Futures are struggling after an overnight ramp job driven by VIX’s retreat from its 200-day moving average. Aside from the technicals, we see more and more analysts echoing our view that a rate cut makes little sense at this time.
Our charts indicate three distinct and very concerning tripwires for equity investors which, depending on what the FOMC decides, suggest substantial downside.
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Futures are slightly lower on the last day of a pretty impressive Q3 at +8.7%.
Can the rally keep going in October?
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In a speech that was essentially a mashup of all his other recent speeches, Powell reiterated at Jackson Hole on Friday that the pandemic – not historically dovish monetary policy – caused the recent huge spike in inflation. In fact, the Fed should be congratulated for putting out the inflationary fire that they started.
He did mention by way of a little joke that the Fed’s assessment of inflation being transitory was wrong, but that the Fed had plenty of company. Essentially, no harm, no foul.
Now, the Fed is apparently ready to lower interest rates. This view will ideally be underscored by Friday’s core PCE print. The market expects it and, in fact, needs it. But, anything more than 50 bps could be seen as the Fed panicking and could unravel the current rally as it stumbles merrily along.
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Futures are off moderately after weaker than expected housing data and in anticipation of next week’s Jackson Hole Fedspeak.
ES reached our next upside target a little ahead of schedule, and is now backtesting the purple TL from recent lows.
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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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Markets are at all-time highs as we await the FOMC’s latest decision on interest rates.
Note that we’re going on 21 months of a yield curve inversion, the longest since August 1978 to May 1980. Interestingly, the market was flirting with new, all-time highs back then as well.
Also interesting, that was one of many inversions that was followed by a recession. In fact, every inversion was followed by a recession.
Is there any reason to expect that this time will be different?
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February PPI came in at twice expectations: 0.6% versus 0.3%. In a replay of the CPI print, stocks dipped for a few seconds before resuming their overnight ramp as algos were more focused on VIX dropping through its 50-DMA just in time for OPEX.
VIX did pop above the 50-DMA…for several seconds. It got better.
Indicators such as RSI still remain on edge.
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The last time VIX cratered to below its 50-day moving average in two days, ES popped over 3%. Then, as now, SPX had committed the egregious sin of dipping below its 10-day moving average as it approached important Fibonacci resistance. The difference, now, is that SPX is on the brink of a breakout above that resistance.
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Futures are flat ahead of the open as traders place their bets on Thursday’s PCE print.
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As we stated in yesterday’s update…
…the downside case would be damaged considerably if NVDA were to come out with stellar earnings and outlook that boosted ES back into the rising yellow channel.
NVDA’s stellar earnings and outlook did, in fact, boost NVDA back into its previously broken channel.
The resulting algo spasm, however, boosted ES back to but not into its own broken channel. It has stalled right there on the brink, leaving both bulls and bears scratching their heads.
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