pebblewriter

Tag: fed

  • Algos: “We’ll Take it From Here”

    More fun and games from the market-rigging department…

    If SPX’s rally has impressed you, check out the Nikkei.  Since its Aug 26 lows, NKD is up a whopping 13.8% — more than twice SPX’s impressive 6.0%.Do what I did and google “Japan” and “economy” for the past month and you’ll see nothing but negative stories including this one which confirms a “worsening economy” even before the effects of the recent 25% increase in the consumption tax have been absorbed.

    So, why the 13.8% rally?  Unlike the Fed, the Bank of Japan makes no secret of the fact that it buys stocks.  In fact, the BoJ and the government pension fund are the two biggest owners of stocks in the Nikkei 225.

    Thanks to negative rates, investors pay the BoJ to hold their cash.  So, it costs the bank nothing to buy up everything in sight.  All they have to do is make sure the stocks never decline in value.  This is accomplished in two ways: (a) buying more stocks (throwing good money after bad); and, (b) by manipulating the currency (the yen carry trade.)

    Lately, the yen carry trade has been working overtime.  At some point the yen could theoretically get too cheap; so, the USDJPY is reset lower most nights when the low-volume futures markets are more easily propped up.

    When the cash market opens, though, the USDJPY takes off.  I’ve highlighted the period between 6:30am and 4:00pm in the chart below.  The effects on the NKD are immediate.  A few nanoseconds later, the S&P 500 futures join in.  The algorithms which drive 90% of all US equity volume watch USDJPY like a hawk.

    What happens if, for some reason, the USDJPY can’t be driven any higher or is busy resetting when extra assistance is needed?  We’ve written often about the benefits derived from hammering VIX futures.  Another favorite of central banks is oil futures.

    As the chart below shows, it works exactly the same way as the yen carry trade.  The only difference is that higher oil prices reverberate through the real economy, affecting nearly every business and consumer in fairly short order.  So, the manipulation requires a little more finesse. The Fed has its own trading desk, presumably with the ability to dabble in the futures market. Their cost of funds is essentially zero as they can print money any time they like.  Imagine how fun it will be when interest rates go negative and investors pay them to drive stock prices higher.

    continued for members… (more…)

  • Why Interest Rates Must Not Rise

    In May 2014 many of us were shocked by a report that Ben Bernanke, who had recently departed the Fed, told a group of wealthy investors that he did “not expect the federal funds rate…to rise back to its long-term average of around 4%” in his lifetime.

    I remember feeling Bernanke’s statement represented both extraordinary hubris and wishful thinking. Surely, the trillions being pumped into the financial system would drive inflation to levels that would produce higher rates.  After all, I reasoned, the bond market isn’t as easily manipulated as is the stock market.

    Last year, I called attention to the fact that the cost of servicing the US debt had broken out to new highs [see: Why Rising Rates are a Problem This Time.]  Even though interest rates had fallen dramatically, the spiraling debt had send annual interest expense on that debt to roughly $450 billion in FY 2017.

    Bernanke’s 2014 words came back to me as I did the math.

    Clearly, if rates were to normalize the interest expense would be unmanageable… Between 2000 and 2007, the average interest rate was 4.84%.  On the current $20.6 trillion balance, that would mean an annual interest expense of roughly $1 trillion.

    Of course he was confident in his prediction!  He understood that rates could never be allowed to rise.  A return to normalcy — and, I don’t believe this to be an exaggeration — would absolutely destroy the economy.

    I had always found the Treasury’s increasing dependence on short-term, floating rate and inflation-indexed borrowings a bit unsettling. Why not lock in a boatload of 30-yr bonds at 2.1%?  Now we know.

    In their wisdom (or desperation…time will tell) the central bankers and those maxing out America’s Gold Card have bet our very futures that Bernanke was right — that everything will be okay in the end…as long as the end never gets here.

    By the way, here’s an update of the above chart…which has been appropriately renamed.

     

     

     

  • Macro Factor Cycles and Regime Shifts

    Some time ago, I noticed that CL’s (WTI light sweet crude oil futures) three important tops since 2008 were almost the same number of days apart. This cycle certainly caught my eye.After tugging on that thread, I found a similar situation regarding CL’s lows. The 2001-2009 cycle was only 31 days longer than the 2009-2016 cycle — a 1.2% difference.

    This is exciting stuff for many reasons. In addition to supporting the fact that markets often move in cycles, it offers some very strong suggestions regarding financial markets over the next few years.

    I gave up on the Efficient Market Hypothesis about the time that central banks and other wealth-effect proponents began directly and indirectly propping up stock and bond prices in the wake of the Great Financial Crisis.

    The first few rounds of QE were effective — but expensive and difficult to fine tune.  There had to be a better way than throwing trillions of dollars into stocks and bonds.

    Since fundamental discretionary traders account for only 10% of trading volume, it turns out it is much easier and infinitely cheaper to “influence” the instruments (the tails) which signal the machines (the dogs) to buy stocks.

    The 90% of trading volume which is, in turn, driven by machines (indexers, ETFs, etc.) is only too happy to let the tail wag the dog. Since it typically drives stocks higher, very few investors complain.

     *  *  *

    I had traded in most of what I believed before 2007 for a mélange of chart patterns, harmonics, analogs and technical analysis. By mid-2011, it became apparent that patterns and cycles could be at least as valuable as fundamental economic data in forecasting markets.

