Last night, CL dipped to within 0.41 and RB within 0.187 of our next downside targets. As members know, these are critical support levels. A breakdown would be devastating to oil and gas and present stocks with very strong headwinds.Futures, now at 3260, are headed straight for our next downside target at 3200.Yes, the coronavirus is potentially a very big deal. But, this decline in oil and gas was baked into the markets over a year ago and is a strong endorsement for our inflation model.
Not too surprisingly, the Iran problem didn’t go away over the weekend. If anything, both sides are making threats that would significantly expand the conflict. What’s more, Trump’s unilateral actions have resulted in Iraq’s parliament calling for all US troops to withdraw from Iraq – without question an important win for Iran.
Trump’s 2011 predictions of a politically-motivated attack on Iran by Obama (which obviously never came to pass) are causing many to question the timing and motivation of his own actions, not to mention the existence of a coherent Middle East strategy.
So far, equities’ reaction has been contained. Though, gold and bonds are providing a less filtered reaction to the escalating risks. Gold popped up to tag our next upside target… …and, 10Y notes broke out.Past Trump-related emergencies (trade war, impeachment, etc.) have been easily downplayed or explained away. I can’t imagine that Trump or his sycophants will be able to spin this latest series of missteps as unimportant.
WTI futures spiked nearly 5% overnight in the wake of a US drone strike on Baghdad Airport which killed Iranian military commander Qasem Soleimani. It is a dangerous escalation in the US conflict with Iran which broadened when Trump alarmed US allies by pulling out of the Iran nuclear deal last May.
We argued at the time, as did many, that Trump’s actions put the US on the path to a potential shooting war. The assassination of Soleimani clearly amplifies the risks. So far, oil prices have pushed only slightly above the levels reached after the nuclear deal pullout and the Saudi Aramco plant was attacked in September. But, this is obviously a more serious geopolitical development. From an economic standpoint, a sharp rise in the price of oil further complicates the already thorny inflation problem facing markets – setting up a showdown between Fed hawks and doves in January.
Today is the 5th session since ES tagged our 3076 target. Four times it has bounced off the bottom of a very orderly, sharply rising channel — which is just what the doctor ordered. Will today be the fifth?
Today is off to an interesting start. Following Trump’s call for negative interest rates and more grandstanding on China in New York yesterday, headline CPI came in hotter than expected but right in line with our forecast. As we’ve discussed, this is the result of oil and gas trending sideways in support of the upcoming Aramco IPO.
On top of all that, the impeachment hearings get underway at 10AM and Powell testifies before Congress beginning at 11AM. EIA inventories are delayed until tomorrow due to the holiday.
It was enough to knock ES down by about 17 points where it finally reconnected with its SMA10 on the 8th session in a row during which it tagged its 2.618 Fibonacci extension.
Housing starts and permits both fell, with starts missing expectations by a mile. Philadelphia Fed index also fell and saw a big miss. Capacity utilization and industrial output both missed and fell. So, naturally, the OPEX-obsessed S&P 500 futures are up 10 points.
If things seem a little upside down at this point, know that this will pass very soon. If only Grandpa Kudlow’s diatribe would…
In The Matrix, Morpheus presents Neo with a choice between a red pill and a blue pill and explains:
You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes.
Neo chooses the red pill, of course, and suddenly realizes that the world he has known as reality is a virtual reality construct used to pacify humans who serve as organic batteries (for the machines which are really in charge.)
They’re doing what!?
I couldn’t help thinking about Neo’s awakening yesterday as I witnessed Kelly Evans, one of CNBC’s more intelligent hosts, come to grips with the market’s reality: it’s a construct used to pacify investors who might otherwise question its inexplicable moves.
Ms. Evans was clearly shocked at the market’s sudden reversal after plunging in the wake of very disappointing PMI data. She seemed bewildered by the apparent machination:
The president seems to be watching this very closely and to be kind of intentionally — look, I’m just going to call it as I see it — be intentionally coming out with a positive headline every time the market slides the way it did.
