pebblewriter

Tag: ES

  • Crude Carnage

    May WTI futures are off almost 35% since Friday’s close.  This drops it below the 17.12 target we first identified in March 2019 when, at 59.32, CL had completed a rising wedge and tagged multiple channel lines.

    Members might recall the 17.12 target was originally set for April 2023 in keeping with a March 2019 cycle study [see: Macro Factor Cycles and Regime Shifts.] The chart patterns and Fib levels fit nicely with the concept of a recurring 2600-day cycle for significant lows.We’ve reiterated the 17.12 target many times, including last December as CL finished on a high note after plunging 45% in the wake of Jamal Khashoggi’s Oct 2018 murder (when the US achieved maximum leverage over the Saudis – see: Coincidences and Consequences.) The last significant bounce accommodated both the Aramco IPO and the year-end equity ramp.

    Oil has been a favorite tool of not only the Saudis but also central bankers and politicians.  In fact, understanding the relationship between oil/gas and inflation, interest rates and equity valuations has made it possible to accurately forecast most of its major moves over the years.

    At times, this has meant ignoring the frequently misleading supply/demand data, OPEC deliberations, and presidential tweets and focusing instead on where central bankers needed oil/gas to go in order to achieve a particular inflation and interest rate goals.

    As interest rates rose over the past few years, for instance, it became obvious that inflation would need to moderate to relieve the building budgetary pressure.

    One major theme on which we’ve focused since calling the top on interest rates in October 2018 [see: Suddenly Interest Rates Matter] has been the relationship between CPI and the YoY delta in gas prices. By “managing” the price of RBOB, CPI and, thus, interest rates could be managed higher or lower as needed.This was a very reliable theme for most of 2018, 2019, and early 2020 – when the focus shifted to oil’s strong correlation to stock prices.

    Oil has long been a major factor in triggering algos to bid up stocks. So, when oil’s major channel from 2016 broke down in February, we knew stocks were in deep trouble.

    With CL dropping through its 2001 lows and approaching its 1998 lows, what might we expect from oil and what are the implications for stocks? As we discussed last week:

    A drop through 19.27 would be reason enough to revert to short with 17.12 and 10.65 the only support between here and zero.

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  • What’s Next?

    The futures are lock limit down again this morning, with ETFs trading in the after-hours indicating losses on the (eventual) open of up to 10%. This is probably not what the Fed had in mind when they unleashed the massive, emergency rate cut and $700 billion in new QE an hour before the futures opened on Sunday.

    As before, the factors are all aligned bearishly, with the bond market failing to swing back to a bullish alignment yet despite the Fed’s desperation move. There are, however, some glimmers of hope.

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  • The Storm Finally Arrives

    After weeks of gathering clouds, the storm we’ve been watching has finally arrived. S&P futures are lock limit down just a few points above our next downside target.

    Not surprisingly, all of our other targets across currencies, commodities and fixed income have either tagged or exceeded our next downside targets, with more to go once the cash market opens.

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  • Decision Time, Again

    We start this morning’s post with a peek at the Russell 2000 as it perfectly illustrates the dilemma facing the broader markets this morning.

    Up until September 2017, RUT followed a well-defined rising channel shown below in yellow.  Like all channels, it was defined by the tops and bottoms along the way. The only problem: The channel was rising only about 5% per year – hardly enough to get excited about. By late 2016, it had become obvious that algos had more influence than discretionary, fundamentally-oriented investors. The algos were, in turn, influenced by certain factors which central banks and their proxies could usually control quite easily.  By wagging the tail (the factors) the whole dog (the market) would usually fall in line.

    In September 2017, after RUT had been bumping up against the top of the rising yellow channel for over 9 months, the factors went to work and RUT  broke out of the yellow channel and rose 21% over the next year. The slope of the new rising white channel was good for about 20% per year.

    Everything was going well until September 2018 when RUT topped out at 1742 and plunged 27% in only three months. To make matters worse, the new rising white channel broke down and RUT fell back below the top of the yellow channel from which it had broken out.

    It spent the better part of the next year trying to break out of the yellow channel again – failing seven times until Dec 4, 2019, when it finally shot above the channel top and remained there. There was a scare last month when, on Jan 31, it successfully backtested the channel top and bounced 5.5%.

    Given yesterday’s carnage, though, it has fallen back to the top of the yellow channel where it faces that same important test all over again.  If it holds, all is well and investors can go back to mindless trend following.

