If the S&P 500 Index suddenly shot up 160 points, or the DJIA 1,350 points (7.4%) in one day, would anyone notice?  It would be the biggest point move ever for the Dow, and the third biggest percentage move ever.  It would make headlines, right?

So, why is it that when oil prices gained an equivalent amount in 24 hours earlier this week, no one blinked an eye?  Maybe the guys filling up their Family Trucksters this weekend will grumble a bit.  But, besides them, nobody seems to notice.  Nobody seems to care.

Would they care if they knew the extra pain at the pump was the result of central bankers manipulating the stock market higher?

Sure, oil companies benefit from higher oil prices.  But, the real point is to goose automated stock buying programs — algorithms — to push stocks up to new highs.

It’s not always as obvious as this week, when the 7.4% spike occurred on the heels of news that should have driven oil prices lower.

Some Background

As we’ve discussed countless times, the relationship between CL and SPX has been quite strong — particularly between February and June 2016.  CL doubled following its Feb 11 lows, which enabled SPX to experience an exceptionally strong recovery.  After topping out in early June however, CL became a drag on SPX.

Since then, CL has given up about 24%, dropping in a tight, falling channel ever since mid-July.  Were it not for the weekly spikes prompted by goal-seeking API and EIA data, and daily intraday ramp jobs based on nothing at all, SPX would likely have followed it lower instead of pushing up past its May 2015 highs.

So, on Wednesday, with SPX having dropped 32 points in the last two days and in danger of falling back below its previous highs, swift action was needed.  It was time for a trend change.  It was time to break out of that falling red channel — even if the EIA inventory news should have sent it lower.

How They Did It

The charts below tell the whole story.   We’ll walk through it point-by-point, looking at how oil futures (CL) were used to drive the S&P 500 index (SPX) higher at critical junctures throughout the day.

1. After falling 32 points from Monday’s highs, SPX rebounded — only to reverse at the 20-day moving average (white dotted line.)
2. The following morning, SPX continued falling, shedding 5 points in the opening minutes.  Oil immediately started moving higher — on no news, whatsoever.  This reversed SPX’s drop, sending it back above the 20-day moving average.
3. The EIA’s crude oil Inventory report came out.  Inventories had grown 1.4 MM barrels versus the 1.3 MM barrel contraction that was expected.  Oil futures plunged almost 3% in seconds, and SPX started slipping.  Literally seconds later, CL turned around and started spiking higher.  Within 3 minutes, it had recovered all its losses and was making new highs.   SPX regained all 4 points it had lost during CL’s drop and was soon back above its 20-day moving average again. When CL popped out of its falling channel and topped its 200-day moving average, SPX spiked higher and closed at its high for the day. CL’s gain from its earlier lows: 5.7%.
4. CL settled lower overnight, dropping back below its 200-day moving average.  When SPX opened the following morning, it gave up 7 points right away.  It only reversed when CL started spiking higher, which it (no so coincidentally) did once SPX’s rising red channel started to break down.
5. SPX popped up to the top of a falling white channel, and was having trouble breaking out.  CL to the rescue again, making new highs that allowed SPX to break out of the channel.  CL’s total gains since Wednesday morning: 7.4%.  It produced a 16-pt gain for SPX but, more importantly, reversed a potentially damaging decline and helped it break out above overhead resistance.

Do real investors dive in and buy up something that’s plunging in value by the second?  Of course not.  They wait, read the report, consider its import and draw their conclusions.  Only then, if they feel prices have reached some kind of equilibrium, do they begin to build a position.

In today’s “markets,” measured judgement is hard to find.  Before a real, live analyst has skimmed the first sentence of the report, the algos have scanned the entire report and placed heavy bets based on a predetermined set of criteria.  This can drive prices up or down, of course.

But, when central banks have their fingers on the scale, provide floors or drive prices up through resistance, we get the sort of rebound we saw on Wednesday.  Is it such a bad thing?

