pebblewriter

Tag: forecast

  • Why Rising Rates Are a Problem This Time

    A sharp drop in interest rates has traditionally been a negative for stocks.  The chart below shows that most significant declines in 10-year yields over the years were associated with steep drops in the S&P 500.  Usually, equity losses precipitated the drops in yield.  As stock declines accelerate, money flows into bonds — raising prices and depressing yields.  The crashes of 2000-2003 and 2007-2009 are striking examples.  So are the corrections of 2010, 2011, 2015 and 2016.

    There were several exceptions, when stocks were supported through carry trades and other algo-stroking forces: the 15% rise in SPX between Dec 2013 and Feb 2015, the minor 6.1% drop between Mar and Jul 2016, and the 2.5% rise between Mar and Sep 2017.

    But, significantly, not a single equity correction occurred without a concurrent and significant drop in yields.  This begs the question, then, of whether increases in yields are positive for stocks.

    In 2008, yields bottomed almost 2 months before stocks did in 2009.  But, in the 2000-2003 crash, yields bottomed 9 months after stocks.  Most other yield rallies from significant bottoms also lagged stocks: 4 months in Oct 2010, 9 months in Jul 2012, 3 months in Jan 2015, 5 months in Jul 2016.

    It would seem at least some bond buyers take a “show me” approach, waiting until the coast is clear in equities before shifting money back into bonds.  This analysis ignores the considerable influence that Fed purchases had on bond yields — an influence which the Fed maintains will diminish over the next few years.

    So, what are we to make of the latest spike in yields which began on Sep 7, 2017?  The 10Y rose from 2.03% to 2.94% through Feb 21.  SPX rallied along with it, up almost 17% by Jan 26 — then promptly did a gut wrenching 11.8% nosedive in only 2 weeks.

    Fortunately for the bulls, it got a strong bounce off its 200-day moving average and subsequently bounced to its 61.8% retracement. But, pundits seem fixated on the 10Y with rates nudging up against 3%.  Does it matter?

    In a word, yes.  Even though 3% is still well below historical yields, the level of debt has risen dramatically over the years.  The chart below shows the annual interest expense (the orange line) and the US’ rapidly growing pile of debt. Superimposed over each is the average interest rate (the black line) paid on that debt.

    Even though interest rates have flatlined since 2013, the expense of servicing the rapidly expanding debt has risen sharply — recently breaking out to all-time highs.

    Clearly, if rates were to normalize the interest expense would be unmanageable.  How unmanageable, you ask?

    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.  And, we haven’t even begun to talk about the effect on consumer debt, the mortgage market, debt issued to fund corporate buybacks, etc.

    Obviously, an increase in the 10Y yield doesn’t immediately reprice the entire pile of debt.  But, it’s a clear step in the wrong direction.  And, investors are right to be concerned.  I imagine the Fed is also quite concerned — which is why I put a target of 2.85% on the 10Y back on Jan 10 [see: China – It’s Not Me, It’s You.]

    Not only did it represent channel and Fib resistance, but it seemed like a good tipping point for what I expected to be rising concern (one can hope) about our shaky fiscal situation.  TNX overshot it a little, which has been fairly common over the years (Feb 2011, Sep and Dec 2013, etc.)

    Those previous overshoots typically helped stocks get past resistance.  It might work this time, too.  But, judging from the mood out there, I don’t believe stocks will be led higher by higher interest yields this time.  And, I have trouble believing the Fed isn’t working to put a lid on long rates – yield curve be damned.

     *  *  *

    Related Posts:

    Where To Next?
    The End is (Probably) Near
    CPI: The Charade Continues
    Update on Bonds: Jan 29, 2018

     

  • Bullard!

    I remember Oct 15, 2014 like it was yesterday.   SPX had risen sharply on the back of the yen carry trade, popping through important Fib resistance at 1823. But, it had just broken trend line and channel support.  To make matters worse, it had just dropped through its SMA200 at 1905.The culprits? USDJPY had reversed off heavy resistance and its 10-week rising channel had broken down.  And, equally concerning, the bond market signaled more stock carnage to come.