    But, as machine-based trading gathered steam, these patterns often broke down.  In some cases, the patterns actually marked opportunities to force short covering by predatory algorithms — giving rise to such “strategies” as Buy the F-ing Dip.

    I devoted more effort to understanding algorithms and the factors they used to drive stock prices — a pursuit which has paid big dividends. Price movements in the factors themselves are much easier to anticipate if one knows how and when they’ll be utilized.  And, by accurately forecasting the factors, it is much easier to forecast the broader markets.

    We saw in 2018 what can happen when markets aren’t supported: an 11.8% plunge in February and a 20.2% nose-dive between October and December.  The latter decline so alarmed the market’s caretakers that the Fed backpedaled on its plans to normalize rates and the Treasury Secretary convened the Plunge Protection Team.

    Since then, stocks have recovered most of their losses, causing some participants to exclaim that the worst is over and we’re one trade deal press conference away from new highs.  Yet, many others see lingering cracks in the market’s veneer — cracks that presage new lows.  Which is more likely?  Can our new models offer any guidance?

    This post will attempt to elucidate the macro factors at work, how and when they are utilized to effect desired outcomes in the markets, and what they suggest about the next few years.

    continued for members…

    First, a quick review of the most influential factors: VIX, USDJPY and CL.

    VIX

    The chart below shows the obvious: VIX declines are strongly correlated with SPX advances.  I doubt that there’s an equity trading algorithm anywhere in the world that didn’t recognize this years ago.It wasn’t much of a surprise, then, when bearish events in VIX began to be engineered in order to prop up the stock market when it was distressed as well as to drive it higher.  At first, it was just a dip at the end of the day to propel stocks back into the green.

    Somewhere along the way, though, the dips became significant declines – often below significant trend lines, moving averages, or Fib levels.  The chart below shows how decisively the occasional spikes were hammered.  Plunges from VIX’s highs during this period were initially in service of allowing SPX to defend important Fib support at 1823. That worked so well that the same maneuver was used to rescue stocks from the shocks of Brexit and the US election in 2016.

    The US election was a watershed moment for VIX as a factor.  As it became evident that Trump was going to win the presidency, futures plummeted by 4.5%.  Yet, along the way, VIX started selling off.  It was hammered by 33% that night.  SPX actually closed in the green the following day.

    Who would sell downside protection in the midst of the sharpest downturn in over five years? It was akin to cancelling your homeowners policy as a tornado bears down on your house. The only explanation that makes any sense at all is that VIX was hammered in order to trigger algos to buy stocks.

    Everything changed following that particular rescue.  VIX broke below horizontal support, TL support and moving averages. Most notably, tags on the yellow channel bottom changed from once every year to two of every three days.

    VIX, long known as the “fear gauge,” had officially become a tool with which to prop up stocks.  It isn’t the only one — though it is the only one which is mostly free from economic consequences.

     

    USDJPY

    The yen carry trade hinges on a sustained drop in the value of the yen to drive stocks higher [see: The Yen Carry Trade Explained.]  It has been instrumental in two strategic moves and countless tactical moves over the past twenty years.

    A decline in the yen relative to the US dollar drives the USDJPY higher. The chart below shows the USDJPY and SPX moving in sync during two significant stretches — each of which culminated in an equity selloff.

    From SPX’s point of view…From USDJPY’s point of view…

    Unlike VIX, USDJPY can only rise so high before it causes problems.  If the yen becomes too cheap, Japanese inflation rises to a level (Japan imports much of its food and all of its oil) which pressures interest rates higher. CPI reached nearly 4% in 2014 as USDJPY broke out of its falling white channel.  With debt-to-GDP approaching 250%, Japan had a very strong incentive to ensure rates kept falling.

    Recall that in the wake of the 2011 Fukushima disaster Japan shut down all of its nuclear reactors and turned almost exclusively to oil and gas for power.  Oil had risen 345% since bottoming in 2009, meaning power costs soared.

    Soaring debt and inflation is a bad combination. If the USDJPY was going to break out of its falling channel and drive stocks any higher, something had to give.  That something was oil. Oil began its 76% crash on the exact same day that USDJPY broke out.

    Nineteen months later on February 11, 2016, as USDJPY was plunging below its critical 120.11 support and stocks were being pummeled to a 2-year low, WTI bottomed out.  It is no coincidence that Feb 11 was the low for the S&P 500, the NASDAQ, the Russell 2000 and the Wilshire 5000.

    Oil

    February 11, 2016 was a very odd day.  Janet Yellen testified before the Senate Banking Committee that the Fed’s decision to raise rates in December (the first time since 2007) made so much sense that the Fed might continue to raise rates.

    This was an extraordinary comment, given that CPI averaged just 0.12% in 2015, spending half the year below zero. How could Yellen be so confident in raising rates unless she knew something the rest of us didn’t about oil prices and inflation?

    It sure seems as though she did. CL tripled over the next 32 months, topping out at 76.90 on Oct 3, 2018.  The S&P 500 followed its lead — soaring by 62% over the same period.

    The chart above raises plenty of questions. The most obvious is whether the third period ended on Oct 3, 2018.  If so, it would be only about 965 days.  The two previous periods were 1823 and 1925 days.  Adding the average of those two (1874 days) to Feb 11, 2016 would put the end of the period at Mar 30, 2021.