Why We Should Care

Gas prices matter to the average consumer.   Collectively, those few cents per gallon all around the world are a tax — a drain on society — that bleeds much-needed money from consumers who are increasingly struggling to make ends meet.

If you have a nice fat stock portfolio, as I’m sure all of our readers do, you’re probably fine spending a few extra bucks when filling up.  But, consider those who aren’t as well off: the families who are unable to afford a new plug-in hybrid.  That few extra bucks has to come out of grocery money.

A recent Bankrate.com study showed that 63% of all Americans couldn’t handle a $500 car repair or $1,000 emergency room visit.  It’s a safe bet that the same 63% aren’t very well represented among the dwindling ranks of stock market investors.

Gasbuddy.com reports that gas prices increased 40% between February and June — an untenable increase for those on fixed income, especially after dealing with rent increases that have far outpaced income growth.

Whether or not you care for the plight of those less fortunate, and whether or not you’re a fan of trickle-down economics, there’s broad agreement on the fact that the economy cannot grow if the “have-nots” don’t participate.

Based on the contraction in the rate of real GDP growth forecast by the Fed, it seems as though all the stock market gains of the past six years have done little to boost the real economy.  Why, then, does the game go on?

Where Do We Go From Here?

The Fed, ECB, BoJ, BoE and SNB are playing a dangerous game.  They’ve figured out how to boost stock prices.  They just haven’t figured out how to expand the global economy.

They play games with currencies, stealing a little growth from each other in a zero sum game.  And, they play games with commodities such as oil, essentially stealing from the poor in order to prop up stocks.  And, they drive interest rates to all-time lows and rents to all-time highs, stealing from pensioners and others on a fixed income.

How much lower can interest rates go?  How much more government and, now, corporate debt can they monetize?  How much more of global stocks can they purchase?  In the end, it won’t make up for the fact that the excesses of 1995-2000 and 2003-2007 bubbles were never allowed to clear.  Today, debt loads are even higher, made bearable only by artificially depressed rates.

I don’t imagine central bankers are proud of what they’re doing.  In fact, I imagine some of them are even ashamed.  They should be.  Their policies prey on the weakest of us.  But, at the end of the day, I think their shame is overshadowed by their fear of what might happen if they stop propping up stocks.

This week it was oil futures.  Next week, it might be the USDJPY, VIX, or interest rate futures that drive algos and stocks higher.  In the end, it won’t really matter to those pushing on the strings, only to those of us who must live with the consequences.

 

 

 

 

 

With this morning’s employment report beat, the financial whizzes in the Eccles Building can go back to beating the higher interest rate drum.  Even with the assessed odds of a September hike priced at a measly 10%, look for the Fedspeak to tilt decidedly more hawkish in the coming days.

The USD, which bounced off our support zone on Tuesday, is getting a nice boost this morning.  This will aid the USDJPY, which has been on life support since tagging our 100.81 target on Tuesday.continued for members… (more…)

USDJPY has not recovered, but is merely bumping along after having seen its rising white channel and falling white channel both break down.

CL, on the other hand, is carrying the entire load of propping up stocks. It rallied over 5% off yesterday’s lows — which was a remarkable feat of manipulation even for CL.  It came in the wake of a 1.4MM barrel build in inventory versus the 1.4MM barrel contraction that was expected.

This ramp took CL out of the falling channel it’s been in since Jul 18 and back above the SMA200, which was music to the algos’ ears.  The algos don’t care, of course, whether or not the rise was a manipulation (it was) or whether it would last (it shouldn’t.)  All they (think they) know is that oil is recovering, which is exactly what whoever manipulated it higher intended.

Our targets remain unchanged from yesterday.  We have channel support for ES and SPX coming in right here.

Will it bounce?  Keep an eye on CL.  It’s back below its SMA200 (40.77), and USDJPY is heading to the bottom of its rising white channel.  So, it would appear that they’re going to let the red channels fail sooner or later.

