Despite a few tense moments midday, ES held the TL of support from last Wednesday and has rebounded to within 7.50 points of the important Fibonacci extension and channel top at 4153.62.
Will the substantial overhead resistance at these levels matter this time? We’ll know very, very soon.
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This CPI data is significant in that it shot up over 2% – the highest since 2018 when the prints of 2.95% (July) and 2.70% (Aug) sent the 10Y up to 3.25%. 
But, it’s the inflation happening right now, which will be reported next month, that the Fed is worried about.
As we’ve anticipated, March’s 2.6% YoY print was largely the result of a large (22%, should be 28%) increase in gas prices. Though clearly non-transitory food, utilities, used cars and medical services all played an important role. 
The data next month, however, will put this to shame. As things stand now, April 2021’s gasoline prices (2.77) are up a whopping 60% over 2020 prices.
As we’ve discussed many times, this should put CPI at over 3% – perhaps closer to 4%.
The Fed seems to be betting that it can divert attention from the coming data. And, maybe they can, as bond prices seem to be immune to this data and the recent blowout PPI.
But, it remains to be seen whether the usual algo tricks will be able to handle a CPI print of over 3%.
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I received several nearly identical emails yesterday asking whether SPX’s tag of its channel top meant a downturn was imminent. The problem lies with the word “imminent.”
We can certainly make a cogent argument that the market is in a bubble: a car company with a market cap of $1.25 million per car sold; more SPACs going public in Q1 of 2021 than in all of 2020 (hundreds of which have yet to buy anything); meme stocks whose PEs would be in the hundreds if they had any earnings; pictures of sneakers selling for $10,000. The list goes on…
Yet at the end of the day, there’s still so much money sloshing around that dips have not only been few and far between but are very aggressively bought. Those tasked with investing said trillions have settled for relative value rather than value. And bears have been laughed out of the game altogether – easily overpowered by algorithms and the innumerable strategies which key off them.
We posted this chart on March 23 [see: Fedsplaining] after SPX had been rejected by its 3.618 Fibonacci extension at 3956, noting that anyone (a central bank for instance) wanting to push stocks above that resistance need only to ensure that VIX breaks down below that falling white trend line.
We examined the same phenomenon back in early 2019 in the wake of the Dec 2018 PPT action [see: The Plunge the PPT is Really Protecting] and countless other times.
It should come as no surprise that VIX did break down and SPX did, indeed, rise above 3956. Like all the other breakdowns, this one has the potential to keep the party going long past curfew.
So…another one of those lovely situations where numerous chart and technical patterns suggest a significant selloff just ahead — but, algos are standing in the way. Which will win out?
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There are many parallels between yesterday and Jan 26, 2018 – the calm before a vicious 10-day 11.8% storm. The obvious one is that SPX is back to the top of the large yellow channel dating back to the 2009 lows. Then, as now, this occurred shortly after SPX had bulled its way through a notable Fibonacci extension.
There are other significant similarities. Recall that then, as now, inflation was running hot due to a dramatic, extended rise in oil and gas prices which accompanied a dramatic, extended drop in the US dollar. From US Dollar: Capitulation posted on Jan 26, 2018:
…inflation fears remain a problem. In order to relieve those fears, oil and gas would need to drop — especially from the BoJ’s perspective. …they’re both far enough above Jan 2017’s prices to have generated adequate inflation for Jan 2018. Needless to say, a 10-15% decline in CL/RB would be a drag on stocks, which are no doubt considering a backtest of the 2.24 Fib extension.
The “inflation problem” in January 2018 was somewhat different from the one facing the Fed now. After months of CPI exceeding 2%, rising oil and gas prices threatened to push it and the 10Y up to 3%. It finally topped out at 2.95% and the 10Y reached 3.25% a few months later.
Now, we face a dramatic spike from below 2% in February to over 3% in April unless oil and gas prices plunge right away. I remain convinced they will, but the clock is ticking.
The Fed has said it sees the rise in inflation as transitory and is thus not concerned. More importantly – we should not be concerned. True, the YoY spike in gas prices will pass as the April 2020 plunge falls out of the comps. But, thanks to the Fed flooding the zone with cash, oil and gas aren’t the only problems. Most commodity prices are back above where they were in 2018 and are still rising.