    As we noted at the time:

    The more troubling development for Mr. Market is the bond market. The 10-yr note futures shot through the previous high overnight, complicating the prospects of a quick resolution to the market’s correction.

    Note that while we might see a reversal today on the white Fibonacci grid — the .786, .886 or the 1.272 itself — we still have to deal with the grey grid, which suggests the possibility of a drop to the .786 at 1798 or the .886 at 1770.

    A drop to 1800 would have meant giving up that important Fib support at 1823.  More importantly, a 10% correction would occur with a drop to 1817.33 or lower.  Who needed those headlines in the middle of spectacular rally to new all-time highs?

    The solution?

    SPX’s plunge halted at 1820.66 — 3.33 points above what would have been an official correction.  No fuss, no muss.  The Fib line which had once loomed as formidable resistance could now be reclassified as support.

    What has been is what will be,
    and what has been done is what will be done,
    and there is nothing new under the sun.
     Ecclesiastes 1:4-11

    As I went to sleep last night, marveling at how SPX had taken a rather circuitous path to our 2703.62 target,I wondered whether the 2.24 Fib would hold.

    I found myself thinking back to 2014.  Maybe Fed President Bullard would make another appearance.  I didn’t have long to wait.

    On CNBC this morning…

    click to play video

     

    Futures are currently up 27 points off their overnight lows (bounced at the 10-day moving average, probably about 60 seconds after Bullard was booked on CNBC.)  At least we weren’t kept in suspense too long!

    Oh, and for those wondering why/how yesterday unfolded as it did, take a look at VIX.  See that little dip (yellow arrow) below the trend line from Jan 26?  Yep, that’s all it took.

    When VIX climbed back above the yellow trend line, SPX promptly gave up all its pre-minutes ramp job.VIX has obviously proven it’s still incredibly powerful.  Who needs a 40% spike when a 20% one can put on the brakes so effectively?  The flipside, of course: if VIX decides to pop up to 26 anyway, SPX will likely ignore Bullard and also test its SMA10.

    Bullard might be able to divert attention from the interest rate problem.  But, it clearly hasn’t gone away.

    This time, it’s a spike in rates rather than a plunge.  So it’s a different kind of interest rate problem.  As a result, this one might be tougher to rectify.  And, the implications for the overall economy are much more serious.

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  • What is Deutsche Bank Trying to Tell Us?

    This morning’s rally is pretty good confirmation that our analog is playing out.  I’ve spent 18 of the past 24 hours charting, and have some additional info on what to expect from SPX, ES, DXY, USDJPY, EURUSD, TNX, ZN, RB, CL and, of course, VIX over the next two months.

    I’ll post it later today, but I’ve yet to come across anything that concerns me from a charting standpoint (i.e., conflicting signals.)  But, of course, there are any number of things that could throw it off track or bust it all together.

    One example is Deutsche Bank.  I don’t usually post about individual stocks, though I do a lot of charting on them for consulting clients.  In this case, I had a client who was trying to decide whether to throw in the towel on the stock.

    I called the bottom 2 days and 4 cents early at 11.23 on Sep 27, 2016 [see: Deutsche Bank – Will it Survive?] and it dutifully bounced up through our various targets until reaching the last target (20.43) I laid out in our Dec 7 post on the stock [see: Deutsche Bank – Another Pause or More?]My view at the time was that DB would correct modestly.

    If DB makes a meaningful reversal here, the rising white channel I’ve sketched in should take form – opening the door to a deeper backtest and fleshing out the rising white channel. It emerges from the falling red channel around Jan 13 at 14.30ish. But, the more conservative target would be the midline at 16.90.

    As it turned out, DB topped out at 20.94 (after gapping higher, gaining 5.6% that day alone) on Jan 25, and reached 16.90 (-19%) less than 3 months later.  It didn’t stop there, however.  It dropped on down to and through its SMA200 and a 50% retracement of its rise where it finally bounced at 15.79.

    Since then, it’s been bouncing back and forth between roughly 15 and 20.  This has been going on for almost a year, since March 2017.  It’s enough to make you wonder where senior management’s incentive stock options are priced.

