The dollar continues to fizzle, but USDJPY is rallying anyway.  CL, RB and VIX are jumping into the fray just in case, helping ES to a 9-pt gain as we go to press.  Maybe Congress will un-pass and re-pass the tax bill a few more times in order to convince the algos to keep the melt-up going.

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The idea of shorting the markets these days reminds me of the iconic scene in A Christmas Story where Flick is triple-dog-dared into touching his tongue to a frozen flagpole.  It sticks of course.

And, while not quite as painfuul as shooting your eye out with a Red Ryder carbine action two-hundred shot range model air rifle, it reinforced the notion that adages exist for a reason: to protect us from disaster.

Be careful what you ask for.  Look before you leap.  Beware the ides of March. They all pale in comparison to “don’t fight the tape.”  It’s an old expression that originates from the days of the ticker tape.  Put simply, it means you shouldn’t fight the prevailing trend.

These days, we might rephrase it “don’t fight the Fed.”  Sure, Neel Kashkari insists it’s not the Fed’s job to protect investors against losses.  Yet, given that maintaining extremely accommodative monetary policy does exactly that, it’s a rather disingenuous claim.

One of the easiest ways to witness this protection in action is to watch VIX and its influence on the algos that guide the markets these days.  VIX is once again on a precipice — off over 36% from its recent highs and clinging to the bottom of a channel that could easily break down if need be.  But, let’s not overlook the fact that two of the spectacular plunges over the past six weeks have been followed by even more spectacular spikes.  Could a third be right around the corner?  Or, is taking a long position in VIX inviting disaster?

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Tax cut euphoria, combined with an overnight bump in CL/RB and a slump in VIX, has sent futures 10 points higher as we go to press.  As we discussed Friday, ES has rejoined the rising purple channel in the year-end melt-up.continued for members… (more…)

As a chartist, you know something’s gone haywire when a major, long-term channel breaks down and it results in higher prices.  Yet, as every chartist knows, this phenomenon has been a hallmark of the financial markets for the past several years.The S&P futures (ES) offer a very clear example.  Like all channels, the rising purple channel above was formed by a series of rallies and setbacks.  It ran into trouble in late October when ES dipped below the channel bottom (yellow arrow) but recovered only an hour later.  It bumbled along until Nov 9, when it broke down again.This time, however, it formed a Head & Shoulders pattern that suggested an additional 32-pt drop to backtest a key Fibonacci level.  In each case, VIX plunged (32% and 41% respectively), algos responded, and the damage was contained.

Intraday dips that drop below a channel bottom are no big deal.  They happen all the time and are promptly bought — the new normal.

But, when the dip results in a close below the channel bottom, it has (traditionally) mattered.  It matters even more when there are a string of lower lows and closes below the channel bottom such as between Nov 8 and Nov 15.

Fortunately for the bulls, and no doubt quite by coincidence, USDJPY rallied sharply (the shaded area below) at precisely the same time that VIX’s 41% plunge (to new, all-time lows) ran out of steam.  The yen carry trade rarely disappoints.

And (another coincidence?) as the initial spike took a breather, VIX took the opportunity to plunge again — this time by a mere 36%.Between the two influencers, and some help from a timely pop in oil and gas, ES had no trouble making new highs and actually rejoining the broken purple channel — at least between Nov 30 and Dec 5.

On Dec 5, it broke down again — but just enough to establish the bottom of a new, more steeply rising channel shown below in red.  The red channel has provided support for no fewer than six bounces since Nov 15.  And, it has guided ES high enough to rejoin the purple channel multiple times — only to end up dropping the ball.With ES currently up 15 points, it’s backtesting the purple channel bottom .  This would traditionally be a potential bearish signal.  But, clearly, the previous backtests resulted in higher prices.  Is there any reason to believe this one won’t?

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When it comes to retail, these are the best of times and the worst of times.  Retail sales last month grew at a 5.8% annual rate — the best since March 2012.But, revolving credit (which recently hit new, all-time highs) has been growing at an annual rate of over 10%.  And, delinquencies are on the rise.

