As we’ve discussed several times over the past month, VIX’s trend line from Jan 24 was overdue for a revisit. Now that we’ve got it, will VIX nosedive as usual or are we in for something decidedly less bullish?
The algos are geared up for a bounce.
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Futures are off sharply this morning as important support for various instruments/indices/currencies begins to break down.
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Another ugly open for markets as ES, down about 1.25%, completed its H&S Pattern we’ve been watching take shape.
More grist for the bearish mill…as though we needed any more.
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August CPI came in hot, rising 0.1% in August instead of the consensus 0.1% decline. Core was even worse: 0.6% versus 0.3% consensus. The annual print also disappointed, coming in at 8.3% versus expectations of 8.0% or less.
Having slightly overshot our 4153 target overnight, ES is now reversing sharply.
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Yesterday marked the second day in a row of sharp declines in the equity markets following the 200-day moving average backtest and the passing of OPEX.
There’s more where that came from.
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Futures are off sharply this morning, reflecting the lack of support behind the runup to the last two options expirations.
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Housing starts missed again this morning, underscoring the NAHB’s assessment that the housing industry is in a recession. Starts came in 100K below consensus and 9.5% below June’s report.
Futures, still laser focused on OPEX, didn’t budge.
The NAHB posted the 8th monthly decline in a row yesterday, reporting the lowest reading since May 2020. This presents a thorny issue for the Fed.
Higher interest rates are bringing down prices as we anticipated over a hear ago [see: Time to Sell Your Home?] But, inflation doesn’t reflect housing prices, it reflects a goofy calculation known as owner’s equivalent rent – which is supposedly what you could rent your home for if you were so inclined.
Even this wackadoodle calculation shows that the latest spike is much higher and steeper than those which preceded the last two economic downturns/market crashes.
But, of course, it’s nowhere near the average 14% increases actually experienced nationwide. According to Freddie Mac, this has left 62% of Americans unsure about their ability to pay their rent over the coming year. Nearly 20% of those whose rent increased said they are now “extremely likely” to miss a payment. Then there’s foreclosures, which are up 143% from last year.
A cooling off of real estate prices would be desirable from the Fed’s standpoint as it might help mitigate high inflation. Yet, due to the COVID downturn, enough builders were more cautious that inventory remained below a 6-month supply until March 2022, when it began rising to June’s 9.3 month supply.
As the chart below shows, this is the same level seen in the lead up to the Great Financial Crisis…
Inventory topped out at 11.4 months in the midst of a 19% reset in prices. If the same percentage drop were to occur now, it would wipe out all gains since June 2021. Note that the median sales price has already dropped 12% so far.
Think about that for a moment. If you purchased a median-priced home in June 2021 ($374,700) and watched it rise to the median price of $457,000 in April 2022, that $82,000 in additional equity might encourage you to purchase a new car, take a vacation, or at least eat out more often. If that bump in your net worth were to vanish, so might your interest in spending.
When spending dries up, so do corporate sales and profits. As sales and profits drop, so does employment and stock prices. The resulting recession would thus be accompanied by a more severe market correction.
What builders need and want – lower interest rates – is not at all likely at this time, at least according to past and current Fed presidents. They have begrudgingly accepted the fact that sensationally low interest rates are what generated this disastrous inflation in the first place.
By raising rates just the right amount, the Fed hopes to tamp down inflation without causing a nasty recession. While technically not impossible, it’s never been done before. And, this Fed has proven itself fairly inept at reading the economic tea leaves.
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Futures have ramped almost 1% overnight – a common occurrence lately, especially in advance of a Fed decision.
Even the durable goods orders beat (a miss if you’re looking for the Fed to slow their rate hikes) did nothing to thwart the algo-driven meltup.
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This morning feels a whole lot like yesterday morning, with futures ramping higher on the latest smackdown in VIX. Of course, these maneuvers can be an effort to force a breakout in stocks. But, they can also be an effort to put a little more air under stocks in advance of a downturn. 
With plenty of important earnings still to be announced, the Gazprom threat, and a potential ECB rate hike just ahead, there’s plenty or risk waiting in the wings.
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Futures are up sharply…
…as VIX is being crushed in order to provide cover for about $2 trillion in options expiring today.
We’ve been seeing this all week, with multiple downturns reversed by late-session assaults on VIX even as earnings and economic data have argued for lower stock prices. Chase this rally at your own peril.
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