Thursday, December 10, 2015

Rate hikes will be market-bullish events

At the moment, the strength of the $USD correlates very strongly to equities.  When King Dollar is torpedoed like it was yesterday, stocks plummet.

So does this mean that a rate hike next week will be tremendously bullish for stocks?

The argument runs like so:
  1. Fed tightening will shoot the $USD through the roof
  2. Beaten-down currencies like the JPY will crumble again with respect to the Dollar
  3. The Yen carry trade and everyone riding on it will launch equities to new highs
When the market falls off its highs in January, the Fed can then rally equities by ... adding another 25 bps.

And so on, until the correlation shifts again between USDJPY and equities. 

SPX highs into EOY 2015

This of course begs the question -- is the Dollar actually on the brink of collapsing today, with the Fed now forced to defend it with a series of rate hikes?

The conventional wisdom of "one and done" or "no hikes at all, ever", may be completely wrong.

2016 may be about the Fed scrambling to regain control of the monster they have created, where the market bounces at each FOMC (against the overall decline) because they continue to tighten.  Between hikes the market sells off again with increased severity as the market comes to grips with what is happening.

The Fed hand may be forced.

The new game may be for each nation to export deflation to the rest of the world.

86 comments:

Christian Gustafson said...

First!

Hey, you guys be nice to each other, please.

I'm really glad to see Bicycle is back on his charting game.

Bicycle said...

;-)

bank deposits

bucky come home...

Christian Gustafson said...

YAY! TEH ZERO HEDGE!

Thanks, Tylers! Love you long time!

Josh Havekost said...

I appreciate your clear article. If we assume rate hikes are bullish for equities- do we assume bearish for precious metals? Second scenario- we accept the argument but the FED chooses not to raise rates- do we assume bearish USD, and bullish PM's?

ChartWord said...

nice observation re: recent dollar - stocks correlation

also thanks for linking to chartist friend from pittsburgh,
but that site got too wild so i made that blog private and created www.chartword.com

keep up the great work, bro
let me know when you join twitter!

scott said...

2029 isn't going to hold...again this market has changed to the realization that
a rising market is by nature illiquid. Especially in a debt system not based on equity. The "I bought what with the milk money" moment is here.

http://stockcharts.com/h-sc/ui?s=%24NYUD&p=D&st=2015-08-18&en=today&id=p02991938082&a=367854604

lower keltner on this chart is at about 1960. That is the minimum decline in the short term.

scott said...

http://stockcharts.com/h-sc/ui?s=%24NYA&p=D&st=2015-07-17&en=today&id=p63553275947&a=427965546

diamond pattern assures a 5% initial decline here.

since there has been divergence between the broader and headline indexes my guess is that this is catch up time and though 1960 is the indicated bounce area we are more likely going to or below October lows.

scott said...

http://stockcharts.com/h-sc/ui?s=%24VIX&p=D&st=2015-10-01&en=2015-12-11&id=p55923231325&a=428878359

keep ignoring this at your peril?

Christian Gustafson said...

UVXY maxed out around +11% this morning, hitting its own upper Bollinger. There is no fear.

Current bullish wedge looks like it reaches the 2017 SPX level into Wednesday FOMC. I plan to buy that with Q4 calls on the SPY.

scott said...

no fear?

http://stockcharts.com/h-sc/ui?s=HYG%3ATLT&p=W&st=2015-03-27&en=today&id=p33983419854&a=424134683

Christian Gustafson said...

UVXY looks positively calm, with its upper daily BB at 35 and flat.

I may buy it on New Year's Eve, though. I think January 2016 is our first real swoon, Scott.

And January sets the tone for the entire year, so we've got that going for us, which is nice.

scott said...

seasonality, sentiment, and "tone" will be meaningless going forward. As will EW. lol

again VIX and especially UVXY may or may not reflect the underlying concerns until the doors are over crowded and the fire is nipping all the ass cheeks of the dippers...

HYG and JNK are clearly showing the truth.

just curious how you will adjust your count and your targets when 2029 fails and the falling wedge is negated (which I think it already was this morning).

Bicycle said...

MZM

Hugh Jazole said...

Just took a small nibble on USO. Feel free to point and laugh.

scott said...

it is outside possible that 1953 is the bumper for price today

Christian Gustafson said...

Clearly it's going to take a FFR hike of 25 bps to dig us out of this hole.

scott said...