From a retailer’s standpoint, unless you’re Amazon (33% YoY revenue growth in Q3) you’re not loving the data at all.

And, not even Amazon can be too excited about the lethargic pace of real income “growth.”

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It’s that time again — when the FOMC does its level best to convince investors algos that they should be optimistic buy more equities.  Lately, this has meant a not so subtle message that rates are normalizing rising ever so slightly, inflation remains under control disappointing and the future looks strong good enough.

We touched on the inflation scam in yesterday’s post: PPI Tops 3%.

The primary culprit: gasoline prices, which BLS officials say increased 15.8%.  Imagine what PPI would have registered if they’d used EIA-fabricated data (+17.4%) or the actual increase over Nov 2016 of +20.3% [see: Again, With the CPI Games?]

Today, thanks to the miracle of seasonal adjustment, we learn that consumers experienced a mere 7.3% YoY increase in the price of gasoline, yielding a YoY CPI increase of only 2.2% (core came in at 1.7%.)

This assessment, of course, flies in the face of virtually all the data as well as every consumer’s experience.  But, otherwise, it’s sound as a pound.

The important takeaways: inflation is not a problem (unless you care about facts) accommodation should continue (because we all know what would happen without it), and rates should gradually increase (even as the curve collapses, because they need a higher perch from which to reduce rates the next time markets collapse.)

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Producer prices for final demand shot up 3.1% YoY in November, up from 2.8% in October and well above consensus at 2.9%.  It’s the highest rate of change since Jan 2012.

The primary culprit: gasoline prices, which BLS officials say increased 15.8%.  Imagine what PPI would have registered if they’d used EIA-fabricated data (+17.4%) or the actual increase over Nov 2016 of +20.3% [see: Again, With the CPI Games?]

While the data certainly offer convenient cover for a rate hike, they present practical problems for central bankers who are worried about disappointing the algorithms which drive equity markets.

Rising oil and gas prices have been instrumental to rising equity prices.  But, as we’re reminded once again, there is no free lunch.

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Higher inflation supposedly means higher interest rates, so the DXY is marginally higher this morning.  And, at least some of that dollar strength is courtesy of the JPY — which just reached channel resistance.  For those playing the USDJPY, this is a good entry for a short position with tight stops.  The initial target is the SMA200, currently at 111.64, followed by the .618 at 110.14 and channel bottom currently around 109.But, the impact I’m watching most closely is that of RB and CL.  Note that RB has tagged the top of the falling white channel and is reversing.  A test of the neckline is just ahead.

For anyone who isn’t still short, this should be a good entry point for our lower targets at 1.64, 1.63, 1.60 and 1.52.  But, since we’re looking for DXY and USDJPY to tumble from here, CL/RB might rally in order to prop up stocks going into year end.  As we’ve discussed, the same thing happened last year.  Bottom line, use stops.  It’s unlikely TPTB will sit on their hands if stocks start slipping.

CL has clearly backed off a TL connecting its recent highs…for now.

UPDATE:  10:25 AM

RB just tested the neckline, momentarily breaking the yellow TL shown below.  Stay tuned…

The past week saw ES retake its broken purple channel, then decisively break down, and, now, rally to test it all over again.  It’ll be interesting to see where it ends up when the music stops.The past few days have been driven primarily by the latest breakdown in VIX and breakout in USDJPY — nothing new.  Yet, for bears, there’s perhaps a light at the end of the tunnel.

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The algos are happy.  Brexit is humming along, Congress kicked the budgetary can down the road a whole two weeks, and USDJPY even had the decency to finally break out.  Sure, the gold bugs are getting hosed.  But, what else is new?  As our friends in the Eccles Building would say, “serves them right for doubting the strength and security of the dollar.”

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Still on hospital duty for the next couple of days, so this post will be brief.

As we discussed yesterday, gold and the USD had reached a crossroads.  One had to win (break out), and the other lose (break down.)  It’s ironic that gold lost this particular battle, as the next CPI data we see will surprise to the upside.  Just another day in the Fun House the Fed built.

Gold traders and stackers are perfectly justified in crying “foul,” but it’s hardly the first time someone learned the hard way not to fight the Fed.

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