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Chart Picks – Trading Range Death Trap Yields Two Picks

While the market averages edged to new highs last week, that’s deceptive as most stocks stayed rangebound. That’s a death trap for swing trades, and it depressed performance for a third straight week.

This Friday’s screens were bearish, with 12 buy signals and 28 sell signals. That suggests some downside ahead but so far in the pre market, the bulls are in charge. I liked the setups on two of the charts. One was a short xxxx (subscribers only). The other was a long, xxxx. I’ll add those to the list as of Monday’s opening prices. Charts below.

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Here’s How Fed and Treasury Colluded to Delay Armageddon Due Date

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Intro

The Fed has bought mass quantities of Treasuries and MBS over the past dozen years, in what are called Permanent Open Market Operations or POMO. This is just a fancy name for trading with Primary Dealers. We call the Fed’s massive asset purchases Quantitative Easing, or QE. The Fed buys that paper strictly from Primary Dealers with rare exceptions. The dealers then use the cash to buy more paper, whether more Treasuries, MBS, stocks, or other financial instruments.

QE has become the primary source of demand for absorbing the supply of financial assets. The primary source of supply is the US Treasury which has lately been issuing an average of $200 billion per month, or more, of Treasury debt. The market must absorb that. In the absence of QE, prices would be under constant downward pressure. Since stocks and bonds are to some extent interchangeable financial assets, both asset classes would be affected.

The Fed has made sure to print enough money, that is to pump enough cash into the accounts of Primary Dealers, to ensure that prices maintain a steady upward course. The Fed has made sure to engineer QE to all but guarantee bull markets in stocks and bonds.

At some point that could change, and we watch the data carefully in order to estimate when that’s likely to happen.

The QE vs. Supply Equation

QE has thus become the primary fuel that powers demand for financial assets.

The flow of QE cash to the Primary Dealers is almost steady, with a non-material reduction in MBS purchase settlements scheduled for mid month.  Meanwhile, Treasury supply, to this point has been steadily enormous, fluctuating within a semi predictable range month to month. Not much has changed since the Fed’s pandemic emergency phase of QE began in March of 2020.

Until now. The big change is that the Federal debt ceiling is now back in force, which means that Treasury issuance will first slow, and possibly stop, until Congress raises the debt limit. This will reduce new Treasury issuance. Supply will be constricted. The reduction in supply could give the bond market rally a second wind, or it could accrue to stocks, or both.

So it will be bullish for awhile. Then it will stop. Then we’ll have a Wile E. Coyote moment. And then it will end. Badly. Here’s the how, why, and the timing.

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Closer Every Day

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Cycle time and price projections suggest that the market is getting close to a high. But it’s not there yet. The 13 week cycle high is ideally due around xxxxxx (in subscriber report), with a projection of xxxx (in subscriber report). The 6 month cycle still seems to be in trending mode with a new projection of xxxx. The 10-12 month cycle is ideally due to top out within x weeks, with a new projection of xxxx.

On the third rail chart the market continues rising within multiple channels. Short term channel support rises from 4370 to 4405 this week. Additional multiple support lines rising from around 4360 and 4330 should contain any pullback. Major trend support is around xxxx (in subscriber report). Only if all of those are broken could is a significant reversal possible.

On the weekly chart, a possible target of this move is now at xxxx. The market would now need to conclusively break xxxx to signal a reversal.

Long term cycle projections point to xxxx with highs due between xxxx and xxxx.

On the monthly chart, the S&P 500 would need to end August below xxxx to signal a potential reversal of the uptrend. If the SPX clears long term trend resistance around 4500, the target would rise to xxxx in August.

The long term cycle momentum indicator remains bullish.

Cycle screening measures remain bullish, despite Friday’s pullback.

The chart picks report will be posted on Monday morning.

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These reports are not investment advice. They are for informational purposes, intended for an audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. 

Fed Finally Starts the Standing Rippo Farcility

They’ve been threatening to do it for two years, and finally pulled the trigger. The Fed’s captured media barely gave it lip service, with a brief mention here and there. A sharp eyed Liquidity Trader subscriber, Chet, called my attention to this well hidden tidbit yesterday.

Here’s the relevant part of yesterday’s announcement by the NY Fed.

Under the SRF, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to conduct overnight repo operations with a minimum bid rate of 0.25 percent and with an aggregate operation limit of $500 billion, effective July 29, 2021. As with the Desk’s existing repo operations, the SRF will be cleared and settled on the tri-party repo platform. Treasury, agency debt, and agency mortgage-backed securities will continue to be accepted. All other terms will be the same as the existing overnight repo operations.

Primary dealers will continue to be counterparties for repo operations under the SRF. The SRF counterparties will be expanded to include additional depository institutions.

Chet wrote:

Why do they need this? Are the money markets who normally participate in the private repo market perceiving counter party risk? Even if the collateral they get overnight or term is pristine?
I am watching all the CNBC talking heads right now, they don’t have a clue. They should be reading your newsletter on Macro Liquidity. 

Without Chet, I may have missed that Fed release. It was not part of the FOMC statement, but was noted in a separate release at the same time as the usual Fed statement. It was designed to either be ignored, or at least under emphasized.

In that, they succeeded. Did anyone ask about it at the press conference? Yes, Mike Derby of the Journal asked a one line throwaway about it, and Powell gave a throwaway answer:

Derby: So I wanted to ask you about the standing repo facility and get your sense of what you think it will do for market trading conditions.

