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.
All the bullish factors which have kept stocks aloft the past two sessions are still going at it. Hence, the futures’ snoozefest even as Trump is about to be impeached.The only potential fly in the ointment remains oil and gas, which have reached an important decision point.
It’s not too surprising that there’s been a firm floor under oil and gas prices, given the upcoming Aramco IPO. But, isn’t it funny how CL has popped above its SMA200 every single day this week, even in the wake of dismal inventory data?
Just like it’s funny that ES, which pretty obviously should have given up all its overnight trade data related gains should have given up at least most of them after the Reuters laid a little trade truthiness on us.If it had done so before the close, ES would have put in another bearish-looking daily candle. But, it waited until later in the evening, which allowed ES to leave a bullish candle in its wake. Funny how that happened.VIX is well-known for timely “breakdowns” that last anywhere from a few seconds to a few minutes which remind the algos of the glory which awaits them if they’ll simply buy-buy-buy. Today, like yesterday, it hit at exactly 9:00 AM – about the time futures were trying to decide whether the market should open in the green or the red. Watch for it to happen again if stocks should have the nerve to slip lower.But, the champion of bullish appearances has to be the USDJPY, which has reminded us of its incredible upside potential over the past month, repeatedly pushing above its SMA200 and pumping the Nikkei 12% in the process.Combined with timely soundbites from the White House on the incredible successes being achieved on the trade front, the market can’t be blamed for ramping higher most every day. But, what happens if the narrative changes? What happens if one or more of the factors fueling the machine runs dry?
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.
As a chartist, I’m often struck by how similarly the stock market acts at important tops and bottoms. By “important tops” I’m speaking of those which precede large corrections or even crashes. So, with apologies to Tim Knight’s excellent Slope of Hope…
In 2000, SPX retraced a Fibonacci 88.6% of its initial drop before falling off a cliff. If you were to draw a trend line (TL) between the two tops, it would take on the slope of the yellow line below.The 2007 top was completely different: no big retracement, no place for a trend line with a similar shallow a slope to connect, just a setup for a gag featuring a roadrunner and a coyote.
But, in 2011, we saw the pattern all over again: an 88.6% retracement and a very similar TL.What many didn’t realize at the time was that the TL from 2007 TL was simply making a return appearance.Isn’t it interesting, then, that the slope of the line between the Sep 21, 2018 high and today’s high (and passes through the 88.6% Fib retracement) is exactly the same?The Big Picture…
Is it possible that all the bad economic and earnings news we’ve had these past few months is just…bad news?
Yesterday’s setup for the e-minis looked pretty straightforward: a drop through the 200-day moving average and backtest of the 2.24 Fibonacci extension at 2729. Futures had already dropped through the 200-DMA and were heading south when the dismal retail sales data dropped.
I hedged my bet, redrawing our daily downside target to include the 10-DMA — just a few points below the Fib extension.Fifteen minutes into the session, as ES reached 2730.25, the headlines started dribbling in. Fed Governor Lael Brainard publicly commented that QT should end this year, ahead of schedule. Larry Kudlow commented that there was a glitch in the retail sales data. Mnuchin felt all warm and fuzzy about the trade talks.
Faster than you could say “Plunge Protection Team” ES reversed course and SPX closed the day with a gain. But, the move didn’t feel finished. As I wrote at the end of the day:
ES looks likely to test its SMA200 all over again. But, will it make it on down to the 2.24? Its SMA10 will probably be up to 2728 by tomorrow morning, adding additional support.
I guess the market fairies were listening, because that’s exactly what happened overnight. ES dipped to 2729 right as the SMA10 was arriving on the scene, then spurted 27 points higher — breaking out of the falling white channel in the process.The algos are in full support mode at present, though a few charts suggest a pop and drop is in the cards if VIX doesn’t pull off a game changing plunge.
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Rumbling toward the end zone, the bears ran into the bulls’ best defender: VIX. As ES tagged our channel-line target a day ahead of schedule (and, therefore at a lower price)… …VIX took the opportunity to plunge back below its 200-DMA. Fortunately, we saw it coming a mile away courtesy of DJIA, which signaled the end of the decline with a precisely executed (random walk, my ass) tag of its 200-DMA. As usual, the refs pretend not to notice when the bulls are caught cheating…This sent SPX back above its 2.24 Fib at 2703 just in time for the close. All things considered, it was a successful goal-line stand.
Unfortunately for the bulls, however, VIX couldn’t hold its stance overnight and is back above the 200-DMA as ES tests yesterday’s lows. And, rates are itching to tag our next downside target — a headwind for stocks.
The algos will have their work cut out for them today.
With the overconfident bulls emboldened by the 200-day moving average looming just above, the bears have run a trick play and have the goal line in sight.To be sure, there are half a dozen defenders in between here and a score – starting with 380-lb All-Pro VIX. Its 200-DMA at 16.54 is now resistance, and it has a reputation for cheap shots.Thanks to exhaustive scouting, though, our yield curve model suggests there’s a weakness in the defense that offers bears a clear path to the end zone — if they don’t fumble the ball.
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.