    It’s a fair question.  After the 2003-2007 period, the rally in CL far outlasted that in SPX.  After the 2009-2014 period, SPX far outlasted CL. There were economic and market reasons for both.

    In 2007, stocks had already doubled when the GFC came along.  As markets fell apart, I believe an effort was made to prop up stocks with CL.  But, all it accomplished was driving CPI up to 5.60% and the 10Y above 5%.  Clearly, stocks were no longer inspired by high interest rates and inflation as SPX sunk into a bear market and GDP turned negative.

    Remember, USDJPY was in the process of crashing too.  As stock markets around the world began crashing, Japanese hot money came pouring back into Japan.  The USDJPY plunged (yen soared) 30% from 124 to 87 between Jun 2007 and Jan 2009.  It wasn’t until CL finally found its feet and QE was ramping up that stocks finally bottomed.

    We already discussed the divergence between stocks and CL in 2014.  It was necessary in order to give the USDJPY room to rally.  Oil, which in the wake of the Fukushima disaster was pushing Japan’s inflation and interest rates to unsustainable levels, needed to crash.

    Before we move into the analysis and forecasting segment of this post, I think it’s helpful to look at the combined influence of USDJPY and CL.  Note that the most serious downturns between 2002 and 2019 were those not “covered” by USDJPY and/or CL: the 2007-2009 crash and the 2015-2016 correction.SPX’s Feb 2016 lows were prevented from getting any worse by CL’s bottoming and subsequent tripling and, of course, our old friend VIX.

    VIX broke down through a trend line which had been in place since Aug 2015 and began construction of the falling purple channel which guided VIX lower for the next two years.

    Continued Mar 21, 2pm

    A quick aside: Powell and the Fed essentially threw in the towel yesterday: full tilt dovish. This fits our forecast nicely.  We’ve been looking for rates to drop for months — even after the phoney baloney December bounce. The 10Y tagged our next downside target 2.498% and bounced a bit.  The ZN (10Y price) came very close to our next upside target.

    ES which had dropped through its neckline, rose after the dovish announcement and then dropped into the close, shedding more points overnight.  It was forming a nice little falling channel until shortly after Thursday’s open when it started climbing… …primarily on USDJPY’s bounce off its SMA50 (which was just a backtest) and DXY’s rebound.  It was also helped by AAPL, which shot up through its SMA200 but is closing in on its .618 and channel top.

    VIX has tagged TL support.Ok, back to the forecast…

    I’ll lead off with where I think this is going and then see whether or not the charts support that outcome or something else entirely.  I know it’s somewhat ass-backwards, but I think it’ll make sense once I lay it out.

    Here’s my favorite case: a drop to 2138 shortly before the 2020 US election.This is a more alarming alternative.I’ll explain — and, my apologies in advance if I step on any toes.  I tend to dislike most politicians, so I’m not taking sides here — merely speculating on what those who are writing the script of this market might have in mind.

    If I’m a Fed President, senior Treasury official or senior commercial or investment banker, I live in fear of a second Trump presidency.

    Yes, I know that the market has rallied nicely so far under his term — though I would argue it is largely because of the algos and has little to do with what he has actually done (other than front-loading corporate profits via the tax bill.)

    Unless he resigns, dies or is impeached or indicted, he’ll be running for office again.  I believe most people in government and finance think he’s a loose cannon (one of the more polite criticisms) and would love to have him out of office next go ’round.

    The democrats would be stupid to impeach him.  It would merely stir up supporters and, if successful, it would land Pence in the presidency.  Pence would plainly be harder to campaign against — lots less ammunition. If they’re smart, they’ll drag out the investigations, etc. as close to the election as possible and release the most damning stuff in, say, October.

    Now, even those who hate Trump have to admit the market is up 33%.  It’s a good argument for him to hang his hat on.  I can see the bumper stickers: “He might be a dolt and a sexual predator, but the market is up 33%!”

    But, what if the market cratered between now and then?  I think that might be the plan — though with a couple of caveats.  First, the decline could be halted very quickly if he were no longer in the picture — as long as no one truly looney on the left or the right became the front runner. Second, if it became quite obvious (much more than in 2016!) that he was not going to be reelected there would be little incentive to force it any lower.

    How did I jump to this conclusion?  Simple, the charts suggest it.  If SPX can successfully defend 2703, then this theory falls flat on its face. But, it has dipped below 2703 many, many times in the past 14 months.  Since the next lower major Fib is 2138, it’s the logical target if SPX breaks back below 2703.

    As it happens, next Fall represents the intersection of the rising channel bottom from 2009 and 2138.  So, the timing is perfect.  2138 is also the Fib where SPX was when Trump was first elected.  So, it would represent a return to the starting point.

    At 25% from here and 27% from the top, it would alarm plenty of people — except the insiders who have hedged on the way up and those who study Fibs.

    And, we have a pretty good example of how to execute it in the 2015-2016 backtest of 1823 which lasted 2 full years from the time SPX pushed up through 1823 for good in Feb 2014.In 2015, SPX obviously pulled back before reaching 2138.  It made the short call much easier.  I think the same thing was planned for 2703, but circumstances got in the way.  RB and CL spurted higher at the end of 2017 – sending SPX up well past 2703.  By the time CL and RB moderated, the damage was done.