If you see CL suddenly spike above 40.77, you’ll know it’s going to be “later.”

 

UPDATE:  11:07 AM

Will they or won’t they?  SPX is sitting at a deep retracement of this morning’s initial plunge.  Sure, it got there through nefarious means.  But, that doesn’t mean things can’t get even more “nefarious-er.”

If it’s going to sell off some more, this is the time & place — especially with the euro close coming up.

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I love analogs.  I love the way they lay out a clear, tradeable path, slicing through all the noise and the head fakes.  Our first was a doozy, correctly forecasting the 21% Jul-Oct 2011 correction with deadly accuracy [see HERE.]  Our most recent one, posted in Mar 2015, forecast the 12.5% correction that would occur almost five months later [see HERE.]

Although I dislike day trading, it’s become a necessary evil.  Gone are the days when a weak close practically guaranteed a weak opening the following morning. It’s just as likely, if not more so, to result in a gap higher.  Strong closes are almost as treacherous.

So, it’s always fun when a new one appears on the horizon and we get a chance to take some longer-term positions.

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Final day for our membership sale on Annual and Charter Annual memberships to celebrate another successful month. Sign up for an Annual Membership at a 62% discount the first year or, for only $100 more, a Charter Annual Membership, where your rate is guaranteed to never increase for the life of the site.

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Last Thursday, with the BoJ up to bat in central banks’ favorite game of Keep Equities Afloat, I suggested that not only would they whiff the ball, there would be some fallout.  With USDJPY at 105.34 and spiking higher into the US equity close, I posted this half-hearted trade advice:

If you’re a glutton for punishment and want to take a flyer on Kuroda disappointing, here’s your entry point.  My gut tells me this is the right move, but of course it’s insanely risky.  And, I’ve been wrong more than right today.  So, do the smart thing and stay on the sidelines.

(If you intend to ignore that last remark, keep an eye on VIX and CL.  FWIW, I think VIX makes a recovery here and CL heads for 40.92.)

This was my best guess at the fallout to come:

USDJPY plunged to the first target (the white dot) later that evening.  This morning, five days later, we’ve been rewarded with the second target — bringing the total gains for those who shorted to 4.1% in 3 days.

It’s a day late, but that’s okay.  It just means the BoJ “cares.”

The delay helped stocks avoid a worse sell-off than would otherwise have been the case  (so did the fact that CL spiked over 3% off its lows and VIX, which has managed to make new highs since then, was first smacked down rather forcefully.)

But, that was then.  This is now.

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The short answer: it depends.  Ever since 1981 or so, stocks and interest rates have mostly been inversely correlated — which makes sense. There are a number of obvious ways lower rates should benefit equities.

For instance, lower interest rates mean cheap leverage, which can amplify corporate earnings and thus increase stock prices.  They are also thought to divert some would-be bond investors to potentially higher-return alternatives such as stocks.  And, they can benefit the general economy by reducing consumers’ interest expense, resulting in greater disposable income.

Rate declines instigated by the Fed as it attempts to stimulate the economy through quantitative easing are considered positive for stock prices.  But, lower rates can also reflect increased fear in the markets — a sign that investors are pulling money from stocks and piling into bonds.

Looking at the chart below, we can see that many sharp declines in TNX (10-yr treasury yields) accompanied strong rallies in SPX (S&P 500), particularly between 1981 and 1998.  But, two other sharp interest rate declines, from 1999-2003 and 2007-2008, preceded significant market crashes.Note that the two worst crashes as well as a number of significant corrections occurred when TNX dropped below trend — either the red trend line connecting the 1986, 1993 and 1998 lows or the resulting falling red channel bottom.

So, what does it mean that TNX has recently plunged below the channel bottom while stocks are on the rise — a divergence of the type that accompanied past corrections?  It’s an important question, as other patterns are arising that smack of the calm before the storm.

