Housekeeping: Here’s a quick synopsis of what happened yesterday in no uncertain terms.There are only a couple of good write ups on the various drivers of the CPI event. Here is ours intended as complementary to Zerohedge's summary linked. We hope you see GoldFix's value
Updated: one logical question to this could be “why would the Fed support stocks if their stated goal is to decrease wealth effect, and lower demand, thereby ideally lowering inflation?” The answer to that question is in the comments. The short version is: they are not stopping the descent, just slowing it.
And then there is this:
YELLEN SAYS WE'VE ASKED CONGRESS TO ALLOW US TO LEND $21 BLN IN SDRS TO IMF TRUSTS, HOPING FOR APPROVAL.
Which supports the larger point. It ain’t just about the US. The PPT is protecting the world now.
The Return of the Plunge Protectors
- CPI came out at 8:30 hotter than expected and stock futures crashed which makes sense from a macro economic perspective as higher inflation means higher rates for longer.
- Stocks opened at 9:30 and made their low for the day right then and there.
- Then with no headline to trigger other than the CPI itself, stocks had the most astounding reversal anyone has seen since March of 2020.
Why such a massive rally if VIX was so low this time?…
Why did it happen?
There was no discernible public event or news that inspired/triggered the turnaround. There were indicators that something like this could happen, but nowhere near the magnitude that it did. One such indicator was market participants were the least long they had been in a long time.
Everybody was already short that wanted to be short…
How to explain it? Return of the Plunge Protection Team
Yesterday we made a comment on twitter regarding Gold and Silver that actually applies to stocks as well. We stated that the reason Gold and Silver rallied along with stocks but could not follow through was in no small part because the precious metals futures markets are broken. Decades of manipulation have demoralized players from expecting any sort of appropriate response to news items. Therefore, if your goal is to make money in futures trading you put it in what gives you a return. You rob banks because that is where the money is so to speak. There is no money in being long Comex futures.
The same is true of stocks. The worlds largest equity markets are broken as well. Stocks have been trained to be bought (BTFD!!!) by activities of the Fed’s PPT just as it influences flow in metals. Therefore we believe very strongly the following: The Plunge Protection Team was very active in the markets before the event making puts available and during the event, keeping them offered so no-one panicked on the downside. The fed is an insurance company selling its products to pension funds now. There may not be a Pivot, but there is a Put again.
We said as much two weeks ago in the post entitled “Return of the Plunge Protection Team. Here is that statement:
We cannot make it any more obvious what we thought would behaviorally happen at the flow level. To repeat again: But this rally was far bigger than what we could have imagined. The worlds largest equity market behaved like a meme stock.
Concentrated PPT and Island Reversals
What happened yesterday was the same thing that has been happening for years, but in a very concentrated, aggressive form. The Fed slowed the descent of stocks so that it could continue to raise rates and remain targeted for 2% inflation. The technical landscape also told you something was up. Here is our comment four days before the event in which the potential for fireworks in both directions is described due to what is called an “Island Top Reversal”.
Stock Charts Island Top Reversal: This is a very powerful technical indicator called an Island Reversal. For some reason, the gap area is a hot spot for missed trade behavior. Simply put, short is the safe play. Long is the very risky but potentially explosive play.
Current situation says: there definitely are trapped longs who wish to sell on and near the “island”. Assume there were trapped shorts who wanted to buy below before. But now they bought and are immediately in the wrong again. You know there are sellers all the way up and into the gap above. There are further more sellers stranded on the island itself. Usually these formations go lower before going higher.
Finally, when they are violated on the upside, it is generally a news event that does it and completely overwhelms the trapped longs who “need” to sell.
Many technical traders will therefore seek to sell this market as it rallies towards the gap with a stop-loss above. Or if they are bullish they buy the market as it strengthens once inside the gap and put their stop loss underneath the gap. It makes for fireworks in both directions usually. Good Luck.
Back on the Island Again…
So: As far as we’re concerned this was in the making for weeks. When a policy fails those with most to lose, they will pull out stops and do what they had been doing before to force markets to comply, but in measures not before seen. They will keep doing it until the market ( or what is left of it) calls their bluff in such a way that they can say “it doesn’t make sense”. That is what currently is happening in the UK. Only then do they admit fallibility. But we are a long way from that moment where they admit fallibility in policy. You cannot know how far a stick will bend unless you actually break it. And gov't will break these markets in an attempt to fix your faulty perception.
Hartnett sums it up nicely in significantly less words than Zoltan
Wall St disorder of 2022 reflects painful "regime change" as bullish deflationary era of peace, globalization, fiscal discipline, QE, zero rates, low taxes, inequality gives way to inflationary era of war, nationalism, fiscal panic, QT, high rates, high taxes, inclusion (Chart 4); 2020s secular investment theme is inflation; long-term charts of bonds, Swiss franc, tech, dollar-pegged Hong Kong stocks- Oct 14th,
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