    Even if it doesn’t, the SMA200 is now up to 1574, a modest 3.3% below yesterday’s close. But dropping through 1616ish would mean breaking down below the horizontal support (which served as overhead resistance between Oct 2018 and Dec 2019.) It could accelerate losses and complicate the rescue mission.RUT is typical of many of the indices and individual equities I chart every day. The Dow, for instance, faces a similar test at 27,700.And, SPX and ES completed important backtests (the purple channel top below) in the process of tagging our next downside targets yesterday.Given the way the factors are behaving this morning, there is a good possibility that we’ll see additional backtest targets such as DJIA 27,700 tested today. But, that would mean taking a chance on the algos’ ability to rescue stocks from some very risky waters.

    Stay tuned.

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  • Wuhan Coronavirus: Still Here

    In a stunning demonstration of the extent to which algos control the market, ES soared 56.50 points after the World Health Organization declared the Wuhan coronavirus a public health emergency of international concern.

    While it’s true the press conference felt more like a China tourism promo, the declaration in no way reduced the risk the virus poses. Nor did it reduce the potential economic risk or stock market downside.

    ES came to its senses after the close, reversing at its SMA10 and dropping back through its SMA20. If today weren’t the last day in January, a month clinging to a positive return for posterity’s sake, we would have seen the next leg down already.Meanwhile, we have scads of economic data coming out at 8:30 and earnings galore to digest.

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  • Just When You Thought it was Safe…

    The downside scenario triggered when S&P futures reached our upside target on Jan 22…

    …is playing out very nicely indeed.

    Credit VIX, which uncharacteristically didn’t collapse last night……and CL which, having come close to our 51.62 target on Sunday, is taking another gander.Needless to say, our downside targets remain unchanged.

    BTW, Boston folks, I’ll be downtown today and Friday. Drop me a line if you’d like to meet up.

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  • We’ve Seen This Movie Before

    I’ve seen one particular assessment over and over in the financial news this morning: The market’s rebound following Iran’s missile strikes last night was “surprising.”

    No, it is most certainly not surprising! Not even a little bit. Anyone who pays the least bit of attention to charts could have seen this coming a mile away. It’s the same response we’ve seen countless times over the past several years and is a product of the way the market works these days.

    The chart below shows a red channel which S&P 500 futures have followed religiously since stocks broke out of a downturn when Phase One was falsely declared a done deal on Oct 11. Since then, ES has fallen substantially only when significant overhead resistance could be backtested [previously resistance, it would now provide support.]

    Ever since ES first broke out of the rising purple channel on Dec 12, we have been waiting for a backtest of that channel. A backtest is the market’s way of saying it’s done with prices that are any lower.

    Yesterday morning, I posted this chart – placing a downside target at the top of the rising purple channel around 3180. Only if the backtest didn’t hold would any of the lower targets come into play. VIX, which spent the past week being smacked back below its 200-day moving average, began to creep higher as soon as the cash market closed.  At exactly 7:41PM ET, it topped out and began a steady drop back to its former lows.

    Why 7:41? Because that’s exactly when ES completed its backtest of the purple channel top.  There was no other news, no announcements, no tweets – just completion of the backtest.Yes, it could have waited until Monday when the purple channel top and falling white channel bottom intersected. But, that would have meant a more substantial intraday drop below the bottom of the rising red channel.

    Remember, the rising red channel is the one that bulls are hell-bent on preserving – the path out of the rising purple channel which promised gains of only 1.4% annually.By now, readers know that when I say “bulls” I’m not really referring to fundamentally-oriented portfolio managers and analysts who suss through news and data and draw conclusions about the likely impact on markets. They are in the minority, now that quantitative and passive trading are responsible for 90% of all volume.

    I just finished Gregory Zuckerman’s excellent treatise on quantitative investing: The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution. It’s a great reminder that central bankers and their proxies have been enabled, incentivized and prompted to exert great control over stock prices.

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  • The Snoozefest Continues

    All the bullish factors which have kept stocks aloft the past two sessions are still going at it.  Hence, the futures’ snoozefest even as Trump is about to be impeached.The only potential fly in the ointment remains oil and gas, which have reached an important decision point.

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  • Inflation Games

    Inflation drives interest rates. Though the Fed probably wishes it didn’t, it’s an inconvenient truth.  There are much tighter correlations, but consider the strong positive correlation between CPI and 10Y notes.