    Note that the difference between 2703 and 2138 is 565 points. The drop from January’s highs to December’s lows was 526 points — not much of a difference.  Had it started when the channel top reached 2703 in June 2017, it would have had 5 months to accomplish the drop and tag the channel midline — comparable to the 21.6% drop from between May and October 2011.

    Members might believe I entertained this notion before. The big channel shown below is clearly a better fit than the one above which includes the Jan 2018 highs.  Note the multiple tags on the channel top all along the way — and plenty of midline tags, too. The problem, though, is that it called for a drop to 2138 by the end of March 2019 – next week.I haven’t ruled it out completely, but the odds of that big a drop by March 30 are certainly a lot lower than they were when I posted this three months ago.

    Then, there’s the Dec 24 lows — a much bigger problem. Remember how alarmed everyone was?  Mnuchin even called in the PPT!  Why such a big deal?

    The answer lies in the white channel midline. If SPX had stopped at 2410.90 — its low on Dec 21 — the 1.618 extension of the drop would have been exactly 2138.04.  But, SPX plummeted through the midline on Dec 24.  This was an accident.

    How do we know?  Because USDJPY dropped through its SMA200 on the 24th — probably because the guys who normally watch such things had taken off for Christmas, and the poor kid who was stuck in the office got caught by surprise.This is all pure conjecture, of course. There was plenty of negative news coming into the session.  But, look at how ugly USDJPY got over the next few days.  If the PPT hadn’t crushed VIX beginning on the 24th, SPX would likely have headed much lower.

    Let’s look at whether 2138 is even feasible.  As we noted above, big drops like this depend largely on a lack of support from CL and USDJPY.  We’ll start with a look at CL.  Here are the cycle charts from above, but with lots of members-only good stuff.  We’ll look at all the reasons why CL might have already put in a significant top and is ready to decline.

    1.  First, let me point out the huge rising yellow channel which does a fantastic job of demarcating the highs, lows and the breaks in between.  It is perfectly aligned with the smaller channel connecting the 2016 and 2018 lows.2.  Note that the latest bounce from Dec 24 looks an awful lot like the bounce in early 2015 which led up to the 2015-2016 correction (a perfect duration match would be Mar 31.) The price ranges are even almost exactly the same:  42.41 to 62.58 in 2015 versus 42.36 to 60.39 for CL (the SMA200 is just above at 61.85.) I’ve highlighted the latest range and copied it to 2015 for comparison purposes.  What made the 2015 drop especially unsettling was that CL never quite tagged its SMA200.  It went sideways for six weeks, then gave up and plunged 57% over the next 8 months.

    3.  The cycle tops are almost exactly the same distance apart — arguing that the 10/3/18 top was a major one.

    4.  The falling white channel from 2008 is a pretty good fit — almost as though it was planned.  CL just bounced off its midline and is closing in on its .786 line – which is also the midline of one of the smaller rising white channels. I put the exact intersection of the two channel lines right at the SMA200.

    5.  Economics:

    There are three causes of rate declines: economics (usually low inflation), central bank manipulation, and fear.  When the 10Y reversed off 3.25% in October, the economics were increasingly scary.  Shortly thereafter, it became about fear. Since January, the Fed has been in the process of trying to shift into manipulation mode.

    Most readers will remember this chart which shows how a slight rise in rates would exacerbate an already frightening debt and interest expense crisis.

    At 3.25%, TNX had reached the top of a long-term channel.  Given the above, a breakout of this long-term trend would have been unthinkable.Interest rates had to be brought back down, which as we’ve discussed meant bringing inflation back down which, in turn, meant bringing oil and gas back down.  That’s why when CL peaked on Oct 3, TNX peaked two days later.I’ve charted this relationship many times in the past, but a quick reminder wouldn’t hurt.  CPI is highly correlated to oil prices.Though, the more dramatic comparison is between CPI and the YoY changes in oil prices.

    We see an even closer relationship between CPI and YoY changes in gasoline……especially over the past few years.  When CPI fell below 0%, YoY RB spiked.  When it topped 2%, YoY RB slumped. The last two years has been focused on keeping CPI in the sweet spot: right around 2%.

    Changes in CPI have been very strongly related to “problems” in interest rates over the years.

    The 10Y usually peaks before CPI, presumably as bonds “price in” expected shifts in inflation.  There have been seven tests of the channel top over the past 30 years — the last one occurring on October 5, 2018.  Each test and reversal was accompanied by an inflation “event.”

    The events varied in nature.  In Jan 2000, for instance, the 10Y (the blue line) shot up to 6.8% when CPI (red line) pushed above the highs reached in 1991.  CPI topped out two months later at 3.8%.

    Between 2003 and 2007 the 10Y had difficulty keeping up. The 10Y peaked at 5.3% even as CPI surged above its 2000 highs to 5.6%.

    Since the crash, the moves in CPI have been tailored to keeping the 10Y on track — with the latest drop delivering a 2.50% 10Y yesterday.

    I have meetings outside the office most of the day Friday.  I’ll continue this post Friday afternoon.

     

     

     

     

     

     

     

     

     

     

     

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  • Manipulation is Nothing New

    Yesterday, former SEC attorney Teresa Goody joined those calling for an investigation into the market action on December 24.

    It was hardly the biggest move we’ve seen over the past year. But, it resulted in new lows that ruffled a few feathers.

    Click the image to watch the interview, or just keep reading.