How you love the CB bedtime stories! Yellen's fairytales.

scott said...

massive hs ready to rumble

http://stockcharts.com/h-sc/ui?s=%24NYA&p=W&st=2012-11-22&en=today&id=p85364767891&a=429428877

Hugh Jazole said...

"UVXY looks positively calm, with its upper daily BB at 35 and flat. I may buy it on New Year's Eve, though" Yeah, a Santa rally might be baked in at this point. New Years is usually a great time for bearish bets into year end rallies.

scott said...

Hugh, UVXY jump to over 23 after CG posted that! Santa is buried with Jimmy Hoffa at this point in an undisclosed location...somewhere outside of Vegas!

Definitely break 2k before the close - flash crash to 1953???

Hugh Jazole said...

It's ugly here in the short term for sure, hard to say where we bottom. Losing 2000 seems like a lock.

Bicycle said...

The Triangles of the Effective Federal Funds Rate

"It's different this time"™

scott said...

whatever triangles there were are broken

the memo is circulating

here is a guy that gets it:

http://www.safehaven.com/article/39842/the-great-train-wreck-of-2016

Christian Gustafson said...

Oh you don't have to convince me to be bearish, Scott.

I just think that a rate hike this week will pull the $USD up by its bootstraps, and equities along with it.

The daily upper BB SPX turned up this morning; maybe it can now rendezvous with the weekly one. This would make a nice top in the tradition of the 2000 (year) and 2007 ones.

Why don't you jump on the team and come on in for the big win?

Bicycle said...

lol charting

Best guess... they get scared and don't raise and we crash and oil goes to 20

FOPIC

Federal Oil Producers Insurance Corporation

scott said...

CG - I am and have been on the winning team! lol
check the dates on you blog as to when I went short...!

also there is NEVER going to be a new high as long as these are as they are (and they show no signs of improvement!):


http://stockcharts.com/h-sc/ui?s=%24NYUD&p=D&st=2015-08-18&en=today&id=p81383675582&a=367854604

http://stockcharts.com/h-sc/ui?s=%24NYAD&p=D&st=2015-02-22&en=today&id=p45242419591&a=418207860

http://stockcharts.com/h-sc/ui?s=%24NYADV%3A%24NYTOT&p=D&st=2015-03-22&en=today&id=p41418645738&a=435751385

http://stockcharts.com/h-sc/ui?s=%24NYSI&p=D&st=2014-04-13&en=today&id=p46319155567&a=431499812

http://stockcharts.com/h-sc/ui?s=%24VXV%3A%24VIX&p=D&st=2015-08-29&en=2015-12-11&id=p94754329494&a=429622149

as Clive Maund said the other day, I could shovel still more of this stuff onto you, but if you haven't got the picture by now you never will.

scott said...

another convert! yet he even thinks there will be a bounce out of the fed follies.

http://www.safehaven.com/article/39852/game-changing-action

Hugh Jazole said...

"Best guess... they get scared and don't raise and we crash and oil goes to 20" How about the exact opposite happens. They don't raise, the market and oil both rally with oil screaming higher over the next few weeks then stocks tank.

T.Berry said...

whatever yellen does will be ok for stocks. the fed has got it right for 7 years. zero reason to start doubting them now : )

Christian Gustafson said...

BTW, I don't think we will make it all the way up to that trendline at 2172.

The monthly and weekly Bollinger Bands for the S&P 500 suggest that 2145-2150 would be more realistic, into EOY 2015.

Market support in Winter/Spring of 2016 is at 1890, 1332, and 1040 SPX.

It's going to be great fun. Bring your mom.

Bicycle said...

New York capex expectations

scott said...

CG - this anomaly needs to be explained before NEW HIGHS are baked into an analysis...

http://stockcharts.com/h-sc/ui?s=PRWCX&p=D&st=2014-11-15&en=today&id=p70340751834&a=430556465

http://www.morningstar.com/funds/XNAS/PRWCX/quote.html

things that make you go WAT THE NUNCHUCKS!

scott said...

T.Berry! Does the fed put you in a high chair and spoon feed you every morning? Got it right!?

Left brain programing is a glory to mankind.

scott said...

5 day trin is going below .8 soooooo WAT THE NUNCHUCKS!

T.Berry said...

lol scott. dow 6700--->18,000+, ue 11%--->5%, inflation <2% and a very strong usd to boot. everyone said mkt would crash when qe ended, it didn't. i bet mkt hit new ath's (more than one!) after fed raises (which i never thought they would this early since there isn't any reason they need to ). i don't think this secular bull is over just yet. : )

Christian Gustafson said...

