to matter, however is VIX. It has been threatening to break trend for several week, but has managed to hold up fairly well considering the market’s meltup.
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One of life’s certainties over the past decade or so has been that the BOJ would always find a way to keep the Nikkei rallying. When QEn ran out of steam, there was always direct purchases of stocks via ETFs. So, it was surprising to see NKD’s rising channel, in place since Fukushima, break down in December.
True to form, it has since made a strong comeback. But, it has paled in comparison to the S&P 500 (the thin purple line.) While SPX is approaching its all-time highs, NKD is approaching a .618 retracement and a backtest of the broken channel.
A possible warning sign?
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As we discussed last week, VIX is at the threshold of what would be a major break in trend. Every such past setup in which VIX broke down resulted in stocks breaking out above important overhead resistance.
S&P futures are up 10 points and are now only about 27 points from all-time highs — the result of VIX being hammered to new lows after rallying nearly 10% yesterday.
ES’s rising channel from December, kicked off by a meeting of the Plunge Protection Team, broke down two weeks ago. But, it hasn’t mattered. ES continues to melt up, guided by an overhead trend line which will intersect 2947 around Apr 26. Only if VIX bounces strongly will stocks avoid new highs.
As for earnings and economic data, the algos could care less lately.
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Time flies when you’re having fun. It’s hard to believe it’s been almost three years since Brexit first broke.
I initially looked at EURGBP as an interesting trade opportunity. With the EURGBP at .7622, it looked like there was a good chance it would end up at .86 or so. This was our daily chart from June 22, 2016 [see: The Eve of Destruction.]
It reached our initial targets of .8262 and .8411 by June 30, and reached .8599 on July 6 — a nice 13% return in two weeks. It might have stopped there, as it represented the .886 Fib retracement as well as the channel midline.
As we had discussed in The Eve of Destruction, sharp rallies and pushes above resistance were bearish for stocks. 
So, I expected heroic central bankers to swoop in and save the world at that point. To be sure, it needed saving. Futures crashed 6.5% overnight. Additional carnage-depicting charts are available at It’s a Brexit! posted live that evening.
In any case, TPTB didn’t save the world by putting a lid on EURGBP — which popped above the former highs. 
Instead, USDJPY made a heroic reversal and VIX collapsed to some of the lowest levels seen in over a decade…
…all because EURGBP couldn’t be contained. It’s important to note that even though SPX didn’t completely collapse, it tested important lows and took almost a year to regain its 2015 highs (the shaded area below.)
There were other things going on. But, GBP’s weakness was certainly a drag on stocks as had been the pattern in previous years.
As it turned out, EURGBP’s ascent wasn’t without a target in mind. It had passed up the purple .886 to focus on a different one. On Oct 7, 2016, it came within .0039 of its white .886 Fib based on its all-time high and its post-GFC lows.
Since then, it has been consolidating. The highs have been very well aligned — preserving the narrative of a downward trend. Does this mean we can count on the GBP to steadily increase in value? Maybe.
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The grind higher continues, driven by an earnings beat by JPM and Chevron’s $33 billion offer for Anadarko. It hasn’t hurt that USDJPY has (again) spiked above its SMA200…
…and VIX is (again) testing trend line support dating back to its 8.56 lows on November 24, 2017.
As an aside, that 2017 low was a bit of a travesty. SPX was rolling over in the final hours of the last trading day before Thanksgiving [details HERE.] Out of nowhere and on zero news, VIX plunged 11.7% in a matter of seconds.
But, hey, all’s fair in love and algo-driven rallies. SPX melted up another 271 points (10.4%) over the next two months before giving it all back over the subsequent 9 sessions. 
Not to be too dramatic about it…but, whether or not VIX breaks down now will determine whether stocks remain in a holding pattern or go on to test their all-time highs.
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PPI just confirmed what CPI declared yesterday: Despite official White House discourse, there is inflation.
Of course, it’s very clear that food, energy and trade services are the primary drivers. Without them, PPI is as low as it was in Aug 2017.
As a reminder, when Aug 2017 PPI was announced, the 10Y was about 2.1% versus the current 2.5%. WTI, shown below in purple, had doubled in the previous year and was on its way to a near tripling in price, eventually driving the 10Y to 3.248% as CPI topped 3%.
We were reminded yesterday that the deficit has ballooned since then. We’re on pace to top $1.1 trillion in fiscal 2019, putting the new total public debt around $22.7 trillion. This is obviously not a great time to be ramping up interest rates.
Yet, if oil and gas prices were to continue rising, this is exactly what would happen.
While the algos are happy to track rising oil and gas prices, the handful of carbon-based traders out there who have done the math know that this is not a sustainable path.
The Fed can pretend that food and energy prices aren’t relevant to their policy decisions. But, they know full well that the consumers who are expected to keep the economy humming have to buy food, gas up their cars, and fork over their soaring rent payments (not owner’s equivalent rent.)
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Oil and gas prices are up strongly since December. While it has been extremely beneficial to algo-driven portfolios, the inflation chickens are coming home to roost. MoM CPI rose to 0.4%, driving the YoY rate back up to 1.9%.
While a single month pop isn’t all that alarming, there’s a very good chance that these data will temper expectations of Fed dovishness.
Meanwhile, across the pond, Mario Draghi just issued another “whatever it takes” declaration. Could this finally be the start of the currency realignment that has been so long in the making?
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Things got off to a nice start for bears yesterday…until our old friend the V-shaped recovery showed up. Even when it looked like it would falter, it just kept melting up.
So, instead of a clean, simple channel to 2875.15, ES has this ridiculous path to follow — all for the sake of delaying the inevitable for a day.
As usual, blame the algos. USDJPY was in on the action, pushing up through its SMA200 every time stocks started to falter. As we expected, it was a head fake.
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