I’ll be posting throughout this week about a new analog [what’s this?] that, while in its early stages, could portend a significant move in the markets.

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June was a very tricky month, yet we managed to rack up a gain of 17.21% versus the SPX, which was virtually unchanged.  But, that description doesn’t due the month justice, as it contained both the biggest 2-day drop and the biggest 3-day bounce back in years.

The reason for all the excitement was, of course, the British referendum to exit the EU.  We were fortunate enough to have anticipated the extent of the sell off (within 9 points), and the events that would signal the subsequent rebound.

Our forecast the day before the vote was known, as posted in The Eve of Destruction:

Our big red target near the intersection of the .618 Fib line and the falling yellow channel would put SPX at 2010-2020, a modest 3.6% decline. An overshoot to test 2000 is also a good possibility.

The actual extent of the sell-off, with a low of 1991:The plunge went even further below the yellow channel top than expected, exceeding our downside target by 9 points.  The rebound was even more vigorous than anticipated.

All in all, the dip and recovery provided a nice bumper to an already successful month.The monthly average for pebblewriter.com dips slightly to 17.70%, and the monthly average for the S&P 500 increases slightly to 0.16%.  That’s the good news.  The bad news is that SPX recently pushed above 2134 to set new all-time highs.

Never mind that the rally was the result of expectations for expanded QQE by the BoJ, and the usual intraday ramping of CL and USDJPY.  And, never mind that it occurred in spite of disappointing economic and earnings data.  The reality is that the chart and harmonic patterns will become even trickier now that SPX has topped a key Fibonacci extension level.  As always, I’ll do my best to stay ahead of the game.

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Now through Jul 30, we’re offering a substantial discount on annual and charter annual memberships.  For more details and to sign up now, CLICK HERE.

 

 

Now through the end of the month, we’re running a sale on annual and charter annual memberships to celebrate another successful month. Sign up for an Annual Membership at a $1,250 discount the first year or, for only $100 more, a Charter Annual Membership, where your rate is guaranteed to never increase for the life of the site.

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In yesterday’s post The BoJ’s Turn I left off with the suggestion that the BoJ would disappoint and the USDJPY would initially tumble to 102.87, followed by a drop to 101.618.  In the subsequent Update to USDJPY, I laid out my reasoning — which is no different from what I’ve been posting for the past year or so.

Japan’s economy has failed.  The only thing keeping it alive is the massive amount of money being thrown at it and very low — now negative — interest rates to pay for it all.

For years, the continually devalued yen supported the yen carry trade, which guaranteed that stocks in Japan and in key markets around the world would continue to appreciate.

The yen bottomed out (USDJPY peaked) last year because Japan could no longer afford higher oil and fresh food prices, which produced real inflation without any economic benefit. Both are almost entirely imported; fresh food prices soared over 12% between November and February.

If the BoJ were to further weaken the yen, it could only do so if oil prices were to continue falling to compensate.  Since lower oil prices could ruin banks and big oil companies, TPTB had to make an unpleasant choice:  support Japan’s exporters and the yen carry trade with a lower yen (higher USDJPY) or support banks and oil companies.

Judging from the fact that USDJPY continues to tumble and oil futures are up strongly off our downside target, it’s apparent which choice they’ve made.continued for members…

I charted CL and USDJPY extensively in last nights update on USDJPY.  So far, CL has rebounded nicely after overshooting the SMA200 a bit. But, I don’t believe it’ll be a straight shot to 45 for it or a straight shot to 2138 for SPX.  Rather, the 2157.38 target will have to be tested first.  And, even that’s no guarantee today, as TPTB might try to keep things from deflating too much in the hours before the weekend.  Today is the last day of the month.

The fundamental basis for a modest decline will be today’s GDP report, which puts a damper on the notion of a September rate increase.  And, let’s not forget that the BoJ’s most significant action was an increase in ETF purchases.  So, we can expect support through that algo transmission line as well.