^IRX at .25% ... looks like the market does lead after all.

This is bullish for $USD, and therefore, for now, for US equities as well.

scott said...

T.Berry - there you go again with the strawman, "everybody"! And as for "early", BY WHAT METRIC!

Good god T, like any government statistician you forget that A=L+C!

I've said it before if the wealth effect depends on "everyone" staying invested then THERE IS NO LIQUIDITY AND THE WEATH IS AN ILLUSION.

A real analysis of the Fed success and feeding baby food to bumkins is that for OVER 7 trillion in addition secured DEBT (just in the US) achieved a 30% total return since 2013. In other words almost half of the nations GDP was spent to achieve nominal returns of 10% a year for 3 years with INCREASED TAIL RISK and
a decrease in actual liquidity that is fueling deflation in almost every realm.

The NYA and similar broad market measures only gains 3.2% per year or about 10% total return!

That is no bargain and it is flatlining.

http://stockcharts.com/h-sc/ui?s=%24SPX&p=M&yr=20&mn=6&dy=0&id=p63413376964&a=415949915

And as for a rising USD being correlated to a bounce in equities...well:

http://stockcharts.com/h-sc/ui?s=%24USD&p=D&yr=1&mn=0&dy=0&id=p04290388495&a=404854377

And one last thing: In a secular bull market, strong investor sentiment drives prices higher, as there are more net buyers than sellers.

What is this breadth chart telling you?

http://stockcharts.com/h-sc/ui?s=%24NYHL%3A%24NYTOT&p=D&yr=9&mn=8&dy=0&id=p96285683812&a=436804668

Magical Thinking is the curse of technocratic societies.

this has been a cyclical "bull" within a SECULAR "bear"





Bicycle said...

Chicago Fed Credit

Christian Gustafson said...

I exited a position in Q4 SPY 211 calls at the open this morning.

If we are in a final 5th wave up, which counts as a triplet, then we could be finishing "A of 5" soon, with "B" choppily retracing down to maybe the 2030 area SPX into December opex.

That leaves us 3 weeks for the final rally into the first week of January, to the 2150 area. Expect turbulence after that.

scott said...

http://stockcharts.com/h-sc/ui?s=%24NYSI&p=D&st=2015-08-09&en=2015-12-15&id=p49284764443&a=429597682

5th waves don't start with the NASI doing this...

CG, has it EVER bothered you that your date for the "final" rally keeps getting pushed out further and further?

At what price point will your change your view?

scott said...

the fact that this never got to 500 shows that no new highs are in the cards:

http://stockcharts.com/h-sc/ui?s=%24NYSI&p=D&st=2014-04-13&en=today&id=p46319155567&a=431499812

Christian Gustafson said...

I'll change my mind when we have a real impulse wave off the top.

August 24 came close. Heck, August reminds us of how this awful thin market really is going to end. But I'm not convinced we have topped just yet. And since we're chasing a rising trendline, we get new highs.

It's really not about stocks. It's about the USD and the JPY, which we see expressed in equities.

The Fed is trapped, and will be forced to raise again and again in 2016 to defend the USD.

scott said...

CG, you keep referencing a phantom rising trendline!

There is declining resistance that keeps providing lower highs and is indicative
of a rollover top...

SPX has it; INDU has it; jesus small caps and mid caps have it...

http://stockcharts.com/h-sc/ui?s=%24INDU&p=D&st=2015-02-28&en=2015-12-16&&id=p73386405311&a=417399411

INDU has tried and failed to break above it a couple of times

http://stockcharts.com/h-sc/ui?s=%24SPX&p=D&st=2015-02-09&en=2015-12-16&&id=p80179878571&a=406333442

SPX hasn't even come close and keeps getting trapped exactly like in AUG.

http://stockcharts.com/h-sc/ui?s=%24SPX&p=W&st=2014-06-26&en=today&id=p21077818237&a=424094005

every index except the NASDAQ Comp is below weekly and monthly bear metrics

Again, as Clive Maund said in his public article this week:

I could shovel still more of this stuff onto you, but if you haven't got the picture by now you never will. :)

scott said...

PS - more evidence that your USD theory is not going to work out:

http://stockcharts.com/h-sc/ui?s=%24SPX%3A%24USD&p=D&st=2010-02-26&en=2015-12-16&id=p30480067903&a=430342556

Bicycle said...

