March durable goods orders disappointed this morning, coming in at 0.5% versus the 2.3% rebound expected after February’s -1.2% flop.
We couldn’t help wonder whether the data were somehow related to the first (tiny) breakdown in RBOB prices since the Mar 23 lows.
Given that oil and gas are poised to deliver a huge increase in CPI for April, this might be a good time to review where we are and where we’re headed.
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With various indices reaching or nearing important overhead resistance, today is shaping up as a moment of truth for a market which has delighted in head fakes.
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Despite a few tense moments midday, ES held the TL of support from last Wednesday and has rebounded to within 7.50 points of the important Fibonacci extension and channel top at 4153.62.
Will the substantial overhead resistance at these levels matter this time? We’ll know very, very soon.
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I received several nearly identical emails yesterday asking whether SPX’s tag of its channel top meant a downturn was imminent. The problem lies with the word “imminent.”
We can certainly make a cogent argument that the market is in a bubble: a car company with a market cap of $1.25 million per car sold; more SPACs going public in Q1 of 2021 than in all of 2020 (hundreds of which have yet to buy anything); meme stocks whose PEs would be in the hundreds if they had any earnings; pictures of sneakers selling for $10,000. The list goes on…
Yet at the end of the day, there’s still so much money sloshing around that dips have not only been few and far between but are very aggressively bought. Those tasked with investing said trillions have settled for relative value rather than value. And bears have been laughed out of the game altogether – easily overpowered by algorithms and the innumerable strategies which key off them.
We posted this chart on March 23 [see: Fedsplaining] after SPX had been rejected by its 3.618 Fibonacci extension at 3956, noting that anyone (a central bank for instance) wanting to push stocks above that resistance need only to ensure that VIX breaks down below that falling white trend line.
We examined the same phenomenon back in early 2019 in the wake of the Dec 2018 PPT action [see: The Plunge the PPT is Really Protecting] and countless other times.
It should come as no surprise that VIX did break down and SPX did, indeed, rise above 3956. Like all the other breakdowns, this one has the potential to keep the party going long past curfew.
So…another one of those lovely situations where numerous chart and technical patterns suggest a significant selloff just ahead — but, algos are standing in the way. Which will win out?
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I know what you’re thinking: it’s “don’t fight the Fed.” While that’s generally true, too, the Bank of Japan is the central bank which most conspicuously wears its balance sheet on its sleeve. When my charts are a farrago of bearish indicators, but the Nikkei pushes up through resistance? I’ve learned to ignore the indicators and become bullish.
Conversely, when the narrative is incredibly bullish but the NKD slips below important support, it’s time to short. For those who haven’t been paying attention, that’s where we are right now.
We’ve had a few hints over the past week or so, but the NKD suggests there’s more to come.
US stocks just haven’t gotten the message yet.
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Algos took their Sunday night ramp and ran with it yesterday. Unlike last week’s breakout, ES was careful this time to break out of and backtest the falling red channel – thanks largely to a 26% plunge in VIX.
While all the attention is on stocks, we should note that currencies continue to play an important role in supporting them. Notably, USDJPY reached our next upside target and EURUSD is nearing our next downside target.
Today, we’ll take a look at next steps.
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Jerome Powell gave a good news/bad news speech to the Economic Club of New York. He noted that employment is still 10 million below February 2020 levels and that a broader range of unemployment would put the current rate at 10%, adding, “We are still very far from a strong labor market whose benefits are broadly shared.”
As the algos were spinning up their sell orders, he delivered the good news upon which the market relies: “Achieving and sustaining maximum employment will require more than supportive monetary policy.” He added that it could take “many years” to overcome the effects of long-term unemployment and scoffed at the idea of problematic inflation.
From my vantage point, he’s right and he’s wrong. The strong earnings and cheerleading from pandemic lockdown beneficiaries have drowned out the wails from the pandemic’s have-nots: those who find that even a $1,400 stimulus check won’t pay the rent, the millions of small businesses and self-employed who couldn’t qualify for PPP loans, the millions for whom unemployment benefits are unobtainable or inadequate.
But, make no mistake about inflation. Yesterday’s CPI data reiterates our long-held conviction that, although official core inflation is mild, actual inflation is much higher. Even the understated official CPI will soon soar to levels not seen since before the pandemic (when 10Y yields topped 2%) unless the manufactured rebound in oil and gas prices unwinds posthaste.
The morning after, futures have regained most of their losses and are again knocking on the door of the 1.272 Fibonacci extension…
…thanks primarily to yet another VIX “breakdown” from its rising channel which, as we discussed yesterday, has produced another bearish (bullish for stocks) 10/20 SMA cross.
