Tip of the hat to central bankers, who have now officially pushed risk appetite to the highest level ever on record.Analysts might argue over whether it was the new administration, the tax plan, the loosening of regulations, etc.

I’m partial to the notion that algos, driven by the manipulation of currencies, oil prices and VIX, have exerted outsized influence on a market dominated by passive, follow-the-leader “money managers.”

I’ve watched the effects slowly creep into the markets, gaining momentum over the past 7 years since I first founded pebblewriter.  At first, it was the occasional stick save — big moves in USDJPY drove the yen carry trade between 2011-2015.After the USDJPY flamed out, a doubling of oil prices kept stocks on the rise.  When CPI started accelerating and the twin shocks of Brexit and the US election threatened to kill off equities’ rally… …USDJPY took over again, registering its steepest spikes in recent history.  And, when the yen fell so sharply that oil priced in yen almost doubled YoY (Jan 2016 – Jan 2017)… …the yen magically started strengthening again and VIX took over the job of triggering the algos, beginning an historic plunge below long-term support that has become a regular daily occurrence.  It has truly been an artful exercise in price manipulation which, ironically, has landed markets right back in the middle of another bubble.  Yes, that’s me talking.  But, there’s a growing chorus of like-minded academics, traders and investors who view the exuberance as irrational.

As the chart at the top of this post shows, markets exhibiting exceptionally high risk appetite rarely get a pass.  There has almost always been a reckoning.  But, it’s clear that central bankers and those who ride on their coattails have become really, really good at propping up stocks.

Toss in the corporations which are buying back their own stock hand over fist, facilitated by historically low interest rates, and you have a rally that’s hard to love.  Consider the fact that prices have grown 70% since the 2007 highs, while GDP and sales have risen only 10%.  The price:sales ratio recently eclipsed the 2000 highs.How long can this go on?  As we discussed last week, the wild cards are inflation and interest rates.

Oil prices broke out in December.  Gas prices are currently threatening to do the same.  While core CPI, which ignores such trivial items, is flat… …CPI shows every sign of having broken out.Bond markets are taking notice and are also threatening to break out……which is probably prompting a fair amount of hand-wringing amongst central bankers tasked with coping with the consequences.

For better or worse, these assumptions continue to drive our price targets for oil and gas, currencies, VIX and gold.

continued for members…
(more…)

With new all-time highs last Friday and a very modest decline in futures this morning, the market keeps insisting that the government shutdown is a non-event.The USD and the bond market beg to differ.continued for members… (more…)

A reminder: our membership promotion is drawing to a close.  For a great opportunity to do well by doing good, CLICK HERE.

 *  *  *

It’s pretty rare to see a V-shaped recovery stop short of new highs.  But, it happened Wednesday and again Thursday.  What’s more, last night’s ramp job is rapidly unwinding as we approach the opening bell.

Are traders actually paying attention to the news flow?  Or, are the algos just taking their very heavy feet off the gas?  Regardless, this represents the last opportunity for the various backtests we’ve been expecting to take place without a serious breach of channel support.

The SMA10 is sitting at 2764.52 today and should be up past Tuesday’s lows (2768.84) by Monday.  With the pols fumbling the budget deal and the IEA raining on OPEC’s parade, we might just get a noticeable selloff that allows us to tag most of our targets at the same time.

Keep an eye on VIX, today, as it seems intent on nailing last week’s upside target.continued for members… (more…)

While we’ve touched on EURUSD many times over the past month, it’s been a while since we devoted an entire post to it.  As the pair approaches our next upside target, this seems like a good time to review the bigger picture.

In July, EURUSD completed another in a series of breakouts driven more by dollar weakness than euro strength.  This one, however, represented a significant change from the pattern in place since Jan 2015. We’ll take a look at the big picture and the likelihood of reaching and reversing at 1.24.

continued for members… (more…)

The last few days has been fun, with lots of targets being tagged and more on the way.  We’ll start this morning with VIX, which is one good spurt away from our 13.93 target — a nice 49% gain from 9.33.  From Jan 10 [China: It’s Not Me, It’s You]:

VIX jumped up and tagged its SMA200. For those still sitting with a long position at 9.33, this is the easy money — a second chance for those who wished they’d sold last week. For diehard bears, the most likely upside target is 13.93 (ideally Wednesday, Jan 17) with a reach target of 16.13.

If it’s reached, it probably means ES is about to give up its overnight gains, potentially to find its way to the SMA10 at 2755 (almost exactly an A=C corrective wave.)That, of course, will depend on DXY continuing its drop to 88.68, CL and RB running out of steam, and USDJPY breaking down.  But, all in all, it’s shaping up as a rare good week for the bears.

continued for members… (more…)

DXY reached our next downside target this morning as it continued to weaken relative to the euro and, intermittently, against the yen. Whether or not DXY holds these levels is critical to bonds, oil and gas and, by extension, equities.  We’ve been bearish on DXY ever since a long-term TL broke down last April (over 8% ago.)

