The Mechanics of This Rally

Last week, both SPX and ES reached Inverted Head & Shoulders targets we established nearly a year ago [see: CIW July 11, 2016.] Not too surprisingly, they topped those targets on Friday, then spent the day defending them. This pattern of slicing through upside resistance and then defending the hell out of it has been a constant over the past several years. But, it’s been ever more blatant since last year’s election.

We’ve covered the whys, wherefores and hows extensively. Consider, for instance, how VIX continues to test all-time lows, constructing arbitrary channels and trend lines which it can then “break down” through at key moments.

Another favorite trick is ramping higher overnight, when futures are easily supported, only to plunge during the session when stocks need a boost. With futures currently off a couple of points, we should see it play out this morning. Another common occurence we’ve examined at length is the use of well-timed rallies in oil and USDJPY. On May 19, I identified a trade opportunity for USDJPY, noting that it was likely to drop from 111.40 to its SMA200 — then at 109.76. It was a nice short with a modest but healthy payoff. All it had to do was continue lower in the red channel shown below.Instead, it constructed a series of bounces and sharp rallies which boosted stocks and, ultimately, enabled it delay the tag until it constituted a higher low. Instead of dropping to 109.76, it waited until the SMA200 had risen to 110.30. When the tag finally occurred, it was at 8pm on a Sunday night.In the time it took to write the above, VIX has “broken down” through TL support, presumably because SPX’s 3.42-pt drop was getting out of hand. Somewhere, someone is calculating how much further it would need to be hammered in order to get stocks back to green.I remember chuckling in 2014 when Bernanke said that rates would never normalize during his lifetime. How could he be so certain? His economic forecasting skills had certainly fared poorly. Apparently, his hubris had emerged unscathed.

JP Morgan now calculates that one-third of the world’s $54 trillion in tradable bonds are currently owned by central banks, confirming what we chartists have observed for years: interest rates are too important to be left to the vagaries of unpredictable investors and traders.

The same can obviously be said for equities. As trading volume continues to drop and passive strategies attract an ever-larger share of assets, entire markets have become more easily manipulated by central banks. The BoJ and SNB buy shares outright. The ECB and Fed intervene indirectly by manipulating the primary inputs to algorithms that drive so much of the daily price action.

I had an interesting chat with a fellow student of the markets yesterday. He posed the question: “is this 1995 or 1999?” I think that’s the most important question investors can be asking themselves right now.

I’ve maintained since March that a June rate hike was problematic. In April, I started incorporating it into our big picture forecasts. And, on May 12 I made it official with the post Bye Bye Rate Hikes. Ten years since the onset of the Great Financial Crisis (and over four years since the S&P 500 recovered enough to make new, all-time highs), markets have never been more dependent on the activities of central bankers.

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