    The Feb 2 drop was a real blow — the latest drop through the SMA200. As of this morning, DB had dropped 22% since Jan 24.  It’s in line with the string of 20% drops and 20% rallies which had occurred every month or so through last September.

    But, this one looks different from a charting standpoint.

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  • US Dollar: Capitulation?

    When it comes to trade, there is no free lunch.  A lower US dollar helps US exporters.  But, for the US – a net importer by a huge margin – it raises the price of imports.

    So, it was really interesting to watch Treasury Secretary Mnuchin step in it explain that a lower USD would be “beneficial to our trade imbalances” without mentioning the offsetting, and more troubling, inflation and interest rate repercussions.

    If we didn’t have $21 trillion in debt (multiples of that off-book) in a rising interest rate environment, it probably wouldn’t matter.  But, the CBO’s numbers, which assume 10-yr rates top out just over 3% (half the historical average), argue otherwise.

    Mind you, I’m not complaining.  I’ve been bearish on the USD for a very long time.  In May 2017 [see: May 1 Update on US Dollar] we noted that DXY had broken below a long-term trend line and was susceptible to more downside.

    …if DXY drops through the SMA200 and the yellow TL, then we have some very obvious Fib targets including the .786 at 97.583, the .886 at 96.789 and the purple .618 where it intersects the purple channel midline at 96.465 in July or August.  If the purple midline breaks down, the next major support isn’t until 91 in early September and 87-88 as early as the end of the year.

    We’ve seen plenty of worrisome bumps along the way, with a couple of timely rallies in Q4 to support stocks.  But, our charts have remained bearish even as the Fed, with its ineffectual rate hikes, struggled to argue otherwise [see: Will the FOMC Minutes Save the Dollar?]

    DXY just tagged our 87-88 target, reaching 88.438 moments ago with its eye on the rising purple channel bottom around 87.423.As we discussed in yesterday’s updates on EURUSD and USDJPY, the big question is what now?  The charts offer a compelling answer.

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  • The Rally That VIX Built

    As discussed yesterday, stocks spent the night building a cushion based on VIX (currently off 5.4%) in preparation for tomorrow’s FOMC announcement.  It started just before the close, yesterday, and has built to a 6-pt gain in the futures.Actually, it’s been less of a rally, lately, and more of an effort to maintain ES at levels above its IH&S Pattern target reached back on Jun1.  Remember the mantra “stay fully invested, because you never know when a sudden rally will appear out of nowhere and you can’t afford to miss it”?  These days, it’s the corrections that pass in a flash, like Friday’s 31-pt plunge which was reversed so quickly that it won’t even register on daily charts.

    But, I digress.  Today’s action is all about putting more distance in between SPX and the Support Below Which it Must Not Go in the wake of the FOMC meeting.

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  • Pulling Out All the Stops

    When unexpected unpleasantness unfurls, you can count on central banks to pull out all the stops. Such is the case with the British election results which, like Brexit, have wreaked havoc on FX markets.

    EURGBP, having broken down from its rising red channel dating back to mid-2015, was well on its way to a perfectly nice backtest at .80ish. Instead, it’s backtesting the broken red channel itself. Hence…the stop pulling.It should start with nice bounces from USDJPY and CL — which, as discussed yesterday, have already reached interim bottoms — and, of course, a sharp plunge by VIX.

    Look for USDJPY to pop through its SMA200 for good measure… …and CL at least hold its own in the midst of strong selling pressure.

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  • The Same, but Different

    Yesterday started out with a VIX-driven pop that quickly fizzled and nailed our downside target before rebounding and hitting our upside target.  Since SPX closed right at resistance, it needed a boost overnight.  So, why not go back to the same clever trick that worked the day before?

    Yes, VIX’s red channel has broken down again.  And, the algos are eating it up… to the tune of +5 on ES.

    Will it pop and drop, again, or will this one take?

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  • Striking Distance

    This is day 8 of our membership promotion, running now through the end of the month for members and non-members alike. We’re offering a 25% rebate off the first month of Monthly and Quarterly auto-renew subscriptions. Annual memberships are available at a very substantial discount (rewarding those who act quickly!)

