The algos are still threatening new all-time highs, this time egged on by the “wonderful” news that only 963,000 new unemployment claims were filed last week and only 15.5 million Americans are currently drawing unemployment.
It didn’t hurt that VIX made several sudden plunges in the past hour and that the USDJPY is threatening to break out again.
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NFP increased by 1.76 million in July, beating estimates of 1.48 million. Futures popped on the news, almost turning green before deciding it was a non-factor – perhaps as Trump had already spilled the beans earlier in the week. Or, perhaps it was due to most of the job gains coming in food service and retail – categories which are susceptible to large downturns if slowdowns and shutdowns continue to make a comeback.
The unemployment rate dropped from 11.1% in June to 10.2% in July, while U6 dropped to 16.5% – still a stunningly large number of unemployed Americans whose benefits have plunged in the past week.
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ES has reached the top of the falling white channel we added a couple of months ago. At 76 points below all-time highs, a 2.2% move higher would make quite a statement about the integrity of the S&P 500 – essentially that a connection between equity prices and macroeconomic conditions is no longer a reality, nor even a consideration in investing. Imagine future FOMC press conferences and the derision that pretenses to the contrary would invite.
Is the Fed ready to cross the Rubicon? Or, could this finally be the end of the road?
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Will the addition of another “thinking about” keep stocks aloft until the next FOMC meeting? Futures aren’t looking so hot, perhaps because WTI has now joined RBOB in breaking trend, 10Y yields have gapped lower, and VIX broke out of its falling wedge. The algos are not happy.
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Futures have given up all their Tesla gains and are pointing to a slightly lower open for the S&P this morning.
Apparently, a threatened breakdown in VIX just isn’t as effective as it used to be.
What we have here is a failure to capitulate (apologies to Cool Hand Luke for the cheap rip-off of a great movie.)
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Lots going on this morning, with currencies joining VIX in leading the equity circus. EURUSD smashed its March highs and is closing in on one of two levels of overhead resistance as DXY tests an important channel bottom. The next moves for each will have important implications for the economy and for algo-driven equities.
ES has recovered 23 points of its overnight losses after failing to hold our .886 Fib target. It’s one vaccine headline away from recovering 3258.
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SPX reached our Fibonacci .886 retracement target yesterday. It’s a level I never imagined seeing after stocks reached important support back on March 23. But, then, I never imagined $5 trillion in liquidity – equal to the nation’s Q2 economic output according to the Atlanta Fed – being pumped into the economy in the second quarter.
We’ve always known there would be a fundamental battle between another round of QE (remember when Powell insisted it wasn’t QE?) and the realities of the worst pandemic in over 100 years, spawning unemployment that would exceed the GFC and deaths in the hundreds of thousands if not millions. But, this market cares little about fundamentals. It cares about liquidity and a steady diet of the right signals being fed to the algos.
Central bankers and governments have delivered on both counts – with WTI having risen $59/barrel and VIX plunging 72% and with liquidity injections purportedly intended to bolster employment which, in many cases, went into stock buybacks.
Nevertheless, here we are. In Harmonics, the .886 Fib represents an 88.6% retracement, or rebound, of a significant drop. It’s typically as large a rebound as you’ll see unless stocks test their former highs (a potential double top) or push past them to new highs. Unfortunately, it’s not always clear cut.
In May 2015, SPX tumbled 12.5% after coming within 3.32 points of our 2138.04 target. By Nov 2, it had retraced 88.6% of those losses, at which point we looked for a pullback. Instead, it spent the next several sessions pushing above the .886, no doubt stopping out plenty of shorts before finally succumbing and making new lows – the 1.272 Fib extension at 1823.42.
With the pandemic picking up steam – at least in the US and many lesser developed countries – the fundamental picture is looking iffy at best. The technical picture, on the other hand, is flashing plenty of warning signals. Can we count on it mattering?
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Ultra low interest rates don’t do much for traditional banking earnings, but they’re pretty fantastic for highly leveraged banks such as Goldman that are only too happy to front run the tsunami of Fed liquidity injections.
Between GS and more positive vaccine news (Moderna) the futures have pushed to higher highs, settling the question as to which of the deep retracements is the ultimate upside target. Note that the yellow channel midline served as a springboard yet again…
…as did VIX’s daily drop to/through trend line support.
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When does “it’s over” mean it’s not over? When the market plunges 65 points, of course.
The 2% hiccup came when Fox’s Martha MacCallum asked Trump advisor Peter Navarro whether John Bolton’s claims that Trump delayed imposing sanctions on China over its policy of interning Uighur Muslims would jeopardize the China trade deal. Navarro, fresh off accusing China of deliberately seeding the virus in the US by sending “over hundreds of thousands of Chinese citizens here to spread [it] around…” didn’t equivocate.
“Do you think that the president — he obviously really wanted to hang on to this trade deal as much as possible and he wanted them [China] to make good on the promises because there had been progress made on that trade deal,” MacCallum told Navarro. “But given everything that’s happened … is that over?”
“It’s over,” Navarro responded.
ES quickly plunged below its SMA10 and 2.618 Fib, but was promptly rescued by a plunge in VIX and spikes in CL and USDJPY which, not so coincidentally, popped back above its SMA10.
In all the turmoil over 9.2 million sickened and 475,000 killed by COVID-19, the ongoing social unrest, and an economy which is arguably teetering, it’s sometimes easy to forget the China trade deal and the months during which the market took its cues from the daily press briefings and chopper talk quips about how magnificently negotiations were going.
With the White House amping up its rhetoric over China’s culpability for the pandemic, I imagine Navarro’s initial assessment was the honest one.
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Two steps forward…in order to accommodate a big step back.
We’ve seen it countless times in the lead-up to Fed meetings, GDP reports and, lately, jobs data. With May unemployment expected to top 20% (it’s unofficially already there) after another 7.5 million joined the jobless ranks…
…the market’s caretakers put a 58-pt cushion into the market. ES’ 10-day moving average, for instance, is about 87 points below last night’s highs. Had ES instead fallen 87 points from yesterday’s lows, it would mean a risky test of its 200-DMA.
It’s gratifying to see scores of analysts come to the realization that the markets are being heavily influenced (a more accurate word is manipulated) by massive Fed stimulus. But, as members know, this has been going on for years – particularly as stocks reach key levels of overhead resistance.
With the Dow finally joining SPX in reaching its 200-DMA on Wednesday and several key components (e.g. AAPL) taking great pains not to break out to new highs, it seemed as though we might get at least a pause in the meltup, maybe even a correction.
Our yield curve model confirmed it yesterday with the 2s10s breaking out above all recent highs except that seen in late March.
Now, we’ll have to wait and see whether the algos, being directed this morning by USDJPY, VIX and CL, are intent on notching new highs or will, temporarily at least, reconcile with the real world.
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