    Goody: …when you have these wide swings in the market, 400, 500, 600 points, 2 to 3 percent, I think that’s a clear indication that there is some sort of a market structure issue, so the SEC will have to investigate, I think, and also FSOC look into why there’s this volatility because it’s not fair to everyday investors, it’s not fair to all investors, really. And it really goes to the fair and efficient markets that we have.

    Melissa Lee and Kelly Evans of CNBC could have left it there. But, to my surprise and to their great credit, they challenged Goody’s statement — eliciting a nonsensical stream-of-consciousness response that rivaled one of the best deer-in-headlights word salads ever.

    Lee: Would, [by] the same token, the SEC investigate big up days?

    Goody: [long pause] I think that big up days are a little different from down days…

    Lee: Why? Doesn’t that speak to market structure as well? If you have the same circumstances that lead to a rise in the Dow of 3% on thin volume, why wouldn’t you investigate that?  If it’s really on the basis of market structural issues, why wouldn’t you investigate that?

    Goody: Well, for one thing, it’s about market loss and investor loss.  And, so, while I think that that’s important to look at too, it’s more important to look at the loss because you have things like the high frequency traders, for example, and, so, once there’s a massive sell off, you have the ability for people in the market like high frequency traders to get out early. And, then, once the market starts coming around, to come up and buy in low, so they sell high buy low.  And, then, the average investor is going to act less quickly than the high frequency trader for example, and they’re going to lose money. And, then, with this volatility everyday investors are very confused by that. They hear “oh Apple’s doing very poorly, or Apple’s doing very well and so maybe I should buy or sell.”  And, the average investor is going to act more quickly to, uh, minimize loss than they are to get a gain.

    Evans: Teresa, I don’t quite follow that.  If they’re front running, they’re front running. Whether they’re shorting or they’re on the long side, either way if you’re front running the public, and that’s a market structure issue, we talked about this a couple of years ago…it’s one thing for investors to…lose money, as you said, but if you also can’t buy something because it’s artificially moved up 10%, you’ve also lost out. So, it’s gotta go both ways or it doesn’t hold water, right?

    Goody: I agree with you.  And, I think that the bigger concern is when investors are losing a lot of money. But, I completely agree that there’s also an issue when investors can’t get in because it’s artificially high.  And, this goes to your point, too, is that what we’re trying to find is the real valuation.  So, anything that negates the integrity of the real valuation of a stock is something that has an impact on the market integrity and the market structure. And, so I agree, it’s big ups and big downs.

    But the SEC and, I think regulators, is more concerned with everyday investors losing a lot of money rather than not being able to get money and the gains because there’s more of an impact there, especially when its 500 or 600 points decrease.  But, I think they need to look into both and this way, also, when you’re looking at a decline, whether there’s front running, whether you know, some traders are able to sell high and start a sell off, and anticipate a big sell or a big purchase, and then they can get in front of that too, so those are issues where you can get more of the manipulation and the fraud.

    On that holiday-shortened trading day, the S&P 500 opened down 16 points and closed down 49 points. It’s highlighted in blue in the chart below.I couldn’t agree more that an investigation is warranted.  In fact, it’s high time the SEC investigate the rampant market manipulation that occurs on a regular basis.  Let’s start, though, with the much more frequent instances where the manipulation results in huge gains in the markets.

    On the 24th, members will remember, Mnuchin called in the Plunge Protection Team — which aptly manipulated markets into a sharp recovery by crushing VIX to the tune of 50%.This is a common occurrence as we saw again last night.  After five sessions of declines, ES broke out overnight and is currently showing a 25-pt gain.The primary reason?  Again, VIX — which was slammed by over 5% overnight and 23% since Wednesday.By all means, let’s investigate market manipulation.  But, if we really care about market integrity, let’s investigate those manipulating it in both directions.

    continued for members… (more…)

  • Update on Gold: Dec 26, 2018

    Back on August 15, we noted that gold was nearing an important downside target.  From Charts I’m Watching: Aug 15, 2018:

    [Gold] has reached triple support –the .618, yellow TL off the 2011 highs, and the red TL from 2010.  We’ve targeted 1173.60 since the yellow TL broke down in May and gray channel broke down in June.  I strongly suspect it will bounce here.

    GC dipped slightly lower, bottoming out at 1167.10 the following day, then began an arduous climb that reached our 1268.30 target last week.

    As it threatens a breakout, we’ll take a fresh look at the road ahead.

    continued for members…

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  • Charts I’m Watching: Nov 5, 2018

    Futures are back to flat, having bounced a bit on the Iran sanction news as it provided a modest (so far) bounce for oil and gas prices.The market has a wait and see feel to it this morning, with AAPL breaking down further……but, the algos all but ignoring it, focusing instead on dollar strength (TNX is higher again) and oil’s potential recovery.  AAPL is now off almost 14% and is nearing our channel target [see: All Eyes on AAPL] with the gap close target of 195.96 and SMA200 target (currently 192.44) looking better all the time.

    Members might wish to revisit last week’s post on VIX [see: VIX’s Warning] in which we discussed the bearish implications of the impending 50/200 cross.  This morning, it’s alive and well.continued for members…

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  • Appearances

    Credit: REUTERS/Jonathan Ernst

    It is often said that there are two sides to every story and, somewhere in middle, lies the price of oil.  Okay, I paraphrased that just a bit.

