pebblewriter

Tag: fed

  • Algos to Stocks: “We Got This”

    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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  • USDJPY’s Turn

    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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  • Update on Gold and Silver: Mar 25, 2021

    We have multiple targets being reached this morning, and several more in the works. We’ll start with ES, which just tagged our SMA50 target in a backtest of the falling white channel from which it broke out two weeks ago.

    The one we’ve been waiting on for what feels like forever, though, is silver. SI broke out of the falling white channel twice before it managed to tag our 30.35 target in January. But, as we discussed at the time [see: Hi Ho Silver]:

    With the SMA200 crawling along toward current prices, we can’t discount the potential for a long overdue backtest.

    We’re finally getting that backtest. But, given DXY’s breakout, we have to wonder whether SI’s backtest will hold. We’ll update the prognosis for silver and gold and also sneak in a discussion of EURUSD, which officially reached our next downside target yesterday.

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  • Don’t Fight the BoJ

    I know what you’re thinking: it’s “don’t fight the Fed.” While that’s generally true, too, the Bank of Japan is the central bank which most conspicuously wears its balance sheet on its sleeve. When my charts are a farrago of bearish indicators, but the Nikkei pushes up through resistance? I’ve learned to ignore the indicators and become bullish.

    Conversely, when the narrative is incredibly bullish but the NKD slips below important support, it’s time to short. For those who haven’t been paying attention, that’s where we are right now. We’ve had a few hints over the past week or so, but the NKD suggests there’s more to come. US stocks just haven’t gotten the message yet.

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  • Update on Currencies: Mar 2, 2021

    Algos took their Sunday night ramp and ran with it yesterday. Unlike last week’s breakout, ES was careful this time to break out of and backtest the falling red channel – thanks largely to a 26% plunge in VIX.While all the attention is on stocks, we should note that currencies continue to play an important role in supporting them. Notably, USDJPY reached our next upside target and EURUSD is nearing our next downside target.Today, we’ll take a look at next steps.

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  • The Bond Market Finally Woke Up

    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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  • Inflation: A Growing Chorus

    After feeling like the lone inflation alarmist for the past few months, I find myself in the midst of a growing chorus which now recognizes the Fed’s conundrum. Building inflationary pressures are now obvious to all.

    What isn’t clear is whether the Fed’s nonchalance re rising rates is real or feigned. And, if feigned, at what point will they throw in the towel on the sales pitch that rising rates are great?

    Futures are back below yesterday’s lows and small H&S patterns have formed on both ES and VIX.

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  • Update on Energy Markets: Feb 16, 2021

    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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  • VIX: Just a Flesh Wound?

    In Friday’s post VIX: Back From the Dead we noted that VIX had recovered from the breakdown below trend dating back to Nov 27. This morning, it’s testing overhead resistance from Jan 4 and, if it’s able to break through, will likely take on resistance from Dec 21 or even Oct 29. Bears might want to hold off on the champagne just a bit longer, though. One of VIX’s favorite tricks is to race up to resistance in the pre-market so it has someplace to reverse lower from.

    The FOMC will issue its latest pearls of wisdom on Wednesday. And, as ES’s chart aptly illustrates, they are loathe to allow a significant decline in the lead-up to these exercises in obfuscation.

    Here’s the chart we posted Friday evening. continued for members… (more…)

  • Update on Oil and Gas: Jan 13, 2021

    The last time we were this bearish on oil and gas was on October 3, 2018 [see: VIX Takes the Plunge.]  Our reasoning at the time:

    CL and RB [have] not only reached overhead resistance by our measure, but must deal with inflation that’s too high, bearish API data, another round of Trump tweeting, and a large build in EIA inventory. I think the time has finally come to revert to short…

    WTI and RBOB both tumbled about 40% over the next three months.