2016 FOMC Calendar
January 26-27 +25bps
March 15-16 +50bps
April 26-27 +25bps
June 14-15 +50bps
July 26-27 +100bps
September 20-21 +100bps
November 1-2 +200bps
December 13-14 +500bps

Christian Gustafson said...

At some point it will register, yes, that the Fed is defending the dollar and must keep hiking rates.

Stocks will not appreciate this. The swamp will be drained!

Hugh Jazole said...

They may be defending it, but it's headed lower. Perhaps they are attempting to make sure its fall is orderly.

T.Berry said...

well time to admit i was wrong thinking fed wouldn't raise till '17. mr mkt seems to agree with ms yellen ---she got it right again! i'm betting we see more than just one more new ath.

already looking forward to the next hike :)

Bryan Franco said...

Utilities and Reits calling b.s. on long term rates rising. They outperformed the most today. Not exactly bullish. Market participants should be careful what they wish for when it comes to hiking rates.

Hugh Jazole said...

I'm starting to agree with Scott. The market is just spinning its wheels, every attempt at getting traction fails.

T.Berry said...

moved some long term investment money into BAC yesterday.on premise banks will continue raising loan rates but leave deposit rates basically unchanged or move very little. financials should do very well in rate hike environment. bwdik :)

Hugh Jazole said...

Uh oh.

Christian Gustafson said...

Hugh --

b of 5 has begun? "a of 5" from 1993 looks complete in 5 plausible waves.

Give b some time to correct, then the count suggests an impulsive "c of 5" up to finish the E-D and (IMO) the market rally since the 2009 lows.

scott said...

good night IRENE

too much internal BS

close the gates - liquidity vs wealth effect real time experiment!

scott said...

25 basis points and no recession

trin does not like it!

http://stockcharts.com/h-sc/ui?s=%24TRIN&p=D&st=2015-07-03&en=today&id=p93867090535&a=424120491

time for epic collapse of holy federation of dunces

Bryan Franco said...

Huge flight to safety yesterday warned all wasn't well. But market never makes it that easy, so yes, CG I am with you on c of 5 still to come.

scott said...

http://stockcharts.com/h-sc/ui?s=%24SPXEW%3A%24SPX&p=D&st=2014-12-15&en=2015-12-17&id=p24006272296&a=436192257

where's waldo? lol

scott said...

waldo? is that uuuu?

http://stockcharts.com/h-sc/ui?s=%21ADRLITOT&p=D&st=2014-08-20&en=2015-12-17&id=p47310265704&a=424394782

scott said...


and Waldo is dead










scott said...

man Waldo decomposes fast!

dow break 17525
spx break 2048

good god buy the dip and ride to Valhalla!

Bicycle said...

ZH out there basically making a crash call for tomorrow

scott said...

and the futures go
down

gonna get interesting

scott said...

best guess for this new all time high is 1927 by Christmas and sub 1820 by new years. OH WAIT! I'm practicing inverted EW!

Hugh Jazole said...

It's starting to look like the Fed was seeing what was ahead for the dollar, and attempting to get ahead of it a bit. They knew it was headed lower and were trying to keep it from tanking in a free fall.

scott said...

USD in free fall would mean INFLATION and that is what the FED FOLLIES ARE ALL ABOUT!

Honestly, I just don't get it. Have any of you taken a college econ class?

Hugh Jazole said...

The Fed wants inflation, but they want it in a controlled manner. Destroying peoples purchasing power is more affective if it's done slowly, like the boiling frog scenario.

" if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger and will be cooked to death."




Christian Gustafson said...

A declining dollar is not about inflation at this point. The inflation is already baked into the big cake -- 80 years of it.

We use the Austrian definition of inflation as expansion of credit, especially in our system where that bank credit is a money equivalent. And Yellen's Fed demonstrated that they are now tightening. Hard to see where bank lending will give us inflation now. Meanwhile, the accumulated debts are still there, demanding to be serviced.

A cheaper dollar is less about inflation, and more about the USDJPY carry trade coming unwound. The correlation of USDJPY to equities since 2011 is very strong.

We're at the end of the long credit cycle, ladies!

scott said...
This comment has been removed by the author.
scott said...

CG - your comment is EXACTLY WHY so many economists like John Williams and gold bugs keep getting the inflation narrative wrong.

Debt "Money" by its nature is DEFLATIONARY. Money issued at interest creates a minimum 10% default rate and that is why for so long bankruptcy laws allowed for that. Now due to the deflationary nature of last dollars all going to interest payments only, NO DEBT IS ALLOWED TO DEFAULT! Hence the "austerity" slavery and the new bankruptcy laws that do not allow a system reset.