Our downside targets for SPX remain unchanged.UPDATE:  10:26 AM

Things are pretty much on track.  USDJPY’s falling white channel has broken down, and it appears to targeting 101.618 around 11:45am – 12:00pm — timing which jibes with SPX’s 2157.38.  It’s unusual timing for a bottom, so I don’t read too much into it — especially as VIX is being heavily suppressed this morning. ES, on the other hand, suggests the bigger drop (all 13 points of it) won’t come until late Monday.  So, we’ll see.UPDATE:  11:07 AM

Thanks to a strong spike in CL and a strong smack-down in VIX, SPX just posted a new high.  This, despite USDJPY making lower lows.  This technique has been quite effective for the past several weeks.  So, there’s no reason to expect that they’ll abandon it now — particularly on the last day of the month. 

Remember, we do have an upside target at 2180-2185 — the top of the rising purple channel — depending on how aggressively they want to force things higher.  At this point, I’d say there’s nothing wrong with riding along on the upside with tight trailing stops.  Once these algos get going, it’s very hard to turn them off.  And, if USDJPY reaches and reverses at 101.618, it would likely add fuel to the fire.

But, my expectation remains for a sell-off on Monday or Tuesday of next week.  So, the sidelines is a safer place to be at this time unless you’re willing to hold short over the weekend.  For those thinking about it, I can only recommend it if you’re able to stomach a potential gap up or can hedge your position.  Fortunately, there’s an easy way to do so at this time — using CL, VIX or USDJPY.

UPDATE:  12:12 PM

This would be the logical place for SPX to reverse if it’s going to.  Note that VIX completed a deep retracement and is on the way up, CL appears to be consolidating, and USDJPY is till edging lower.   Anyone who’s tagging along on the breakout should consider taking profits or establishing a short position. UPDATE:  3:55 PM

End of the day coming up…VIX and CL still driving stocks higher.  Don’t see any fundamental change in what to expect.

I’m taking a stab at USDJPY’s likely course tonight, given what I expect to be disappointment over the BoJ’s QQE actions (or, lack thereof.)

We left off earlier this afternoon with this chart.  It seemed a little silly at the time, given that the pair spiked into the US equity close.  But, of course, that close was all about ensuring a positive day for SPX, courtesy of the (still occasionally effective) yen carry trade.And, you could see it coming from a mile away.  SPX was sliding, after having bounced up to backtest the SMA5 200 and a channel top……when suddenly — and I’m sure quite by coincidence — USDJPY started spiking.  The pair not only broke a trend line connecting yesterday’s phoney-baloney spike, but soared out of the falling white channel for good measure.If that weren’t enough, VIX picked that exact moment to take a dive.And, wouldn’t you know it, CL decided it was a great time to pop up out of the falling white channel it’s been locked in (except for yesterday’s clumsy, but effective, ramp job) for over a week. Instead of continuing lower, SPX spiked up through the channel top and its only remaining moving averages.  Mission accomplished — for the eleventy billionth time this year.Given that stocks are still susceptible to USDJPY’s gyrations over a year since USDJPY topped out, and given that the BoJ has painted themselves into a corner so tight that not even Picasso could find a way out, what does the path ahead look like?

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The FOMC announcement came and went with less excitement than usual.  Most market participants expected no change, and that’s essentially what we got.  Aside from a 13-pt VIX-induced spike in SPX which fizzled into the close, there were no fireworks.

Tonight, the BoJ is likely to upstage the Fed.  The yen carry trade, the principal driver of higher stock prices since 2011, officially ran out of juice over a year ago.  Intraday rallies have been quite helpful on a regular basis.  But, the USDJPY has been locked in the same falling channel since October 2015.With SPX at new all-time highs and CL no longer providing much algo support, will the BoJ finally take widely expected action to weaken the yen?

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