Will it be enough to offset the cold water with which Powell just drenched the reinflation trade?
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Lots of calls and emails yesterday from folks wondering how the hell the market could be up so strongly in the face of the violent unrest in D.C.
When the capitol was breached, shortly after 2pm, the S&P 500 was already up 55 points on the day. This came on the heels of a sharp 22-point plunge on the open. Altogether, the S&P 500 rallied 78 points from the daily lows before finally topping out.
We know why this happened. As is so often the case, the algos were directed to erase any signs of dissatisfaction with the events of the day: an abysmal ADP employment reading, FOMC minutes, a brewing constitutional crisis, etc.
Note the slight breakdown of the futures around the time ADP employment (-123K vs prior month +304K and +120K consensus) was released at 8:15. Now, see if you can tell when Fed minutes, which the Fed obviously knew reflected a less than rosy assessment of the economy, were released.
I’ve marked it in case it’s not obvious. Note that it didn’t stop until ES had made a new all-time high (by 1.5 points at 2:15.)
Now, here’s what happened to VIX as the market opened and the day progressed. The breakdown of a falling red channel and the 10-day moving average are pretty common and effective algo signals. I’ve marked the release of the Fed minutes with a yellow arrow. As fate would have it
Sure, there’s too much liquidity in the markets thanks to central banks’ obvious agenda to prop up stocks. But, the cash on the sidelines we always hear so much about didn’t suddenly materialize yesterday at 9:30.
Let’s be honest about what’s really moving markets like this: the systematic and deliberate crushing of volatility which, in turn, signals the machines to buy anything that isn’t nailed down. It happens over and over – and especially when the market’s protectors fear a potential downturn.
As I wrote yesterday…
Either this is the start of a chart-busting rally, or things are about to get very ugly right as ES’ 50-day SMA has reached its Dec 21 lows.
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Maybe Warren Buffett can get through to Congress. In a CNBC interview aired this morning:
“It’s so important that small businesses, which have become collateral damage in a war that our country needed to fight, but we, in effect, voluntarily had an induced shut down of parts of the economy, and it hit many types of small businesses very, very hard… We made some provision for that in March in terms of the CARES Act, but then nobody really knew how long this self-inflicted recession would last with this particular effect on small businesses, so we need another injection to complete the job.”
Congress, the Treasury and the Fed have done a terrific job of “saving” corporations that already had access to plenty of cheap capital and whose stock prices could then vouch for the strong recovery from the pandemic. The rest of the economy? Not so much.
For all the independent restaurants, mom and pop stores, non-big box retailers, things are dismal. And, to all the unemployed folks barely hanging on to their house or their apartment, it will get much worse if Congress doesn’t act in the next few days to prevent them from being evicted during the depths of winter in the midst of a pandemic.
Naturally, futures are up 25 points.
According to VIX, it probably won’t last.
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One of my favorite market indicators is our yield curve model. It has warned us several times in advance of significant correctionsthis year.
Warnings over the past few years have included:
July 16, 2018: The Yield Curve Update – We were a little early. SPX closed at 2798 that day, rose to 2940 before crashing 20% by Dec 26. The final 13% was signaled on Dec 5: The Yield Curve’s Warning.]
April 25, 2019: The Yield Curve Model Warns Again – SPX gained 21 points over the next four sessions before quickly shedding 226 points.
February 20, 2020: Buckle Up – SPX (which had topped out the day before) crashed by over 35% over the next month.
August 25, 2020: Update on AAPL – We were about a week early, but the model signaled a correction which saw SPX fall 11%, followed by another 9% the next month.
The recent breakout of the 2s10s is clearly a bearish signal – though it hasn’t yet paid off. Is the model still working? 
First, a little history. Among other things, the model holds that breakouts above significant resistance are bearish for equities.
If we plot the 2Y and 10Y together, we can see that significant sell-offs in stocks were marked by more rapid declines in 2Y yields than in 10Y yields (i.e., a widening of the spread between the two.)
The shaded areas below illustrate the period during which stocks experienced their most significant corrections between 2000-2013. Though the 2Y and 10Y both declined during these periods, the 2Y yields clearly fell faster.
But, as we saw in 2015-2016 and again in late 2019, not all corrections involved a steepening. These selloffs occurred without the yield curve model signal being triggered. 
Did the model stop working? Hardly. The decline earlier this year was a stark reminder of its predictive power. 
What made these corrections different? More importantly, what is the model signaling now, and how likely is it to play out?
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