Fed is Behind, But Still Screwing Up

By Tom McClellan

Fed Funds vs. 2-Year T-Note Yield
April 13, 2018

Make me Emperor for a day, and I would compel the FOMC to outsource interest rate policy to the bond market.  Why should we pay 12 experts, most with expensive Ivy League PhD degrees, to do what the bond market can do far more efficiently (and cheaply)?

This week’s chart compares the 2-year T-Note yield to the stated Fed Funds target rate.  The FOMC has actually said that the target rate is 1.5% to 1.75%, so I’m splitting the difference by calling it 1.625%.  What this chart shows is that first, the two interest rates are very strongly correlated over time, which is as one would expect.  But second and more importantly, the 2-year yield knows best what the Fed should do.  And the Fed screws up when it does not listen.

If the FOMC would just set the Fed Funds target to within a quarter point of wherever the 2-year T-Note yield is, we would have fewer and quieter bubbles, and also much less severe economic downturns.  For whatever reason, the FOMC members have not learned this lesson.  None of them, as far as I know, is a subscriber, which is their loss.

Continue reading Fed is Behind, But Still Screwing Up

Fibonacci Reveals the Stock Market’s Next Big Move

By Elliott Wave International

Scientists speculate that Elliott waves are the stock market’s “critical structure”

The stock market’s recent triple-digit swings might have many investors wondering if the path of prices is completely random.

But, as random as prices may appear, EWI’s analysts can assure you that a recognizable Elliott wave pattern is unfolding. In other words, we’ve been here before, and we have a good idea of how it’s going to turn out.

No, the stock market is not random. In fact, Elliott waves are the clearest when volatility is the wildest! You see, volatility is driven by investors’ emotions, and Elliott wave price patterns in market charts are nothing more than a reflection of this investor psychology.

What’s more: investor psychology unfolds in those recognizable and repetitive patterns that I just mentioned, whether on an intraday basis, day-to-day or across longer time frames.

Even independent scientists say so.

Consider this 1996 quotation from “Stock Market Crashes, Precursors and Replicas” in France’s Journal of Physics:

We speculate that the ‘Elliott waves’ . . . could be a signature of an underlying critical structure of the stock market.

EWI founder Robert Prechter put it this way:

Scientific discoveries have established that pattern formation is a fundamental characteristic of complex systems, which include financial markets. Some such systems undergo “punctuated growth,” [or] building fractally into similar patterns of increasing size.

Nature is full of fractals.

Consider branching fractals such as blood vessels or trees: A small tree branch looks like an approximate replica of a big branch, and the big branch looks similar in form to the entire tree.

Now consider that most of nature’s fractals are governed by the Fibonacci sequence. It begins with 0 and 1, and each subsequent number is the sum of the previous two:0,1, 1, 2,3,5,8,13,21,34,55 and so on. The Fibonacci sequence also governs the number of waves that form in the movement of aggregate stock prices.

Take a look at this figure from the Wall Street classic book, Elliott Wave Principle:

Continue reading Fibonacci Reveals the Stock Market’s Next Big Move

Melt-Up Media Morons

By Tim Knight

Since the BTFD crowd and “it’s still a bull market” imbeciles were after me today, I thought this would be appropriate…………..

As we move deeper into the year 2018, and as the market slips lower, I am increasingly confident that the gargantuan bull market that started on March 6 2009 ended on January 26 2018. We all know that no one rings a bell at the top………but I think we’re all starting to hear the ringing anyway.

With that in mind, I decided to take a look backward at the kind of chatter that was going on in mainstream financial media when the market was peaking. What became quickly clear was two “legendary” voices – – Bill Miller and Jeremy Grantham – – took center stage and encouraged people to throw all their money into an equity market that had already gone up over 300%.

Let’s start with the first “legend” – – Bill Miller – – who in January 2018 (that is, the month the market reached its highest peak in human history) notified planet Earth that the market was going to “melt up” by 30%.

billmiller

Below is the chap making this prediction. I dunno, but it seem to me the only thing reliably melting up is his consumption of hamburger sliders. But let’s not get sidetracked.

Continue reading Melt-Up Media Morons

US Stock Market – A Scenario Presents Itself

By NFTRH

Well, a speculated upon ‘M’ rally may or may not be starting today, but NFTRH 494 fleshed out this scenario on the way to completing a comprehensive report across all major markets. I know I am the guy with the confusing indicators that make some peoples’ eyes glaze over, but I am also the guy guiding myself and NFTRH readers with more conventional and accessible (at least I think it’s accessible) charting every step of the way as well.

I bought back a sizeable chunk of QQQ this morning after taking profit on it last week, in large part due to the analysis in #494.

A Scenario Presents Itself

Last week due to the overdone news (media blitz) about the decline of big Tech we allowed for a rally. NDX went down on Monday, made a big rally and then got Trumped on Friday. The same pretty much goes for the rest of the market. I would rather not have the Trade War stimulant in the mix when trying to manage a potential bear phase, but that’s what we’ve got. The volatility, as expected, is intense.

Referring to 2015 we see that SPX aborted that analog several weeks ago as it resumed dropping. VIX resumed its rise unlike in 2015. That 2015 return to complacency fueled the 2nd decline of the larger ‘W’. In the context of similar time periods, the current SPX situation is doing the opposite to 2015, as it has dropped to test the lows amid rising volatility instead of bouncing to test the highs amid declining volatility.

When VIX rebounded into the 25-30 range in early 2016 the 2nd low of the ‘W’ was put in and the correction ended. VIX hit 25 last week and dropped back to 21.49.