And, of course, the national debt that weighs in the balance is now over $28 trillion compared to only $20 trillion back then.
Ordinarily, I might be tempted to ignore such patterns as the rising wedge in place in ES. 
Maybe not this time…
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It’s a light volume day leading up to a holiday weekend – the market’s favorite time to take a shot at important resistance. Though SPX tagged its 3.618 Fibonacci extension several weeks ago, ES has fallen short time after time. 
The disappointing employment data due out at 8:30 wasn’t going to help, so VIX jumped in with a 7.4% decline at 8:03, falling through the gap close at 18.21 from Feb 21, 2020. It wasn’t quite enough to get ES up to 3998 (those pesky unemployment data.)
But, then, the game’s not over yet…is it?
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On top of the world, with an adoring crowd gathered below and indifferent law enforcement milling about…there is a bit of a parallel between a famous rooftop concert and the current market.
As stocks slink into the end of Q1 amidst a bevy of perils, there’s a sense of calm before the storm. Then again, SPX closed yesterday above its 3.618 Fibonacci extension – though just barely this time. Can the algos keep the music playing?
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Members will recall that one critical component of our oil/gas decline scenario is USDJPY’s breakout from the falling channel from 2017 shown below. Guess what?
The yen carry trade is a tried and true method of goading the algos into buying equities – even overpriced ones. It works especially well as a counterweight to falling oil/gas prices as we first observed in 2015 [see: Did TPTB Crash Oil?]
So, it’s absolutely no surprise to see central banks pull it out of the playbook at a time when folks are suddenly curious about hidden, systemic risks and oil/gas prices are in the midst of a healthy reset.
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There’s a well-known scene at the end of the classic film Casablanca where Captain Renault (Claude Reins), having seen Rick (Humphrey Bogart) shoot a Nazi in order to enable Ilsa and Lazlo to escape, tells his men to “round up the usual suspects.” It saves Rick, Ilsa and Lazlo’s collective bacon (though I suspect it sucks for the usual suspects.)
So it is with the algos driving equities lately. With oil/gas prices on their back heels and VIX being bid up every day by nervous carbon-based investors, it falls to the the usual suspects in the currency markets to provide algos with the proper “motivation.”
Think of USDJPY’s breakout not so much as a bug, but a feature of the modern market — one of the many quiddities which allows futures to ramp higher on, say, disappointing economic news.
While it is sometimes difficult to know when stocks will get much-needed support, these tools have been fairly predictable and have provided excellent trading opportunities.
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For months we’ve been warning about the coming inflation problem, wondering when the bond market would notice and/or care. The immediate problem in a nutshell:
One of the most highly correlated components of CPI with the headline rate is the price of energy, and gasoline in particular. If prices were to remain where they are now, the base effect will result in a 40% increase YoY in April. Historically, this has produced headline CPI in excess of 2.5%.
The Fed points out this base effect bump will be transitory and should be ignored, but the recent rise in interest rates tells us that the bond market is not ignoring it. In fact, recent beats in economic data and sharp price increases across the commodity complex underscore the notion that the rise in inflation will not be transitory. The pop we could see in April would be only the beginning.
As we approach $30 trillion in debt with more stimulus on the way, markets have to wonder what to make of CPI of 2.5-3.0% or higher. In our opinion, the US has no choice but to follow in the BoJ’s and ECB’s footsteps and repudiate higher rates until the end of time.
10Y note futures reached a level at which we have felt would represent critical support. A drop below this level, we reasoned, would sound loud alarm bells. As we wrote yesterday: “This is quite possibly the Fed’s last chance to avoid a real mess in the bond market.”
Bottom line, don’t be fooled by the Fed’s ability to repeatedly bail out equities at the last minute.
The algos have learned well to respond to moves in VIX, currencies and oil/gas when they are so instructed. It’s no surprise that yesterday’s plunge was arrested at our previous SMA downside target.
The problem is bigger and more difficult to cope with than most – including, apparently, the Fed – can imagine.
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Texas, the energy capital of the US, is running short of energy. The cold snap is breaking records throughout the state, with temperatures so low that many wind and water turbines are frozen and not able to produce energy. Refineries are shut down. As of last night, over 3.5 million Texans are without power.
Not surprisingly, oil, gasoline and especially natural gas prices have shot higher.
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