Even tomorrow’s jobs report, if it’s terrible, should we expect then some further reports about some trade breakthrough with China? …Is it as simple as the data was terrible and then the president came out and had some positive commentary on China and that was all people needed to hear?
The timeline of events illustrates just how ridiculous Kelly’s suspicions regarding Trump’s intentional intervention are.
10:00am – ISM non-manufacturing PMI released and disappoints
10:01am – SPX plunges 22 points in the first minute
10:07am – SPX registers a 1% loss on the day
10:08am – SPX off 1.09% when everything reverses, heads higher on the day
10:35am – Trump stops for some “chopper talk,” briefly mentions upcoming China talks
By 10:35am, as Trump suggested to incredulous reporters that China should also investigate Biden, SPX had already rallied 25 points. Trump’s comments came 27 minutes after the 10:08 reversal.
It wasn’t ridiculous that Trump would try and prop up the market with another spurious China remark. He does it all the time.
What’s ridiculous is that the market was so easily “rescued” by manipulating the algos into buying everything in sight. I wrote last week [see: The Big Picture] how spikes in oil, gas and USDJPY and especially breakdowns in VIX cause stocks to rally on demand by sending powerful signals to algorithms which are programmed to notice such things (e.g. volatility is plunging, must be time to buy!)
Maybe it was the BoJ. Maybe it was the ECB. Maybe it was the Fed. Remember what Fed Governor Robert Heller argued in a WSJ article in the wake of the 1987 crash, suggesting that the Fed not only had the ability to prop up stocks but should not hesitate to do so.
But wouldn’t it be more efficient and effective to supply such support to the stock market directly? Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole.
Maybe it was a major bank, brokerage firm or hedge fund caught on the wrong side of a huge trade and just wanted to postpone the plunge until after all those put options expire today.
It doesn’t really matter. What matters is that it has become this easy to force the market to turn on a dime. Sometimes I involuntarily wink when saying the word “market.”
Did I mention that everything reversed precisely at 10:08? See if you can spot the pattern.
SPX
ES
CL
RB
NKD
USDJPY
TNX
The lead factor, in my opinion, was VIX which spiked 7.5% in the minutes following the ISM report. It topped out at exactly 10:08 at 21.44 — only slightly lower than Wednesday’s highs — and was then relentlessly crushed. It made seven successive lower lows in the process of shedding 11.2% by the end of the session.
Ordinarily, VIX alone would be enough to stave off a significant drop. In this case, though, everything else reversed at exactly the same time — seconds after SPX had registered a 1% loss.
A fluke, you ask? If you’re wondering why futures are higher after this morning’s lackluster jobs report, check out VIX’s latest “breakdown.”
BTW, don’t bother looking for Kelly’s segment online. I’ve checked, and it’s buried somewhere deep and dark. Welcome to the Rabbit Hole, Kelly.
Things are playing out as expected, with ES coming within 5 points of our next downside target (the SMA200) overnight.
The chart receiving the most attention is the 10Y, which broke below 22.94 and is on its way to our 21.72 target.The one which should be receiving the most attention is SPX, which closed below its H&S Pattern neckline — adding credence to our lower targets.Though it seems like more, 2776 will represent a 5.5% drop since our short signal at 2940 on Apr 30 [see: FOMC – Endgame.] Things will get really exciting if/when SPX fails to bounce.
It’s now been five days since futures bounced out of the falling white channel. It still seems fairly likely it was just a delaying tactic, as various currency pairs, commodities and indices are sliding toward our next targets.
As members know, these are critical support levels. A breakdown would be devastating to oil and gas and present stocks with very strong headwinds.
Futures, now at 3260, are headed straight for our next downside target at 3200.
Yes, the coronavirus is potentially a very big deal. But, this decline in oil and gas was baked into the markets over a year ago and is a strong endorsement for our inflation model.
