Authored by Mark St.Cyr,
We’re hearing a lot about red lines this week. And when those “lines” are posed at a near incessant pace coming from every corner of the media while including other items such as: chemical weapons, missiles, carrier group, troop movements, and more. It’s easy to see how one gets desensitized. It seems for anyone trying to actually pay attention to world events the task gets harder by the day. It makes one think that maybe Timothy Leary was on to something, but I digress.
However with the above noted there is one “red line” which is currently below the horizon and has the potential to disrupt the globe in ways that everyone currently believes has been avoided. And much like the carrier group now steaming its way towards the Korean peninsula, it has the same amount of potential “firepower” to escalate things in ways we all hope can be avoided.
That “red line” is not a military one, but rather, a “market” one. And if crossed everything changes, and I do mean everything. To wit:
(chart source)
The above is a weekly chart of the S&P 500™ as of Wed. before the opening bell. As you can see we have been in a near vertical assent since the election. It’s important to put these things into perspective for reasons as I highlighted on the above.
First, as you can see there are two horizontals containing blue fields. Why is this area of importance? Because this area represents where we bounced within, incessantly, for months. Where the headlines of “New record highs!” dominated the mainstream financial/business media for months on end. That is, until about Aug. of that same year (2015.)
As you can see that range which allowed for the generating of all those “headlines” and “great vibes” that poured out of every next in rotation fund manager, economist, or Fed. speaker suddenly became null-and-void when the “markets” began to nosedive, seemingly out of nowhere. (e.g., the resulting aftermath of the overnight devaluation of the Yuan.)
That didn’t stop until Fed. officials (along with a note in James Cramer’s pocket) took to any media venue they could to shout from the skies on “the wings of doves” that they were “at the ready” with whatever new iteration of money printing may be needed. The “cooing” was always at its loudest as the “markets” approached (again, and again, and again) that now monikered “bottom.”
This was, and has been, the BTFD genius trade in spades. For every-time the “markets” rolled over? The Fed. has scrambled to assure their dovish tones, and deeds, were standing at the ready.
This (once again) was played (and I presume continues to be played) by Wall Street as I mentioned before – “in spades.” For if you look at that chart you’ll notice the “markets” were about to (once again) breach that all too familiar line and possibly resume its now familiar pattern of “It’s all falling apart! Someone do something!!!”
And as the above shows (once again) a Fed official did just that when the Chair herself made what is now deemed one of the most contradictory speeches as to what the Fed. might be contemplating with her insinuation that running a “high pressure” policy may be the only way to alleviate the damage still residing within the economy. We were, as the above shows, once again, looking as to repeat the same old, same old.
Some might be asking what’s so contradictory? Hint: “High pressure” insinuates a far more “dovish” monetary stance. (i.e., “Don’t worry boys, we’ll make sure Christmas isn’t cancelled.) This was in October. Within about 60 days of that speech Ms. Yellen would become the undisputed leader of the now gathering flock of “hawks are us.” The only thing that changed during that time besides the Fed’s posture? The election, imagine that.
Since the election the “markets” have been on a one way trajectory, straight up, into record-breaking, after record-breaking, closes. In my opinion: Nosebleed territory is an understatement. Yet, what one must remember is this…
The Fed. has seemingly done all it can other than openly scream, “We’re serious here, and still relevant!” about their intentions of further, and faster hiking, and/or their balance sheet reduction ideas.
And so far, it’s all fallen on deaf ears.
The “markets” currently are (possibly were) only concerned with the “Trumpflation” trade. i.e., If the economy gets what Trump promised as in: meaningful tax cuts, Obamacare repeal, incentives for manufacturing and more – the Fed. doesn’t matter. Only the economy and resulting GDP does, as it should. But there’s a problem.
Suddenly it looks like all that campaign promising and rhetoric is turning into just that – rhetoric, and promises that can’t be kept. And the “markets” ears are now beginning to wonder if all that “screaming” about further hikes, balance sheet rundown, and more coming out of the Fed. which is emanating no longer on the “wings of doves” but rather from a concerted group of “hawks” should be given more thought.
So “noticed” in fact, it seems to have taken the Fed. itself by surprise when none other than N.Y. Fed. president William Dudley after a speech where he expressed he favored gradual tapering of the balance sheet felt the need to take to the airwaves (sorry but, once again) only days later as to clarify what he meant by the word “pause” because of the adverse reaction given by Wall Street.
Yes, the Fed. got it’s wish – Wall Street is once again “all ears.” And with that the Fed. suddenly found itself like that old joke of someone shouting over the ambient noise at a party to suddenly find the music stopping mid sentence while they’re still screaming.
So comical was this knee-jerk reaction via a Fed. speaker as to make sure they clarified what “pause” truly implied, I nearly spit my coffee when I heard one of the hosts on Bloomberg™ make the observation: “Is this what its all come to? Needing to clarify the meaning of ‘pause?'”
Yes, yes it has. However it’s been that way for quite some time, just no one cared to listen other than those of us relegated to mocking as the “doom crew” or “tin foiled” types. The real problem is – we’ve been right. It’s just that most are just beginning, including the media to catch on. The issue that goes with that hand-in-hand is this: possibly far too late. And here’s why…
As I said in the beginning there’s a “red line” that needs to not be crossed in my opinion. I’ve marked on the above chart that line is, or about, the 2130ish area (give or take) on the S&P.
If that line is crossed there will be a battle which I’ve delineated as the “battlefield area.” I would assume we will ping-pong back and forth (i.e., 2130 – 2085 respectively) within this area until the break of where we’re heading in the near future is made. If it breaks lower? All bets are off. And I mean just that: All.
For this rally to hold and further gains to be promising that 2130 line needs to be avoided at all costs. Especially with the Fed’s current stance and policy implications. Much like a kinetic war, this “market” and monetary battle may have just as harsh ramifications if certain red lines are breached.
The issue at hand is this: Just as fast, and unrelenting as the “Hopium” trade of reflation has been. It can reverse with the same characteristics as it started, and we could end up at that “moment of truth” before we know it.
If we do start barreling there out-of-the-blue, and with some momentum? Your first signs for concern will be when you suddenly hear hawks cooing. Though that process (or metamorphosis) might already be underway. See Mr. Dudley for clues.
Now it’s time to see how the “market” reacts. Or more importantly:
Is the damage of 2 rate hikes in 90 days, and relentless jawboning for balance sheet reduction, along with the realization of potential reflation trade DOA damage already done?