Yesterday was all about fine tuning, positioning SPX/ES for a breakout — which arrived at 2am courtesy of the breakdown in VIX we were expecting.
Is the start of another prolonged period of VIX bashing? And why now? Has it anything to do with DXY finally breaking down?
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ES reached new highs yesterday, but SPX reversed at its .886 Fib retracement. Which should we believe? Since VIX is plunging in the minutes before the open, indications are that this morning’s selloff will be just enough for SPX to flesh out its latest rising channel — also on the way to new highs.
What could go wrong? Plenty. For one, 10Y yields are threatening to break out of a channel dating back to Jan 2000. This seems to me to be a very dangerous game the Fed is playing.
The Fed clearly wants more headroom in rates on hand for the next economic disaster. And, the 2Y continues pushing higher, perhaps to buoy the dollar and keep inflation from running away.
As the 2Y rises, the 10Y must at least keep pace in order to prevent a yield curve inversion. But, yield breakouts have been unhealthy for stocks over since 2015. With debt accumulating quickly, why would this one be any different?
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Catch this news flash yesterday? Trump, ironically at a White House meeting with the National Council for the American Worker:
You’re gonna see on China, today, right after close of business…we’ll be announcing something, uh, and it will be a lot of money coming into the coffers of the United States of America, a lot of money coming in, but you’ll be seeing what we’re doing uh right after close of business today, the markets closing. Thank you.
Note the repeated emphasis on the market’s closing. Was there something about the announcement that required a delay? To paraphrase…the after-hours markets are the devil’s playground.
The S&P 500 plunged 22 points from Friday’s highs, then recovered just in time for a well-engineered close: down only 16 points on the day. More importantly, it closed at 2888.80 – just above yesterday’s 10-DMA at 2888.70 (2888.80 today.)
After the close, of course, the futures tanked – shedding 14 points before being saved by the usual suspects: VIX, WTI and USDJPY. Trump’s announcement didn’t come right after the close. In fact, it didn’t come until after 3 1/2 hours had passed. Why?
That’s how long it took to get the safety net properly positioned. USDJPY, which had just backtested its IH&S neckline, spiked sharply moments after the announcement.
VIX, which had just backtested the broken white channel, suddenly reversed and headed lower.
The overnight action was impressive, with the usual timely plunges when ES faced important tests. How much more of a smackdown will resurrect stocks’ rally?
Whether the rebound will hold or not is anyone’s guess. China has already announced retaliation – which Trump insisted will lead to a $267 billion expansion of US tariffs.
Futures are under pressure again, and interest rates are threatening to break out on the obvious (to everyone except Trump, apparently) inflation threat that tariffs pose. Might investors care that the trade wars could, as Jack Ma theorized, last for 20 years?
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Stocks slid sharply on Friday following news that tariffs on an additional $200 billion in Chinese goods would be announced today. We got the usual V-shaped recovery by the close; but, futures are still a few points in the red this morning.
The biggest impact, so far, has been on rates. The 10Y popped through its triangle and is testing an important channel top while topping 3%.
The 2Y is keeping pace.
DXY is trying mightily to hold the line, but it’s looking iffy.
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Retail sales disappointed, coming in at a paltry 0.1% — well below expectations of 0.5%. Once again, we see how dependent the data is on gas prices. And, once again, we’re left to wonder if the number would be positive at all if: (a) accurate inflation adjustments were used, and (b) the impact of the trade wars wasn’t already being felt.
The dollar index, which had completed a H&S Pattern, scurried back above the neckline in an attempt to keep futures in the green.
ES is still positive by a few points after breaking out yesterday on the expected “timely” breakdown in VIX.
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I first began focusing on DB in September 2016, when a consulting client asked me to opine as to whether the stock was circling the drain or represented a buying opportunity. In our original post [see: Deutsche Bank, Will it Survive?] I concluded that a huge falling channel dating back to 1997 made it a buy at 11.23.
