In a repeat of the most effective algo move of the past 10+ years, VIX broke down following the Fed’s no-news rate decision and press conference yesterday.
As always, this allowed equities to leapfrog an area of stubborn overhead resistance. 
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Blink, and you might have missed the selloff this morning when nonfarm payrolls came in much higher than expected but the January print was revised sharply lower.
Fortunately, the algos were on it, immediately crashing VIX to a point where a 15-pt decline in ES turned into a 15-pt gain.
This should put SPX at its 1.272 Fib extension, a potentially important level of overhead resistance ahead of next week’s CPI and PPI prints.
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Futures are off moderately as concerns mount over hostilities in the Middle East.
Fed Governor Christopher Waller will speak at the Brookings Institution at 11am ET. The event can be seen online HERE.
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We finally saw the backtest we’ve been expecting as SPX fell a whopping 70 points (-1.47%), almost reaching its 10-day moving average and bleeding off its overbought condition.
ES came within a few points of our Fibonacci backtest, also coming up just short of its 10-DMA.
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Futures are essentially flat ahead of tomorrow’s important CPI print.
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If the enemy of my enemy is my friend, is the friend of my enemy my enemy? The relationship between the US and the Saudis has been through plenty of ups and downs, but it’s been years since it was as fraught as it is now.
The West is trying to put the screws to Russia, which in turn is trying to put the screws to the eurozone by enlisting the help of the Saudis, who are arguably US allies… Around and around it goes, with a decision due out later today that might spell a 2MM bpd (about 2%) cut in production.
Will it be enough to revive the correlation between oil/gas prices and interest rates? ES is positioned to at least backtest its SMA10.
Stay tuned.
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When COMP bounced at 10,572.33 on Friday, a mere 7.19 above its June 16 lows, it might have struck some as a coincidence. It wasn’t.
It was a well-coordinated effort to ensure that new lows were avoided – at least for the time being.
The usual culprit: VIX. For the 6th session in a row and the 12th time since Jan 24, 2022, VIX tested and retreated from the same trend line – an occurrence the algos have been well trained to respond to with a bounce. 
The June 13 test went further, producing a huge bounce because it also broke below two significant trend lines of support as well as producing a bearish (bullish for stocks) alignment in moving averages.
Yesterday’s huge plunge in VIX similarly wreaked havoc with moving averages – postponing (at least) an imminent 50/200 cross. Will this short squeeze rally follow the same playbook?
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Stocks rarely drop over a 3-day weekend. This one was no exception. The miniscule decline we saw in the futures last night has been all but erased despite a conciliatory 5% bump in VIX to backtest its SMA10. No fuss, no muss.
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Once upon a time, a few boys whose families owned the biggest lemon groves in town got together and opened up a lemonade stand. It was a very hot summer, so they sold an enormous amount of ice-cold lemonade. Since they controlled the supply of lemons, they were able to quickly raise prices from 10 cents per glass to as much as $1.50. Their customers didn’t mind as they could afford 1.50, it was excellent lemonade, and there were no alternatives. They like it so much, in fact, they invested $2 trillion in shares of the stand.
One day a freak storm hit town, and the temperature dropped from 95 to 25 degrees in a matter of hours. The weatherman said it could last for months. Not many people were interested in ice-cold lemonade, even though the boys frantically dropped their prices. They even tried cutting back on the amount of lemonade they made. For some reason, this had no effect on sales, and prices continued to drop. A few boys split away from the group and tried selling cheaper lemonade on their own, but this further depressed prices. Soon, the lemonade stand went out of business. The end.
And that, boys and girls, is how OPEC came to be in their current predicament.
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It’s interesting how Khashoggi’s murder top-ticked oil and gas prices…
…and, so soon after Trump’s latest demand that OPEC lower oil prices.
I’m certainly not insinuating that Trump had anything to do with Khashoggi’s murder.
But, OPEC ignored Trump’s Sep 20 demand. Two weeks later, oil prices had spiked 10% higher. Since Oct 3, the day of the murder, WTI has fallen 14.5% and RBOB has fallen 16.7%.
As Churchill famously said, “never let a good crisis go to waste.”
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Sometimes it’s quite difficult to anticipate a major market move. You’ve got hundreds of companies, all with their own earnings, outlooks, and market-moving headlines. Then, there’s the economic news of the day, both domestic and foreign. And, of course, there are geopolitical developments such as who’s dismembering or cozying up to whom?
And, sometimes it’s not so difficult at all. It can be as simple as the VIX chart we’ve discussed all week. From Time to Panic on Tuesday:
Note that VIX need only break the purple TL [for SPX to bounce.] If VIX doesn’t break down, this should be the end of the line for this bounce.
It didn’t bounce. SPX plunged. Next?
Or it can be slightly more complex, but still fairly straightforward — such as is the case with oil and gas.
As we all know, central bank support (low interest rates, among other accommodations) has been critical to stock prices since 2009. Low interest rates, of course, rely on low inflation. And, low inflation relies to a great extent on low oil and gas prices (more accurately, low MoM and YoY increases in those prices.
From last April in Oil & Gas, Inflation and Interest Rates: A Delicate Balance or Goal Seeking?
The complicating factor, of course, is that oil and gas prices took over the job of stimulating algos (chief among the 90% of all trading activity which is conducted by machines) to drive stocks higher.
Most recently, oil, gas and SPX all bottomed on Feb 11, 2016 and oil and gas prices played an integral role in stimulating the subsequent rally. The most important nudge was in December 2017, when oil and gas prices broke out of an already rising channel.
To chartists, and to algos, this is a very bullish maneuver. It also has the effect of driving inflation and interest rates higher. CPI rose from 2.11% in December 2017 to 2.95 in July 2018. The 10Y rose from 2.31% in December to 3.24% just a few weeks ago.
The Fed told us they were okay with this, that they were going to let the economy and inflation “run hot.” I was among the many doubters, citing the damage that higher rates would inflict on our already alarming budget deficit, but darned if they didn’t do it anyway. 
I suppose that, at the end of the day, a temporary increase in the rate at which the debt and interest expense are expanding was less important than having a higher perch from which to crash rates during the next GFC.
Stocks ignored the implications for a while, happy to play follow the leader with oil and gas prices. The day that RBOB popped out of the rising purple channel was the day that SPX popped above its 2.24 Fibonacci extension at 2703 – a level which might otherwise have provided serious overhead resistance. It can be seen as the horizontal, purple trend line on the chart below. 
In early February, though, RBOB’s breakout faltered. No surprise, but SPX followed along, suffering its biggest and sharpest decline in years. Like magic, RB quickly popped back above the purple channel top – rescuing SPX and helping it back above 2703.
Note that SPX went on to new all-time highs in September, only after RB backtested the purple channel and bounced higher.
And this lovely little correction we’re enjoying? SPX topped the day that RB failed to break out of the falling yellow channel (also the day of Khashoggi’s murder.) SPX fell through its 200-day moving average on the day that RB plunged back below the purple channel top. And, SPX plunged below 2703 on the day that RB fell out of the falling yellow channel.
With the elections less than two weeks away, I’m not expecting a sharp rebound in oil and gas prices any time soon. So, the algos will have to rely on other tools — such as VIX, which has now shed 12.5% since tagged our 26 target yesterday.
So far, VIX’s decline has produced a pretty nifty bounce. Is it enough to offset weakness in oil and gas and a hawkish Fed which has been browbeaten by a “low-interest rate president?”
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