It’s easy enough to engineer a meltup in advance of a Fed meeting. We’ve seen it countless times. But, what about after a meeting, particularly one where an actual taper or rate hike is announced? The countdown has begun. Stay tuned.
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Equity markets rarely fail to rally into the end of the year. But, there have been several noteworthy Q4 exceptions over the years, each of them marked by VIX’s bounce off well-established trend lines.
Note that SPX’s yellow channel has been rising at a compouned 12.2% per year since the 2009 bottom – historically a very decent rate of return. With SPX currently testing the channel top as VIX tests the rising purple trend line, SPX is at a critical juncture where it must either correct or break out.
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In an excellent interview on CNBC this morning, Paul Tudor Jones echoed what many on Wall Street have been thinking and we have been writing for the past year or so.
Inflation could be “much worse” than feared, billionaire hedge fund manager Paul Tudor Jones says. “It’s probably the single biggest threat to certainly financial markets and probably I think to society just in general.” https://t.co/OoMbhdnsm0 pic.twitter.com/yCP11BVELO
— CNBC (@CNBC) October 20, 2021
Has the Fed committed a policy mistake? Most certainly. Even more outrageous, it did so deliberately.
If yours truly, sitting in his home office with a Mac Pro and a public school MBA, can accurately forecast soaring CPI long before the convenient supply-side disruption pretext came along — then the Fed’s brain trust of MIT grads with supercomputers certainly saw it coming even sooner. How did they respond (besides protecting their own portfolios)?
1. changed their inflation target language to accommodate higher inflation
2. lied about their expectations of it being transitory
3. continued to pour $120 billion per month into fixed income markets
4. manipulated interest rates lower with said injections of QE
5. thereby eliminating price discovery in bond markets, potentially permanently
6. reinflated bubbles in virtually every financial and real asset market
7. reduced housing affordability to 13 year lows
8. enriched the top 10% of Americans by $17.5 trillion
9. subjected the bottom 50% to contracting real discretionary income
The kicker is that they are still pouring $120 billion into the markets every month, even though they have publicly admitted that inflation has “surprised” to the upside and is not transitory. This is in stark contrast to Powell’s assurances that the Fed would use its “tools” to prevent such an occurrence.
Now, I don’t for a minute believe the Fed is an evil cabal bent on ruining the middle class and subjecting the poor to unbearable hardship. I believe they entered into the latest round of QE with the intention of staving off an economic collapse and saving financial markets from crashing even further. They successfully accomplished this.
But, somewhere along the way, probably in June 2020 as SPX fell below its 200-DMA for the second time, the conversation turned to making sure the rally continued. It took almost 10 weeks, but on Nov 4 SPX rose above 3393 for the last time. It hasn’t looked back, bouncing on its 50-DMA over and over until last month when it finally backtested its 100-DMA – registering a meager 5.9% decline.
The Fed has demonstrated the astounding power of its tools: ever-increasing oil prices, currency manipulation, interest rate manipulation, and the periodic crushing of vol. But, it has caused, not moderated, higher inflation.
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Futures nailed our 4424 target overnight. Most will attribute it to Powell’s (completely unsurprising) resolve to support the economy the stock market. But, we know that the algos were spurred into action by VIX’s drop back into the falling channel from Mar 2020 and its dip below its 200-DMA.
Remember, it ain’t over till it’s over. Follow this headfake at your own peril.
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Watching the “market” melt up and bonds barely budge in the face of all-time highs in the monthly and annual PPI print… 
More grist for the Fed’s “transitory” inflation scenario.
Inflation is no longer dominated solely by soaring oil/gas prices. In other words, not transitory.
Will the party end? Not as long as the Fed can control volatility and interest rates – which are, for now at least, ignoring reality. Tomorrow’s another day…
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OPEC+ is expected to increase production by another 400,000 bpd in today’s meeting, another dagger in the heart of the stubborn oil/gas rally. Of course, at this juncture, CL can backtest its SMA200 without even making a lower low. So, perhaps a pullback will finally be allowed.
Given how important rising oil/gas prices have been to equity performance, stocks might just have a hard time digesting a significant pullback.
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If you liked yesterday, today is shaping up as more of the same. But, there are still a few warning signs tugging at the market’s sleeve.
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Futures are continuing their meltup in the pre-market on a 4% bounce in crude oil and the usual overnight slump in VIX.
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The correction is gathering steam, with ES off 40 points earlier this morning before getting a bounce. From a technical standpoint the culprit is VIX, which broke out of the falling channel which has guided stocks higher since March 2020. 
Our downside targets remain unchanged.
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July retail sales fell 1.1% versus -0.3% consensus, reflecting the impact of stimulus payments, Amazon’s Prime Day change, and the general apprehension surrounding the delta variant.
Yesterday’s bad news faded under heavy algo action, with VIX going into meltdown mode…
…the instant SPX reached its SMA10. 
The bears will get another shot today.
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