VIX Rules

VIX continues to rule the roost. Friday’s plunge below the 200-DMA was all the algos needed to justify breakouts in multiple indices. The rallies in USDJPY and oil were icing on the cake. At what point can we assume stocks will take a breather, or more?

continued for members…

At this point, we are in wait and see mode as VIX is close enough to its SMA200 to make an equity-saving move quite easily.

Remember, it also has two additional cards to play: the drops through the yellow TL and to or below the .886 at 19.86.

If we shift ES’ rising white channel slightly, we can see that it is at the top of the channel and nearing the intersection of the .886 retrace of the Feb-Mar drop.Of course, the rising red channel is still intact, implying much higher values in the weeks ahead. So, which is right?

Note that the yellow TL from 2018-2019 has been topped. A peek at the SPX chart shows that the white channel has already broken out to the upside, and that its yellow TL from 2018-2019 has also been topped. As we discussed last week, the 2s10s is on the brink of a breakout – but it hasn’t happened yet. The 2Y has been inching higher to keep pace with the 10Y. This has taken the 2s10s almost to its March highs – with a breakout within reach. Another view…

Fundamental analysts maintain that yields are on the rise due to confidence in a resurging economy. The flip side of that argument is that if the economy reopens and activity increases, oil and gas prices will also continue to rise and inflation will rebound.

EIA posted 1.769 per gallon for May, which means that the 2+ per gallon registering for June will put the MoM increase at about 13% (vs a YoY delta of -30% or so.)

IMO, this is significant enough to raise the spectre of stagflation unless oil and gas reverse at or near our upside targets. CL reached 44.04 overnight, just shy of out 41.05 gap target.

While, RB reached 1.2444, essentially tagging our 1.245 horizontal target from Dec 2018.

If CL is taken off the chess board for driving the algos higher, what about USDJPY? Below 1.0922, it will have retreated from the red channel top as it did in Feb and March.

There’s even a certain logic to it, as NKD has already reached its .886 and a channel midline.If USDJPY contributes to dollar weakness, what about EURUSD? It seems unlikely to continue rising, as it has poked back above the same channel line that failed to hold a breakout in March.

I believe the next leg will be lower, which would correspond with a strengthening of DXY – even if USDJPY drops as expected. TNX has reacted positively, just like we saw last Fall when it traced out a pennant pattern between Sep 3 and Jan 16. If this one lasted as long, we’d be looking at late July — well past the June OPEX and Q2 target dates.With a Fed meeting tomorrow and Wednesday, the field is wide open. Surely, the FOMC is satisfied that the markets ramped high enough after their March intervention. Might they respond to the widespread criticism that they intervened too much?

Rates must stay low, now more than ever with debt rising precipitously and many businesses – not to mention cities, counties and states – staring insolvency in the face. Raising rates is not an option. But, I don’t really see them offering any substantial additional accommodation, either.

I believe if rates crater as my charts indicate, it will be due to a resurgence of the coronavirus and market turmoil. But, such events aren’t terribly likely to present themselves in the next week or two — again, OPEX and Q2 results being the overriding factors. If SPX/ES jump up to their .886s, then we’ll reevaluate.

No guarantees though, right? As the end of Q2 2015 approached, SPX dumped the equivalent of 65 points to backtest the SMA200 (the white arrow is Jun 30.) At the end of Q4, though, it managed to hold up pretty well until year-end (yellow arrow.)It almost feels silly to compare the two periods, as the Fed has obviously much more skin in the game at this point. More later.

UPDATE: 3:45 PM

Well, this is kinda embarrassing. Though ES/SPX are up about 1%, VIX is up over 5%, CL is down -3.5% and USDJPY is down 1.1%. The algos don’t even care that all the signals are bearish.