In the process of closing the down gaps from last week the bulls opened their own gap, which if the rally has legs will close itself within a day or so. Gaps deferred tend to create long term obligations, (just repeating what I see in this market since October) Jeff Snider has his own money flow analysis (which is intelligent and informed), and you can see him on twitter. He also sees a change in the underlying around October.
In the here and now the best case for the rally is to drop back and pick up that little gap this AM and move ahead to the upper gap. We have seen that ain’t always the way, but sooner or later we pay. My money flows are not stellar, MFI is below the benchmark, and that could correct with one good day, and aren’t we having one today?
A/D is below the lower trend line, which is dangerous, when the lights flicker on and off, then they go out. OBV still in the downtrend. Nothing to see here folks lets move on. Meanwhile the Fed induced speaking rally continues! They do love their goombah. The relationships here are long term in question, I mean they so much as promised that the old monetary policy was not going to be there going ahead.
This is why the Paul Volcker Redux is so wrong. Volcker’s surge in rates did not cause long term inflation because of the new deficit spending policy. Then in about 94′ there was the famous Bond Massacre, the last stand for the Bond Vigilantes who took rates up hard, but interest rates kept declining for forty years. That was a counter rally in yields, a last hurrah for the bond market, pushed aside by bankrupt fiscal policy, which Republicans have been railing against for forty years, only to pile on more debt while they are in control of spending.
Now we have reached to sublimits of that policy, and perhaps interest rates really should be zero, usury is condemned in the Bible. Maybe this is Bond Massacre II, history as farce. One thing is likely the size of the monetary base will need to shrink and that isn’t consistent with expansionary monetary policy. The largess added to save the economy from Covid was a band aid, and it’s time to rip it off.
Then the Fed started pumping short term rates, but are they really? The Fed controls those low interbank rates but when they start raising them to 3% they are no longer on the same page. Now they are in the bond market, and gosh, here rates are really higher, like we want them. However the masses of money that seek short term (duration) returns can easily overwhelm that market and drive the rates down, through sheer supply and demand.
The Fed has a plan, Reverse Repo which is 2 trillion and counting. You, Joe BBQ put your nestegg in the money market account at XYZ bank and the owner of XYZ looks at all that cash on his balance sheet and the interest he owes them and he says I must do something with this money (commensurate with the risk tolerance which is very low) So here comes the Fed handing me Treasury bills, in exchange for depositors cash, and I can use the interest to pay them.
Remember COLLATERAL is just money extended in time, and what happens when the Fed moves out the curve???
The Fed sets rates (firmly) in order to ensure that they are fighting inflation, which they are not. They are only making the cost of money on Main Street more expensive, which is INFLATIONARY. If this didn’t always work after the Bond Massacre, that is a credit to the creation of a functioning bankrupt system (deficits and debt) and now we are in a REAL economy where that shit doesn’t fly.
This is why the market is rallying today, on the news that the Fed will be quick to pivot on it’s rate hike policy and we will have a recession and interest rates will plunge!! All good for stocks of course. Short answer is Wall St loves the status quo when it benefits them. Certain political malcontents do not like the status quo when it doesn’t benefit them and this is an issue also while their intransigence (against transsexuals) causes intratransitory bleeding into corporate governance. So to get back to the charts.
The gap which opened today should close soon and then we can move higher confidently. There is down gap above us which needs to close in order to continue the larger downtrend. How all this plays out will serve to determine where prices might be heading.
My gut tells me with all the exogenous negative factors that any rally is doomed to fail. An extension of the selling would require long term owners of NYSE stock like say the Swiss National Bank, to actually place their shares on the table, that would show up in the A/D line where the twin money flow trend lines have a confluence in July. The banks are still following the water course way on stock buying, downhill and a hopeful divergence in short term trend money, MFI isn’t looking too likely. The impetus for a lift absent any real improvement in money flows, or a synchronized rise, which would be a false dawn. the resolution involves relief from one or all of the many exogenous problems lurking out there.
My prog is that inflation will continue to rip. The price of crude oil may drop which provides little or no short term relief in gasoline prices. The Fed is making the cost of doing business go up at at the moment when new capacity is needed to fill the supply chain gaps. While inflation forces a recession, bond yields drop, worst of all scenarios.
The only Trump appointee Biden keeps, and it blows up in his face. I moved the pink heart, a failed rally target, over to the right. That might provide some resistance as well. Good trend lines and objectives often come back and asset themselves long after you have given up on them, because in the interim money and sentiment overwhelms the inner logic of the market.