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    * * *

    After SPX’s break out on the back of a 37% plunge in VIX, it’s no surprise that the VIX has kept it within striking distance of new all-time highs.

    In dropping that 37%, VIX completed a deep retracement of its rise from 9.97 — the lowest it’s been since 2007 — to 16.28.  The .886 retracement is considered the last stop before prices drop through the previous lows.  Imagine: risk being considered lower than at any time since 2007!

    Yesterday, VIX spent the entire day dancing around that .886, with a dip below it every single time SPX started slipping.  The message to algos was that VIX was about to drop to new lows and, therefore, stocks should be bought.It was enough to keep SPX from completing a simple retracement from its .886 to its .786, or any meaningful dip until the final minutes of an otherwise nonsensical session.Today’s a new day, as CL is closing in on our 48.35-48.45 target and investors are no doubt anxious to express their disappointment with the lack of details provided for the fantastic, big-league tax cuts “revealed” yesterday.

    Despite the slight bump in futures overnight, our downside targets remain intact – starting with 2384.

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  • Charts I’m Watching: Apr 12, 2017

    As we noted yesterday, SPX is hanging on by the skin of its teeth to a breakout.  Despite an 18-pt intraday plunge, it recovered by the end of the session thanks to a timely decline in VIX and rally in WTI.  Will it be enough to keep the trend intact?

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    The daily candle is close enough to the yellow channel bottom to call it a save.  But, futures are off several points again this morning. 

    And, VIX is on the rise — likely headed for our target at 16.25 – 16.48.

    But, USDJPY has reached the white channel bottom ahead of the SMA200 and could get a bounce for a few days.

    It will need to clear the 109.75 price level to be of any help.

    I suspect this is all designed to allow ES to tag support on this little red channel as well as the larger red channel.  If it doesn’t hold, the falling white channel suggests another 20+ points of immediate downside.If it holds, SPX should bounce from right here and recover to test the IH&S neckline over the holiday weekend.  Aside from the purple TL, the other key level is the SMA5 200 at 2354.95 — which is very close to the yellow neckline (which has yet to be properly backtested.)  I would want to be long here with very tight stops.

    Here’s SPX with the same falling white channel as ES sketched in.  Clearly, yesterday’s reversal at 2337, which occurred a few points shy of our 2334-2335 target (yellow) was a little premature.  It leaves open the question as to whether the bounce was off firm enough support.

    UPDATE:  10:01 AM

    SPX is struggling to remain above its SMA50.  USDJPY and CL aren’t helping much, though VIX is falling just enough to keep it above the purple TL — now around 2348.80.

    Remember, we have an EIA crude inventory report coming out at 10:30AM.  CL has been steadily approaching the .886 at 54.11 for the past two weeks, and yesterday’s API report was bullish.

    Stay tuned…

    UPDATE:  10:32 AM

    The EIA says crude inventories decreased by 2.2 million barrels.  The bad news, however, is that Cushing is at all-time highs — 69.4MM versus capacity of 77MM barrels.

     

    CL spiked higher for a moment, but is back to its .786 Fib.  SPX is following its lead, and dropping through the purple TL.  I’d revert to short on any drop through the SMA5 100 at 2348.76.

    CL is slipping, and looks like it wants to tag its SMA5 200 at 53.19.  It would be enough to knock SPX off trend, so it’s a little tricky.  If CL drops through the SMA5 200, it’d be quite negative for both CL and SPX.

    VIX is keeping SPX afloat……and USDJPY is still playing its cards close to its vest.

    UPDATE:  10:38 AM

    SPX is slipping below the purple TL, but has so far just head-faked 5 separate declines below the SMA5 100.  If CL gets a strong bounce off its SMA5 200, it’ll set up another head fake.  Even so, it makes me nervous to hold long as it keeps testing the SMA5 100.  Keep your stops where you’re comfortable.

    UPDATE:  10:44 AM

    I’ll probably be right back to long, but I’ll revert to short here.  CL is struggling with its SMA5 200 and USDJPY might not hold its red TL.A drop through 53.29 would be bearish and open it up to 51.6 or lower.