But, the path has been incredibly erratic, and the effects have been all over the map.  As evidenced by USDJPY and VIX, the algos are struggling with the implications of a breakdown.I’ll pick up where I left off yesterday, with a discussion of two past patterns with potentially important bearing on the path forward: an analog.

continued for members… (more…)

The great thing about low inflation is that central bankers can continue accommodative monetary policy without too much criticism.  Stocks love easy money. The crummy thing about low inflation is that it makes it that much tougher to prop up the US dollar.  For some reason, investors just don’t believe the FOMC will keep hiking rates while prices are falling.  Investors are funny that way.

A lower USD, of course, means a lower USDJPY.  Stocks don’t like a falling USDJPY — which has, again, dropped through its SMA200.For its part, DXY has spent over a week bumping along an important channel line, and is testing it again today.  With USDJPY struggling, the onus has been on VIX, CL and RB to help prop up stocks.

VIX did it’s best yesterday, with a dramatic turnaround at its SMA200 as expected.  But, the charts suggest it could be pushing 14 by next Wednesday.

RB is trying to rally, but the last two inventory reports argue for lower prices, not higher.  And CL…well, it’s the key, isn’t it?  As we discussed earlier this week, it’s one sure way to get PPI/CPI up to where it needs to be.  That’s important, because the Fed’s inflation problem is morphing into a credibility problem.

If inflation were measured accurately and not gamed the way it has been for years, there would be no credibility problem at all.  Between healthcare, gas and housing, true inflation is closer to either 6% or 10% (Shadowstats.com.)  Of course, if the Fed ever acknowledged this, higher interest rates and cost of living increases would increase the deficit and debt to untenable levels.So, instead, we live in a world where average Americans are increasingly unable to make ends meet, where their income can’t keep up with the bills despite what the official data says.  The savings rate is dropping just as fast as consumer credit is rising.At what point will oil’s rally and the dollar’s drop run out of steam?  If the past is any indication, we have two specific patterns with which to concern ourselves.

continued for members…
(more…)

It’s one thing when the Fed hits the pause button.  It’s quite another when China, holder of $3.1 trillion in foreign-exchange reserves, hints that they might be a little overinvested.  Bloomberg reports that China is reconsidering its commitment to funding the US debt addiction.

And, that has stock and bond futures searching for a new equilibrium.  For starters, USDJPY plunged to our next downside target overnight.ES came within 9 points of our downside target for it.  And, EURUSD’s slide was halted at a backtest as we discussed yesterday.  DXY is clinging stubbornly to the channel bottom reached last week.  But, it remains to be seen whether or not it’ll hold.

continued for members… (more…)

The BoJ tapered its bond purchases just a bit yesterday, sending the USDJPY marginally lower on the news.  The fact that it would taper at all was a bit surprising, but it appears the falling white channel will remain intact long enough for our next downside target to be tagged.The big question: will the trend continue or are they just buying a little time for EURUSD to backtest?

continued for members… (more…)

I can’t begin to count the number of times I’ve written about the manipulation of VIX futures over the past several years.  With 80% of daily equity volume tied to algorithmic inputs, it’s one of several powerful methods by which equity markets are propped up.

My comments have drawn a fair amount of scorn over the years, particularly from those who reject the idea that central bankers are involved in propping up equity prices.  That scorn waned over the past year, however, as it became increasingly obvious that VIX was under more pressure than market forces alone would generate.

A favorite graph of mine depicts the large channel that has guided VIX gradually higher since Mar 2009 — the depths of the Great Financial Crisis.  VIX tagged it roughly once a year (the yellow arrows) until December 2016.  Since then, VIX has tagged or dropped below it about 75% of the time.The reasons are perfectly clear.  Having plunged 12.5% and 14.5% in two severe corrections in 2015 and early 2016, SPX had attempted a breakout in July 2016.  The breakout failed, however, and SPX fell back below support (the neckline of a IH&S Pattern) as the US election approached.

When Trump was announced the winner, equity futures plummeted 4.5%. Central banks panicked, and took decisive action.  USDJPY, which had oringally plunged on the news, suddenly spiked higher — on its way to a 20% gain over the next month.  VIX, which had spiked on the news, suddenly began to sell off — even while equity futures were plummeting.  This was the equivalent of cancelling ones homeowner’s insurance as a tornado comes into view.

By the time the market opened the following morning, futures were back in the green.  SPX actually booked a gain.  It was a gutsy move, but it worked.  It worked so well, in fact, that it continues to this day.  Moves above VIX’s channel bottom continue to be a rarity and have been largely responsible for the last 32% of gains in SPX.

Who, in their right mind, was ballsy enough to short VIX in the midst of a 4.5% flash crash?  Who changed the course/cost of volatility protection, resulting in new all-time lows?  Who continues to hammer VIX every time stocks threaten to dip more than the allowed amount?  Once the musing of tin-foil-hatted conspiracy theorists, we now have confirmation from incoming Fed Chair Jerome Powell.

Excerpted from the transcripts of the FOMC meeting, Oct 23-24, 2012.

MR. POWELL.

I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.

First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce?

Second, I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.

My third concern—and others have touched on it as well—is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.

Take selling—we are talking about selling all of these mortgage-backed securities. Right now, we are buying the market, effectively, and private capital will begin to leave that activity and find something else to do. So when it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response.

So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month.

Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position. When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month— it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could have quite a dynamic response in the market. And I would just say I want to understand that a lot better in the intermeeting period and leave it at that. Thank you very much, Mr. Chairman.

 

 

(more…)