DB bounced 90% at 11.19, and has since become a favorite trading vehicle of mine — bobbing and weaving predictably enough to have produced some excellent returns over the past two years.
In our last post to focus on DB [Deutsche Bank: On the Ropes] we noted DB had reached channel support which, if broken, would suggest downside to 10.30 (another test of the huge white channel.)
DB reached 10.29 on Jun 27, then reversed and nailed our upside target at 13.06. From July 25’s CIW…
Had the rising purple channel held, 14.72 was up for grabs. But, the channel broke down on Aug 9. As we noted a few days later [see: Currency Crisis on the Horizon] there was little support remaining other than the 10.29 lows.
We were looking for a deep retracement (10.62) and/or white channel backtest a few days later when DB tested 11 again.
Clearly, 10.62 would still look like a decent downside target were it not for the fact that someone (say, a Frankfurt-based central bank) is propping up the stock.
While it has obviously completed a H&S Pattern that targets well below 10.62 — all the way down to 8.78 — the pattern hasn’t been permitted to play out yet.
Just yesterday, Reuters reported that Deutsche Bank is looking into “loosening the bond” between its retail and investment banks (good bank, bad bank?), which sounds to me like a precursor to a more dramatic restructuring than has been discussed to date.
Deutsche Bank is considering an overhaul to loosen the bond between its retail and investment banks, according to three people with knowledge of the matter, a move that could make it easier to merge some or all of the group with rivals.
The German lender is examining creating a holding company structure, a step that would give it more flexibility to strike merger deals, as it seeks to regain its footing following years of heavy losses and multi-billion-dollar penalties.
The possibility is likely to be discussed at a meeting of management later this week in Hamburg, other people familiar with the matter said, as the bank’s new chief executive, Christian Sewing, sets a new course for the struggling lender.
Given the $11 floor under the stock and the increased threat of a merger, spinoff, or other value-enhancing restructuring, continuing to hold short is a riskier proposition. If it dips below 11, go for it. Or, consider going long here with stops at 11.
Either way, DB has been a great trading vehicle for the past two years. But, it might very well have reached the end of the road.
With futures stuck in a consolidation for the past two weeks…
…and, VIX finally breaking down, is it just possible we’ll see a rally this morning?
And, why not? Thanks to the timely dip in oil and gas prices (and, some creative accounting over at the BLS), CPI came in at an annual rate of 2.7% — down from last month’s 2.9%.
In other words, the argument for a December rate hike just got a little weaker.
Toss in a bullish (sp?) statement from Draghi [announcing the end of QE as the ECB trims its growth forecast …yeah, right] and the algos are loving it.
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This is the most interesting PPI report in some time. The headline number fell from 3.3% to 2.8%. But, Core PPI (less food, energy and trade services) ticked higher. We’re used to seeing food and energy prices as the cause of higher inflation. Apparently, this time it’s everything else that is ticking higher.
When core price increases become problematic, the solutions aren’t quite as simple as driving down oil/gas prices (which, by the way, bounced pretty dramatically yesterday.)
It should be interesting to watch the 10Y. Will the triangle continue to hold?
For now, DXY is hanging in there – back above the important trend line established back on June 14.
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After a reasonably clean backtest of its January highs, ES has broken trend and is back below that benchmark as well as its SMA20. Currently in the red by 11 points, SPX is indicated as opening below its January highs (2872.87.) So, either we get some algo heroics in the next hour or the market will be in for some trouble in the session ahead.
Without question we face some important tests today — starting with TNX, which is back to the top of its triangle. It has now been over seven months since it reached our 28.56 target.
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The backtest we expected last week played out almost exactly as planned. So, naturally, we’re getting a fairly typical Monday morning meltup.
None of last week’s troublesome issues have dissipated, but the market has made a statement about additional downside. All we’re waiting on now is for VIX to follow through with a breakdown.
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