    But, isn’t it odd that the day after the Saudis threaten $400/barrel oil, Donald Trump suddenly embraces the ludicrous “rogue killers” theory for the death of Washington Post columnist Jamal Khashoggi?

    It appears that after days of vehement denials of any involvement, the Saudis suddenly remembered that Khashoggi was, in fact, assassinated and dismembered in their Turkish embassy (Saudi operative: “Oh, yeah…that guy that we chopped up with a bone saw?  I had forgotten all about that!)

    After a 20-minute conversation, the president who fell in love with Kim Jong-un also came to terms with Saudi King Salman.  Was it love?  To quote the master of the deal, himself, who knows?

    But since Trump is desperate to reverse the rise in gas prices, inflation, and interest rates between now and November 6 (and, to salvage billions in arms sales) don’t be surprised if we get that next leg down in oil prices very soon.  Nobody knew the economy could be so complicated!

    And, while we’re on the topic of government prevarication, the much-delayed September Treasury Statement was finally released yesterday.  Anyone notice something odd about September outlays?  Did we really see a plunge in every expense category?  Or, maybe, someone decided to massage the numbers just a bit to prevent the report of a $1 trillion deficit.  Appearances, again.

     

    Nah…then we’d surely see other efforts to obfuscate the country’s fiscal plight.  For instance, they’d never allow charts like this one from the August report.

    The same chart in September…  (appearances, indeed!)continued for members… (more…)

  • FOMC: What Elephant?

    Over the last 20 years, we’ve seen two yield curve (2s10s) inversions: essentially all of 2000 and Dec 2005-May 2007.  The inversions themselves posed no issues for equity markets.  It was the dramatic unwinding of those inversions that produced crashes.Eight months ago, we almost had another.  2s10s had fallen to a trend line connecting those two previous curve lows. Instead of bouncing, however, 2s10s continued falling — reaching a low of .18 on Aug 27.

    Unfortunately, the optics of this approach to an inversion are troublesome.  It is commonly believed that inversions presage recessions.  So, the brain trust in the Eccles Building has a little tightrope walking to do.

    They need to increase the short end of the curve to stave off (understated) inflation and build some cushion for the next financial calamity.  But, to avoid an inversion, they must scale back their intervention in the 10Y — at least enough so it can keep pace with the rapidly rising 2Y.

    Eagle-eyed observers might note that both recently out above the trend line connecting previous highs. Not so coincidentally, this occurred as the above-referenced trend line connecting the 2s10s lows was breached and equities began their Jan-Feb swoon.Can the Fed keep the plates spinning a little longer?  Without question.  Especially if Powell is successful in convincing investors algos that the economy is strong but there is no wage pressure and inflation poses no real threat.

    Should that narrative fail, however, the spectre of higher rates alongside soaring debt levels might finally awaken equity and bond investors to the elephant in the room.

     *  *  *

    So far, the damage resulting from Friday’s channel breakdown has been contained to the August highs.  But, still ahead, EIA inventory reports and the FOMC statement and press conference.

    continued for members… (more…)

  • Update on Gold: Apr 11, 2018

    In our last major update [see: Jan 26 Update] we noted that gold, 1355 at the time, had reached the same price level at which it had frequently reversed.  Even though we’d had a bullseye at 1377-1380 for over a year, it had stopped short several times.

    GC is sitting just below the neckline of the huge IH&S that could result in a significant breakout.  The fly in the ointment: I don’t think TPTB will let it break out.  So, you should either take profits here in the 1348-1365 range, or at least set your stops at this level.

    As it happened, 1365 (reached the day before) was the cycle high.  Gold tumbled 4.1%, then bounced around between roughly 1308 and 1362 for the next two months.  Our interim posts caught most of the moves:

      * * *

    Feb 8: Analog Details  “[Gold] has dropped 4.1% since reversing where expected in late Jan, and just reached fanline and double channel support [1321.] Could it finally be ready to tag 1377-1380?”  Bottomed that day, rallied to 1364 over the following week (+2.51%.)

    Feb 15: Where to, Next?  “GC might have run out of steam here [1360.] Cautious types should consider taking profits, while the daredevils out there remain focused on 1380.” Topped out the following day at 1364 (+2.95%.)

    Feb 27: Powell’s French Toast   “Gold is getting clobbered…our analog suggests a Mar 1 turning point. The SMA100 should be around 1303 by then and would be a better bounce spot.”  Bottomed on Mar 1 at 1303.60 (+4.15%.)

    Mar 27: Algos to Markets – All Better  “GC, which tagged its 1362 resistance yet again, has retreated once more… It still has a good shot at 1380, but only if/when DXY finally breaks down.” Reached 1369.40 today (+5.05%.)

     * * *

    So, here we are, sitting on a tidy 14.7% gain.  It’s not terrible for 2 1/2 months work, considering gold has only netted a 0.9% gain during that period.  But, I hate to leave money on the table. Is it time to pull the plug on 1377-1380?  Or, are we about to reach or exceed it?

    continued for members…

    The two major factors at work are the ongoing saga of the US dollar and the possibility of a shooting war with Russia in Syria.  I can’t speak to the question of a war other to say anything’s possible, especially with the crew currently running the ship.

