VIX tagged our 34.84 target on Friday – an important breakout in risk – before tumbling back into the safe zone.
With other factors holding their ground and equities’ 100-DMAs still untagged, it’s not at all clear that the worst is over.
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It’s only happened 4 times in the past five years. The last time it happened was on Feb 27, 2020. SPX had reached a new all-time high of 3393.52 a week earlier and had sold off 12% so far on news of the new coronavirus reaching US shores. We were in the minority of analysts warning of an imminent selloff.
VIX, which had been loitering in the teens for months, had gapped from 17 to 25 a few days before, sending its 50-DMA above its 200-DMA. In technical analysis, this is known as a golden cross. It’s normally a bullish move. But, since a rising VIX is typically bearish for stocks, this was the equivalent of a death cross.
We all remember what happened next.
Note that only half of the prior instances resulted in a large correction. The other half turned out to be insignificant. VIX was hammered into submission within a day or two, unwinding the 50/200 cross and sending stocks scurrying higher.
Which will it be this time? Was this morning’s dreadful jobs report the keymaster and gatekeeper’s meet cute? The “stag” to the economy’s “flation?”
Unlike Nigerian Air Force Lance Corporal Ogah Bercy, we have at least been warned.
We should know soon enough.
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You know things are getting real when ES closes below its 50-day moving average. It has bounced at that support 9 times in the past year. When the 50-DMA fails, the 100-DMA has provided support 6 times since Jun 2020.
With ES closing below its 50-DMA yesterday and likely to reach its 100-DMA today, is it finally time for a test of the 200-DMA?
The stakes are high, as VIX pulled back after reaching important resistance at our 32.50 target yesterday.
Meanwhile…inflation, the Fed policy choice that pundits are mistakenly calling a “mistake.” Sure, it delivered a body blow to the have-nots, but It provided record high stock and real estate prices to the rest of us.
November CPI is due out next Friday, and we are still looking for it to mark a turning point in this cycle. WTI is off 23% from its highs – technically a bear market. And agricultural commodities have backed off their breakout and are eyeing a potential breakdown.
Our assumption remains that CPI will be back below 3% by the time the taper is complete. Sorry savers, but there probably won’t be any need to raise rates any time soon, if ever.
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The algos have been busy overnight again, driving futures up 50+ points as we head into the open. Omicron shutdowns, botched responses and Powell’s admission that the Fed might accelerate the taper seem to have been forgotten.
ES came close to our next downside target, but whiffed. Is the correction over?
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Futures are off sharply on comments by Moderna CEO Stéphane Bancel on the effectiveness of existing vaccines against the omicron variant:
“I think it’s going to be a material drop. I just don’t know how much because we need to wait for the data. But all the scientists I’ve talked to . . . are like, ‘This is not going to be good’.”
Bancel’s comments might also apply to this morning’s testimony from Jay Powell and Janet Yellen who head to Capitol Hill to explain why 6.5 inflation is nothing to be concerned about.
BTW, WTI made it official overnight, tagging our 66.81 target.
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With goldbugs calling for gold to double, we got bearish again when it reached our upside target at 1870.60 on November 10 [see: CPI: Out of Control.]
Gold is getting a big boost from the inflation data, and has now reached the purple neckline at 1870.60. I would revert to short with tight stops right here.
We didn’t give silver the hook until Nov 12 [see: Gold – Still a Good Inflation Hedge?] when it tagged our 200-DMA target. Neither metal has fallen much since then. But, the fact that they haven’t broken out in the midst of an inflation scare speaks volumes.
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VIX collapsed in the nick of time yet again, busting ES’ latest falling channel.
Has the run to the year-end barn begun already? (more…)
Stocks tumbled yesterday on inflation numbers that call into question the pace of the Fed’s taper and rate increases. Then they rallied overnight on an 11.4% collapse in VIX. 
The most significant chart on my screens at the moment, though, is the US dollar. DXY has had great difficulty breaking out of a tightly controlled consolidation pattern that dates back to July 2020. It tried this past September, but was smacked down to support stocks’ recovery from that terrifying (sarc) 5.8% slump.
Now, it’s making another bid for a breakout — one we’ve been expecting for months (a very lonely stance BTW) — which wouldn’t bode well for stocks. Is this one for real?
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CPI soared to 6.24% YoY in October, well above the 5.9% expected and the highest since Nov 1990. The MoM print of 0.9% and the Core CPI print of 4.2% also came in hotter than expected and set multiyear records. Put simply, the Fed has lost control.
As we’ve discussed, inflation continues to become more broad-based than the oil/gas-driven effect initially seen earlier this year.
The chart below shows the divergence from May-September and illustrates the importance of oil/gas prices to future inflation prints. If gas prices were to level off at today’s levels, the direct effect on CPI would cease in November. However, even if the base effect were to roll off, the other categories are now equally problematic. 
Futures are off 20 points on the news, with several key factors indicating more to come.
Today marks the point at which the Fed officially stops cheering on the reflation trade.
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Producer Prices for Final Demand in October jumped 0.6% MoM and 8.6% YoY (6.2% less food, energy and trade.)
Futures were little changed… 
…though the 10Y slipped to a cycle low of 1.43%.
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