When the only way you can expand the money supply is through more debt then eventually all dollars get sucked under by interest.

HENCE THE CREATION OF DERIVATIVES as shadow "liquidity". But leverage of that kind
creates HYPER DEFLATION, not inflation!

Waldo's corpse has to be around here somewhere!

Christian Gustafson said...

Yes, Scott, deflation. Deflation to zero.

Mind where you are posting, sir. You're in Deflation Land now!

When "inflation" returns as hyperinflation, it won't be because of any crude "printing", it will be because faith is lost in the $USD and $USD-denominated debts.

Then the mad rush to hard assets!

The free-market world as we knew it ended in 2009. Everything since then is running on the fumes & faith in what our grandparents won for us on Utah Beach and at Midway.

scott said...

But that's the key ISNT IT CG? In a debt money system expansion only happens when the hypothecation of a dollar can be multiplied through the system by those who receive the initial deposit of those "new" dollars.

Once interest payments exceed "discretionary" income in the system, savings and investment are impossible. Only financialized "wealth effect" schemes can create marginal float. DERIVATIVES! ALL SECURITIES ARE DERIVATIVES.

So inflation cannot occur in a system that doesn't allow for lawfully managed defaults.

Inflation wont occur in the current regime until the systemic defaults bubble out on their own as is happening in the Junk and Corporate structures with the ending of buybacks...

THE DEMAND FOR USD IS FORCED BY INTEREST PAYMENTS AND BY CONTRACT SETTLEMENTS.

That USD demand will remain deflationary as long as people think debt service is legitimate and as long as the overlords refuse to allow defaults.

Christian Gustafson said...

Scott --

Yes. Also ... yes.

We're not perma-bulls or optimists here. I think the S&P will trade under 1100 by the next All-Star Game.

We only quibble about whether this market can eke out that elusive last new high.

scott said...

the new high is baked in the brownies but not in the markets!

NBA in Feb or MLB in July? lol

scott said...

http://stockcharts.com/h-sc/ui?s=%24SPX&p=M&yr=20&mn=1&dy=0&id=p16343336346&a=428291868

Bicycle said...

fwiw we can still slice off 80-100 more DJIA points today from current levels and remain in the so-called bull flag or triangle

based on recent history WTI and tech are not really confirming this move south today... we'll see this afternoon I suppose

scott said...

the smell from Waldo is confirming!
http://stockcharts.com/h-sc/ui?s=%24NYADV%3A%24NYTOT&p=W&st=2012-11-15&en=today&id=p13491143900&a=428066221

scott said...

also, where is this triangle? It isn't here...

http://stockcharts.com/h-sc/ui?s=%24INDU&p=D&st=2015-05-23&en=today&id=p08319121886&a=417399411

one level broke and now we wait and see if 17125 breaks - probably does today.

also on the Vol OsC there is a bearish cycle or "T" that obvious has broken down but will accelerate after the "T" ends which is Dec 22. This date is also surprisingly close to the 75 day cycle.

http://stockcharts.com/h-sc/ui?s=%24NYUD&p=D&st=2015-08-18&en=today&id=p08060221429&a=367854604

That's all folks!

Bicycle said...

see chart in comments on my post here

rather obvious triangle and bull flag as well

I am with you long term tho... just can't get excited about bearishness short term until we break these patterns. which we may if WTI continues to slide.

Bicycle said...

well now... starting to get interesting in the final hour

scott said...

well now another 47 points on dow and the WOW!

Hugh Jazole said...

"see if 17125 breaks - probably does today" Looks like you may have called it Scooter.

scott said...

48 basis points from HELL!!!!!!!!!!!!!!!!!!!!!!!! lol

Bicycle said...

hahaha nice close algos

scott said...

clearly Santa has left the markets! what will the world do now that seasonality has failed to warm the winter?

Christian Gustafson said...

Scott, did you bottom-tick the market today?

We had bounced off the descending trendline from FOMC a couple of times this afternoon, but then you taunted the market gods, and we broke out and closed over this resistance.

GDP in the morning ...

scott said...

Be careful CG. EW leads to superstitions of all kinds!

pretty clearly the last day of the cycle as I pointed out before. This is a 75 day cycle high WITH a bear Vol Osc "t" ending, so watch out.

http://stockcharts.com/h-sc/ui?s=%24NYUD&p=D&st=2015-08-18&en=today&id=p54436366306&a=367854604