    The dollar is another matter.  While it normally rises and falls in sync with interest rates, this relationship reversed at the end of 2017.    At that point, DXY logged another leg lower while TNX spiked. At just shy of 3%, the TNX became a drag on equities — the whole “going broke” thing [see: Why Rising Rates Are a Problem This Time.]  But, as the gyrations in equities picked up again, great care was taken to ensure it didn’t plunge in value.

    I suppose the thinking was that lower rates would weaken the dollar’s appeal.  Or, maybe it was just fear of a yield curve inversion.  In any case, TNX’s purple TL has refused to break down. DXY also refuses to break down.  And, this could go on for quite a while.  It needs to tag the bottom of the rising purple channel.  But, until mid-July rolls around, that would mean dipping below the .618 at 88.423.  So, it’s quite possible TPTB will prop it up for another three months! 

    Remember, Mnuchin publicly stated he wants to support the USD.  And, it goes without saying that he, like every central banker, loathes any serious price appreciation in gold, as it undermines the value of the mighty dollar. One silver lining, EURUSD suggests a shorter timeframe, say Jun 5.  But, even two months would be a long time to wait for another few points.  An escalation in MENA tensions could obviously accelerate things.  But, is it worth taking the risk for 10-15 points?  I think not.  I’d pull the plug or at least enter stops here at 1367.  If it pops above 1380, great.  No argument with going long, again.  DXY could drop to 87 tomorrow, and GC could easily reach 1377-1380 or higher.

    But, if DXY continues sideways, and unless war breaks out in the next day or two, it seems likely that gold’s next move will be lower.  The most obvious support is at the rising white channel bottom and SMA100, currently around 1315.2-1318.  If the channel breaks down again, the SMA200 will reach the purple channel line later this month, probably around 1300.  I’ll update things if we see a material deviation in either direction.

    GLTA.

     

     

  • The Market’s Latest “Lucky” Bounce

    That’s a relief!  For months, pundits have been arguing whether the Fed needed to hike interest rates three times or four times this year — you know, because of all the growth coming down the pike.

    Fed Über-Dove and “Man Who Thinks Market Integrity is Overrated” Jim Bullard just announced that the correct number is zero.  That’s right.  Everything is perfect just like it is.

    Amazingly, and quite by coincidence, this pronouncement occurred on the exact same day that several stock market indices were in danger of falling below a very important technical level of support: their 200-day moving averages.  As we discussed on Monday, falling below the SMA200 isn’t usually very healthy for markets.

    For visitors and new members, this seems like a good time to take a walk down memory lane.  This isn’t Mr Bullard’s first rodeo.  Nor is it the first time “someone” did something clever to ensure the market’s continued ascent.

    The S&P 500 illustrates the phenomenon quite well, having experienced a number of such fortunate events at crucial times. October 2014 – Bullard!

    Bullard appeared on Bloomberg to explain that another round of QE might be in order. As “luck” would have it, this enabled SPX to reverse right as it reached important Fibonacci support, ending a 9.9% tumble and narrowly averting an official correction.

    Big assist from USDJPY, which soared 16% over the next 7 weeks in spite of the fact that more QE should have weakened the US dollar.  The Yen Carry Trade in all its glory.

    August 2015 – USDJPY!

    This 12.5% correction was set up by USDJPY falling back below a critical Fibonacci level (the .618 at 120.11) in the wake of SPX reaching a key Fibonacci extension (the 1.618 at 2138.)

    We had correctly forecast the top [see: The Last Big Butterfly] but it was unclear whether or not USDJPY could remain above 120.  SPX plummeted when 120 finally fell but, as “luck” would have it, was (temporarily) rescued by USDJPY’s bounce back above it.

    February 2016 – Oil!

    The price of West Texas Intermediate Oil (CL) had fallen 77% between Aug 2013 and Feb 2016.  While this crushed inflation to a manageable level, it made investors in and lenders to energy-related companies pretty nervous.

    As “luck” would have it, CL bottomed out on Feb 11, 2016 — the exact same day that SPX reached that critical Fibonacci support level of 1823.  CL doubled over the next four months, and SPX rebounded sharply.  By accurately forecast the bottom in oil, we could confidently call a bottom for SPX [see: USDJPY Finally Relents.]June 2016 – USDJPY!

    Stocks plunged in the wake of the Brexit vote.  As “luck” would have it, USDJPY — which had used CL’s rally as an opportunity to reset — picked this particular day to bottom out and spiked 8% higher over the following month.

    Futures had sold off by 6.5%, but by the time SPX opened the next morning the recovery was well underway.  It was soon back above its recent highs and the critical 1.618 extension at 1.618.  In other words: new all-time highs.

    November 2016 – Trump*!  Unfortunately for stocks, the US election results weren’t conducive to a rally.  Once Trump’s election became apparent, futures plummeted over 5% in a matter of hours.  SPX had bounced off its SMA200 a few days earlier.  Unless something was done quickly, it would drop through this key support the following morning.As “luck” would have it, USDJPY picked this particular day to bottom out.  It spiked 5% over the next few hours and 18% over the next few weeks — a supersized version of the exercise which had saved stocks post-Brexit.

    And, if that weren’t enough, VIX — the widely accepted indicator of fear and volatility — plummeted even as futures were plunging.  It’s the equivalent of calling your insurance broker to cancel your homeowner’s policy as a hurricane bears down on your beach house.  How very, very “lucky” indeed.Futures recovered almost all of their losses by the time the cash market opened the following morning. VIX went on to shed over 50% of its value and broke down through trend line support (above, the white arrow.)