Continue reading US Stock Market – A Scenario Presents Itself

Weekly S&P 500 #Chartstorm

By Callum Thomas

Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I’ll pick a couple of themes and hammer them home with the charts, but sometimes it’s just a selection of charts that will add to your perspective and help inform your own view – whether its bearish, bullish, or something else!

The purpose of this note is to add some extra context beyond the 140 characters of Twitter. It’s worth noting that the aim of the #ChartStorm isn’t necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.

So here’s the another S&P 500 #ChartStorm write-up!

1. An Unfortunate Analog: Analog charts are often interesting and always dubious, but there is obviously merit in looking at historical scenarios and drawing parallels and lessons.  In this case the chart, shared by Lance Roberts, and originally featured on Zero Hedge, shows an apparent similarity between today’s market and the 1987 episode. I can’t give an assurance either way on this one, other than saying here it is and make your own mind up.

Bottom line: According to some analysts there are some similarities between now and 1987.

Continue reading Weekly S&P 500 #Chartstorm

Backmasking The DJIA’s Price Pattern

By Tom McClellan

DJIA 2008-18 upside down and backwards
April 05, 2018

The stock market is continuing to display a weird backwards rerun of its own behavior 9 years ago.  I wrote about this here back on Jan. 18, 2018, in a Chart In Focus article titled, “Ending How It Began (Parabolically)?”.  That was just a week before the stock market’s blowoff top.  So it is time for a review of how things have turned out since then.

Just so you understand what this week’s chart is showing, what I have done is taken the black-line plot of the DJIA, and rotated it around the Z-axis (perpendicular to the page) in order to create the red-line plot.  Each one is showing the same thing, it’s just that the red line is upside down and backwards from the black line.  And no, I was not smoking mushrooms when I thought up this comparison.  I just happened to notice that the parabolic shape of the DJIA’s swoop up in late 2017 looked a lot like the parabolic initiation of the new bull market in 2009, but backwards, and that led me to go hunting to see how the overall pattern fits together.

Continue reading Backmasking The DJIA’s Price Pattern

Mega-Reversal

By Tim Knight

Well, that was quite the reversal. My highest profit of the day was pretty much the millisecond that the market opened. It was all downhill from there. A glance at XLB, the Materials ETF, shows that the market is having just a bit of trouble making its mind up.

XLB

The bulls had two big things in their favor. First, on the whole, the lows of 2/9 didn’t get taken out, and second, the market had come down very far, very fast, recently, leading to an oversold state. We aren’t necessarily out of this oversold state yet, since the price gap is still a fair bit north of present price levels.

Continue reading Mega-Reversal

Price Action YTD – What Can We Learn From History?

By Chris Ciovacco

REFERENCE POINTS PROVIDE CONTEXT

““In strategy it is important to see distant things as if they were close and to take a distanced view of close things.”

— Miyamoto Musashi, Legendary Japanese Swordsman

A December 2016 post highlighted similarities between late 2016/early 2017 and the 1994-1995 period.  The analogy proved useful in 2017 with stocks posting a rare low-volatility year that featured a strong bullish trend, which compared very favorably with the strong-gains/low-volatility year of 1995.

EASIER MARKETS AND HARDER MARKETS

Since we know easier markets are typically followed by harder markets, it is not particularly surprising 1996 was not as easy as 1995.  Nor is it particularly surprising 2018 has been harder than 2017.  Price action in 1996 featured several bullet points investors in 2018 should easily identify with:

  • 1996 started with a gain of 10.58%
  • Stocks then dropped 11.04% and went into negative territory YTD
  • The S&P 500 dropped below an upward-sloping 200-day moving average.
short-takes-1996-correction-stock-market-1.png

Continue reading Price Action YTD – What Can We Learn From History?

That’s the Breaks

By Tim Knight

The shift from bullish to bearish since January 26th has been delightfully insidious. [Monday’s] market action created some more progress for the bears, although the breaks of February 9th lows were not across the board. Indeed, looking at some of the big indexes, you can see that we’re getting to the point of “challenging” those important lows, but not yet piercing them:

slopechart_$SPX

Continue reading That’s the Breaks

CBI To Remain At 0. No Edge Apparent Despite Potential 50-Day Low Close.

By Rob Hanna

The Quantifiable Edges Capitulative Breadth Indicator (CBI) is a tool I have spoken about quite a bit lately, since we have seen a few recent spikes in the CBI. In the Quantifiable Edges CBI Research Paper I published last month (download information here) I examined the CBI a multitude of ways. Below is an excerpt from a section of the paper where I looked at 50-day lows and different CBI levels.

By combining CBI readings with a market that is hitting new lows, the results are often even more interesting. Let’s consider some studies that examine how the market has performed after hitting new lows, and break down those returns by CBI readings. The first one looks at performance following 50-day low closes when the CBI is 0.

2018-04-02

Continue reading CBI To Remain At 0. No Edge Apparent Despite Potential 50-Day Low Close.

The S&P’s 200-DMA: Why It Ain’t No Maginot Line

By David Stockman

For the last five years the S&P 500 has been dancing up its ascending 200-day moving average (200-DMA), bouncing higher repeatedly whenever the dip-buyers did their thing. Only twice did the index actually break below this seeming Maginot Line: In August 2015, after the China stock crash, and in February 2016, when the shale patch/energy sector hit the wall.

As is evident below, since the frenzied peak of 2873 on January 26, the index has fallen hard twice—on February 8 (2581) and March 23 (2588). Self-evidently, both times the momo traders and robo-machines came roaring back with a stick-save which was smack upon the 200-DMA.

But here’s the thing. The blue line below ain’t no Maginot Line; it’s just the place where the Pavlovian dogs of Bubble Finance have “marked” the charts. And something is starting to smell.

Continue reading The S&P’s 200-DMA: Why It Ain’t No Maginot Line