    Note that ES’ red channel has completely broken down.UPDATE:  11:07 AM

    A bounce off the white midline makes sense.  We’ll have to see what happens, thought, when it reaches the SMA5 10 at 2347.80.  If it pushes through, everything’s a go for the SMA5 200 tag and yellow neckline breakout.  If it can’t, then 2334.26 is in view.

    At the current rate, it could reach the .786 without tagging the bottom of the falling white channel — if it’s willing to wait a while.  Note that the channel’s .236 line reaches 2335 a little after 3pm this afternoon.

    UPDATE:  11:42 AM

    ES just reached the midline of its falling white channel, which could provide support even though SPX doesn’t show much.

    UPDATE:  11:58 AM

    Now, SPX has tagged its midline, too.  I’d expect a bounce here, though it could be confined to the SMA5 10 around 2344.  Note, though, the SMA5 200 is approaching the purple TL.  A huge bounce would make that a target — though it seems unlikely.

    CL has broken down below the .786 and SMA5 200.  So, this entire decline feels very much managed/engineered — meaning there’s a purpose and a target which is below current levels.

    UPDATE:  12:09 PM

    12:09 — often a turning point in bounces — and SPX just backtested its SMA5 10.  I’d look for a reversal here, but keep an eye on USDJPY and CL.

    UPDATE:  12:21 PM

    SPX is nudging up through the SMA5 20 on VIX weakness and USDJPY strength.  But, CL continues to falter.  And, VIX has bounced at the SMA5 50 three times in a row.  I’d hold short here.

    UPDATE:  12:51 PM

    VIX is getting a nice boost, but our 16.25-16.48 target isn’t that far off.  SPX should continue dropping, but I’d keep a close eye on VIX and USDJPY, which is testing its SMA5 200 again.

    I have to run a quick errand, will be back in 10 minutes or so.  Watch for TL support at 2341.78, the 1.618 and .786 at 2334.26-2335.34, and the .886 at 2328.65.

    UPDATE:  1:03 PM

    SPX just tagged TL support at 2341.78 and got a nice bounce.  Bears need the bounce to stop right here.  Will CL be satisfied with a backtest?

    UPDATE:  1:14 PM

    Giving it just a little leeway in case the .886 is the target.  My only hesitation is USDJPY, which has pushed above its SMA5 100 again.  On the other hand, VIX has tagged the SMA5 50 for the 4th time.  The fact that it hasn’t plunged down to the SMA5 200 or below tells me this is probably an officially approved and scripted decline.

    UPDATE:  1:40 PM

    SPX is breaking out on VIX’s dip below red TL and USDJPY’s push above the purple TL.  Back to cash until this resolves itself.  Remember, VIX has support at the purple TL and the SMA5 200 around 15.35.  If it drops through the SMA5 200, SPX has a good chance of reaching its own SMA5 200 — perhaps as it reaches the SMA50.

    UPDATE:  2:01 PM

    Feeling pretty iffy about it, but we could get a reversal here at the SMA50 rather than the SMA5 200 as it’s also the white channel .786 line.  Back to short with relatively tight stops.

    Note that ES has fully backtested the red channel.

    UPDATE:  2:10 PM

    Note that USDJPY is back below the purple TL.  I need to run out for a meeting and probably won’t be back until after the close.  I think there’s probably a 50% chance that SPX holds these levels until the SMA5 200 arrives at the SMA50 at 2349.60.  It’s equally likely it reverses between here and there and heads down to 2334 or 2328.  As long as it stays below 2350, I’d want to be short.

    UPDATE:  2:51 PM

    TL support, again.

    UPDATE:  3:20 PM

    USDJPY just snapped, sending VIX surging and CL popping to compensate.  SPX is down to the white midline again, where it could bounce.  VIX might have one more good run in it up to 16.25+; but, they might be looking to close the session at that SMA50/SMA5 200 intersection. I’d want to revert to cash above the SMA5 100.  As usual, shorting overnight should only be attempted by those who can hedge or handle the gap risk.  Watch your stops.

    .

  • Price Alert: Gold

    Gold is approaching our next upside target from two weeks ago [see: Gold – Following the Yellow Brick Road.]

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