    Stocks were soon registered new all-time highs. The talking heads called it the “Trump Rally” and attributed the gains to the incoming president’s pro-business orientation and deal-making acumen. But, I think it deserves an asterisk…on account of the incredible “luck” involved [see: Why the Trump Rally is a Fraud.]

    The SPX chart isn’t labeled as such, but the rise from 2138 to 2703 (the next major Fib level) wouldn’t have been possible without continued support from oil and VIX.  After doubling in value, CL proceeded to construct a well-formed rising channel (below, in purple) that was very supportive of stocks.  It oscillated between the channel’s top and bottom like clockwork — until December 2017.  We’ll come back to that.Also during that time, VIX was trying something new.  After years of occasionally bouncing off the bottom of a long-term channel (below, the yellow arrows) it decided to plunge below that channel bottom and spend 80% of its subsequent days in the cellar — reaching new all-time lows in the process.This sent a strong all-clear signal to stocks (or, at least the algos that trigger stock purchases) that the coast was clear. It was completely safe to buy stocks, which they did — producing a rally that accelerated all the way up to the 2.24 extension at 2703.

    December 2017 – Oil!

    At that point, oil’s breakout (remember the purple channel above?) and the onslaught of new, daily lows in VIX combined to give SPX the boost it needed to climb above that resistance.  I mean, how “lucky” can you get?  It popped above 2703 and tacked on another 6.3% for good measure.

    Unfortunately for stocks, though, there was a practical limit to how high CL could go without creating problems.  Someone had forgotten that higher oil prices mean higher inflation.  And, higher inflation means higher interest rates.  And, when you’re $21 trillion in debt and pass a tax bill and budget that greatly widen the deficit considerably…higher interest rates are not exactly lucky [see: Why Higher Interest Rates Are a Problem This Time.]

    Between that realization and a growing disconnect between price and supply & demand, CL had to drop.  When it did, and the (dashed, red) trend line from August 2017 finally broke down, stocks didn’t take it well.SPX plunged almost 12% over the next two weeks, one of the sharpest corrections ever.  Luckily, the SMA200 was there to catch it.  A few days later, CL popped back above its channel top and SPX recovered to back above 2703.

    As the bounce began to fade, we had a surprise message from Bullard that “too many rate hikes could slow the economy.”  It was enough to extend SPX’s bounce for another few weeks.  But, ultimately it slipped back down below 2703 to tag its SMA200 again.  And, again.  And, again.  And, again.

    By then, DJIA and RUT had finally risen to the point where they could tag their SMA200s as well.  SPX bounced at our 2561 target.  Investors were in luck!  Until this morning.

    April 2018 – Bullard!

    Apparently, someone forgot to explain to the Chinese that we were supposed to win the trade war (winning them is easy!)  This morning, we found out that China had the gall to fight back.  When I was woken by an price alert at 3:15 this morning, the futures were off 55 points.  SPX would open back below its SMA200.

    But, the futures didn’t know what they were up against!

    Then came Larry Kudlow, the guy who in May 2008 called the impending Great Financial Crisis a “non-recession recession.”  Some people might have misunderstood; but, obviously he meant it would be much worse than a recession.  (I can’t wait to find the pot of gold!)

    As “luck” would have it, the market was quite pleased with all this positive scuttlebutt.   ES, once down 55 points, closed up 34 points.  SPX and the Dow rose about 1%.  RUT added 1.30%.  And, COMP — which never did tag its SMA200 — popped 1.45%.  Take that, 200-day moving average!

    Bounces are nice, whether driven by oil, the USDJPY or Fed cheerleaders.  This one got SPX back above its SMA200, which is a good start.  Next comes the 2.24 Fib, which SPX has crossed some twenty times in the past two months.  Can it rise back above and stay there this time?

    Oil’s limitations haven’t disappeared.  Managing inflation and interest rate expectations will continue to dominate its price action.  Lately, the market has a very narrow range within which it feels comfortable.

    USJDPY is threatening to break out from a falling flag pattern, but one has to wonder why it hasn’t done so already.  Japan got no love from Trump in the trade war chatter to date.  It’s quite possible they’re done cooperating with currency intervention. VIX, after popping back above the yellow channel bottom in dramatic fashion in February, has fallen back to a trend line (red, dashed) from its January lows.  Every time it pops above the trend line, SPX stumbles.  Every time it drops below it, SPX rips.  Today, it tagged it and reversed lower – hence the day’s gains.  It has plenty of additional downside potential, with the potential to drive stocks back above 2700.  But, again, it hasn’t done so yet.

    It makes one wonder whether SPX will be allowed to put in a lower low in order to make the corrective wave look a little more conventional and give COMP a shot at its SMA200.  We have oodles and oodles of downside targets if SPX’s SMA200 should fail.  That white dot at 2138 in the chart above is there for a reason [see: More Where That Came From.]

    There are countless other factors I haven’t even mentioned: our yield curve model (which tentatively turned bullish today), 10yr note rates, the US dollar’s buoyancy, various momentum indicators, and the continuing sagas of FB, TSLA, AMZN and DB — all of which have played a role in the market’s gyrations (mostly of the bad luck variety.)

    Whatever happens, it’s hard to imagine we could reach new highs without plenty more luck.  Trade safe, and stay tuned.