    This matters, of course, because with $22 trillion in debt, the US faces the same problem as the ECB and Japan: High interest rates on rising debt levels (the blue bars below) would lead to insolvency.  The slight increase in average interest rates (the black line) between 2018 and 2019, for instance, sent interest expense (the red line) soaring.

    There are only two ways to keep interest expense from consuming untenable slices of the budget: cut back on spending or bring interest rates back down and keep them down. Since the government isn’t likely to cut spending any time soon, this means focusing on interest rates.

    Japan and the ECB have coped with runaway debt by manipulating rates below zero — negative interest rates where you pay the government money to borrow from you. Though not there yet, the US is on the same path, seen most notably lately in the repo market through Not-QE.

    The government plays lots of games with inflation.  There are many different definitions, some of which include or exclude different expenses such as food, gas prices and rent. Although just as flawed as any, I like good old-fashioned CPI as it includes food and gas prices — things that affect the budget of almost every American and is factored into many important calculations such as cost of living increases.

    CPI can be influenced in some very predictable ways, some of which are subject to manipulation such as oil and gas prices.  Without harping on geopolitical considerations [see: Coincidences and Consequences] all over again, it’s obvious that the Fed’s effort to keep interest rates low is dependent on keeping inflation under control which, in turn, is dependent on keeping the annual change in gas prices under control.  How so?

    CPI (which, remember, is a measure of the rate of change in prices) has averaged +1.74% through October 2019, while YoY changes in the price of gas have averaged -6.79%. Months such as January and February, when CPI registered 1.55% and 1.52%, corresponded with the largest YoY drops in gas prices: -13.05% and -10.65%.  In April, the only positive YoY change in gas prices (+1.58%) produced the highest CPI measure of the year: 2.0%.

    The chart below illustrates the relationship so far in 2019 which simple regression analysis reveals is:

    CPI = (0.0263 x YoY change in gas prices) + 0.01918.

    In November, the rate of change in gas prices was only -3.16%. All else being equal, this suggests CPI will come in around 1.84% – a modest uptick. However, the first reading in December (unless gas prices fall) would indicate a 9.8% YoY increase in gas prices and a CPI reading of +2.18% or greater.

    That, folks, is why the Fed is considering formal changes to the way it evaluates inflation as (not) detailed in the official gobbledygook offered last month. It also explains the various comments made by Fed officials – first suggesting that inflation should target a range rather than a specific level (i.e. 2.0%) and more recently suggesting that inflation should be allowed to “run hot.”

    As the Financial Times reported:

    The Federal Reserve is considering introducing a rule that would let inflation run above its 2 per cent target, a potentially significant shift in its interest rate policy.

    The Fed’s year-long review of its monetary policy tools is due to conclude next year and, according to interviews with current and former policymakers, the central bank is considering a promise that when it misses its inflation target, it will then temporarily raise that target, to make up for lost inflation…

    If the Fed adopts this so-called “make-up strategy”, it would mark the biggest shift in how it carries out its interest rate policy since it began to target 2 per cent inflation in 2012.

    Most economists would probably suggest that the Fed has been working hard over the years to get inflation up to 2%. I strongly disagree and believe the Fed has used the constant shortfalls as the primary rationale for accommodative monetary policy – the purpose of which is to keep interest rates low and support equity prices.

    This latest prevarication is intended to provide cover for the fact that oil and gas prices have been propped up in the lead up to the Aramco IPO.  Now that the IPO is in the rear view, we’ll find out whether central banks can really stomach 2.2% CPI or gas prices are about to tumble a good 6-8%.

    If the past is any indication, the Fed won’t take a chance on CPI over 2.0% and we’ll see oil and gas prices drop substantially over the next couple of weeks. The White House wouldn’t complain, especially if it helps keep interest rates low.

    If I’m wrong, and inflation heads back above 2% (remember, the next tariff is scheduled to arrive on Monday) then we face bigger problems in January (when December CPI is reported.) I’ll post oil and gas price targets below the break.

    Meanwhile, it’s Tuesday and futures were off substantially overnight, so of course there’s news on the trade front – particularly in light of the impeachment goings on.  S&P futures have spiked 25 points off their overnight lows, but have yet to break out of the falling white channel that leads to a 3.5% correction.

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  • Fifth Time a Charm?

    Today is the 5th session since ES tagged our 3076 target.  Four times it has bounced off the bottom of a very orderly, sharply rising channel — which is just what the doctor ordered.  Will today be the fifth?

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