    At nearly 3%, inflation had been too high – sending the 10Y to 3.5%. Highly correlated, both had recently broken out of long-term downtrends: CPI above the black dotted line and the 10Y above the blue dotted line.Historically, this might have been perfectly acceptable. But, as we were shouting from the rooftops at the time [see: Why Rising Rates Are a Problem This Time] rising rates with a $1 trillion deficit and debt soaring past $20 trillion was completely unacceptable.

    And, inflation was too high primarily because energy prices were too high. The correlation with the YoY rise in gasoline prices, in particular, has been quite strong over the years.

    No doubt the Fed saw the writing on the wall – as did the White House. Trump had been tweeting about oil prices being too high for months. His tweets had taken on a decidedly desperate tone.

    Yet Saudi Arabia politely ignored him, and oil prices continued higher – until Crown Prince Mohammed bin Salman slipped up in a very big way.

    It took about 5 minutes for virtually everyone to connect Khashoggi’s murder with MBS – who suddenly found himself without friends.  Except for one who, coincidentally, needed a favor.  As we wrote in Coincidences and Consequences at the time:

    It’s interesting how Khashoggi’s murder top-ticked oil and gas prices…and, so soon after Trump’s latest demand that OPEC lower oil prices. As Churchill famously said, “never let a good crisis go to waste.”

    Some were aghast that we would insinuate such a thing.  But, Bob Woodward’s excellent Rage recently shed some light on the topic…But, we digress.  Oil and gas prices crashed 40%.  Inflation and interest rates receded.  The story might have had a happy ending, but the Fed and White House had apparently forgotten about the strong correlation between oil/gas prices and the stock market. When RB plunged 42%, SPX gave up 20%.

    Not coincidentally, they both bottomed on Dec 24 (when Treasury Secretary Mnuchin convened the Plunge Protection Team – but that’s another story.) Trump probably texted to MBS…something to the effect of “jk!!! LOL!!!  ” because oil and gas prices rebounded sharply.

    Wait, you’re probably wondering, what about interest rates?  Bond yields drop for all kinds of reasons. Sometimes it’s because inflation is dropping. Other times, it’s because a stock market crash scares the crap out of equity investors who sell everything that isn’t nailed down and pile into bonds.

    While the PPT’s volatility crush gathered momentum, the Fed announced that the recent round of rate hikes was kaput and began cutting. Stocks were thrilled.

    The occasional mini-crashes in the stock market helped drive rates even lower, until the 10Y finally bottomed out at 1.43% on Sep 3, 2019 – down sharply from its 3.25% October 2018 highs.

    Oil and gas, which had nudged stocks back to their September 2018 highs, could take a breather. Their ascent had been way out of line with the fundamentals, and the charts strongly suggested a reversal.  As we wrote on April 22, 2019 [see: Oil Fails to Rally Stocks]:

    One of the more effective factors in prompting algos to buy stocks is the price of oil. Yet, as we’ve been discussing, higher oil prices are a double-edged sword as they can drive inflation to levels which prompt uncomfortably high interest rates. The oil and gas picture shows RB and CL have both run out of room. It’s time to short again.

    CL, which closed at 75.04 that day, fell 15% over the next six weeks. It bounced around in  in the 60-70 range until January 2020, when it finally broke down.  RB, which closed at 2.13 on Apr 22, fell 32% before stabilizing somewhat. It finally broke down in March 2020.

    The culprit this time, of course, was the coronavirus pandemic. As we noted on February 20 [see: Buckle Up] the stage was set for the algos to keep pushing stocks higher. But, as we had discussed on January 6 [see: Middle East Tensions Escalate] the repeated failure to break out in response to numerous opportunities was itself a strong sell signal.

    CL has tagged its white .886 and, having broken out above the red TL, will threaten the April highs if it breaks 64.77.  If it can’t break the April highs, it will be very susceptible to a downturn. Remember, if the rising white channel breaks down, we could be looking at a major crash. Meanwhile, RB failed to break out past either its SMA200 or the red TL from the April highs. For those not already short, this is the place.

    It certainly was.

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