Powell: So, on the standing repo facility, what is it going to do? So it really is a backstop. So it’s set at 25 basis points so out of the money, and it’s there to help address pressures in money market — money markets that could impede the effective implementation of monetary policy. So, really, it’s to support the function of — functioning of monetary policy and its effectiveness. That’s the purpose of it. And it’s set up with that purpose in mind.

What a useless crock of shit that answer was.

I had not given much thought to the SRF recently, because I have always felt it was a non-issue. The Fed has always made unlimited amounts of repo funding available on an ad hoc basis when crisis demanded, so why would this matter?

Chet’s question made me revisit my thinking and I sent him this response.

I’ve long said that the idea for a Standing Repo Facility is smoke and mirrors. What’s the difference between it and offering them on an ad hoc basis when required, as they’ve always done? But I think I see their rationale for it. And it’s not what they say it is, of course.

Right now, there’s too much cash in the system from the Treasury paydowns, so it’s currently a moot point. But when that cash is gone in a few months, if the Fed opts not to take up the additional Treasury supply by increasing QE to absorb it, then the dealers will need to resort to repo to finance it.

[Additional note: Otherwise bond prices would fall and yields would rise.]

I guess the difference is that if they call it a “standing” facility, that means permanent. And that’s almost as good as outright QE to the dealers [because they would never have to pay it back], except that the cost would be variable, and would rise, if the market tightens.

Another thought is that by having this, it gives the Fed the backstop it needs to pretend to taper QE [emphasis added] No question that something will be required to absorb the Treasury issuance. If it’s not outright QE, then it will be the SRF.

At this point the SRF is a non-issue. If they ever start to use it, we’ll have to see if the dealers redeploy enough of it to keep the markets levitated. As I said in the Lindsay Williams podcast interview (Bond Yields Down, Inflation Up, Here’s Why), there are simply too many variables that will come into play beyond the next 3-4 months to make an accurate forecast [beyond that length of time] now.

Thanks for alerting me to this! I wasn’t paying attention at all today. I was out exploring Warsaw!

To sum up, there’s currently no need for this facility. But when the Treasury runs out of cash (timing analyzed here) Congress will raise or suspend the debt ceiling, and the Treasury will start issuing more debt. If the Fed wants to keep bond yields down, it will need to buy more of that new debt, or fund it in some other way. There’s no way it could taper its purchases if it wants to hold yields stable. If it doesn’t buy more paper, then they hope that the SRF will do the trick.

If it doesn’t they would either have to let Treasury prices fall, and yields rise, up to a point. That point is the level that triggers a crash. You can forget about the Fed ever tapering purchases other than a token show trial for a month or two. To seriously reduce their purchases would be an act of financial mass murder.

They will either need to increase their purchases (more QE whoopee) or do repo, lots and lots of repo. The $500 billion they have initially set will be gone in a few months. Then they’ll go to a trillion, then who knows.

It’s all so sordid. But I’m not here to moralize about why this is so gat-danged wrong. We’re only interested in the practical effects of Fed policy on the prices of stocks and bonds. I analyze that and give you the look ahead for the time frame that’s reasonably foreseeable in the Liquidity Trader Money Trends reports. If you are a new subscriber, you can try them risk free for 90 days.

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Be Careful of that Yellow Stuff

Gold remains at risk despite a positive sign in the miners yesterday.

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Chart Picks – Dipping Two Toes in the Meat Grinder

The meat grinder tore up my picks last week, wiping out more than a month’s worth of hard won average gains. Attempting swing trades of expected duration of 3-4 weeks in a weakly trending market with lots of chop, is virtually a fool’s errand at this point. Day trading, or buy and hold, has worked a lot better lately. C’est la vie. C’est la marche.

History tells us that conditions in force tend to remain in force until they don’t. It’s market inertia. So I approach my short term picks at this point with high skepticism. I continue to dip a toe in the water with a pick here and, but no more than that, until I see signs of good performance. This week I saw two charts that I liked enough to add to the list. Both were in the agricultural sector.

This Friday’s screens were bullish with 55 buy signals and 19 sell signals. That suggests more upside ahead.

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Prices Show Us Not to Argue with Mother Market

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All swing cycles are back in gear but only one of them has a projection. Meanwhile, we know that one major cycle is due to top out at any time between now and September. We’re on the alert for the signs from the indicators for that cycle (shown in subscriber report).

The market closed Friday at trend resistance on the third rail chart. That resistance starts the week at 4433 and rises to 4455. Clearing that line would indicate acceleration. Massive trend support lies between 4270 and 4335. That would need to be broken to signal reversal.

On the weekly chart, the SPX had a false breakdown from the uptrend line off the October 2020 low. The market would now need to conclusively break 4230 to signal a reversal on this chart. Trend resistance and a possible target of this move is now at xxxx (in subscriber report).

Long term cycle projections point to xxxx-xxxx (subscriber report) with highs due between xxxx and xxxx.

On the monthly chart, if the SPX clears long term trend resistance at 4410, the next target in July would be xxxx. In August, that would rise to xxxx (subscriber report).

The long term cycle momentum indicator remains bullish.

Cycle screening measures reversed their recent weakness. They have sent misleading signals in recent weeks. Price trends themselves must always be the finally arbiter of any trend analysis.

The chart picks report will be posted on Monday morning.

Technical Trader subscribers click here to download the complete report.

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Not a subscriber? Get price and time targets, and weekly swing trade chart picks, risk free for 90 days!  

These reports are not investment advice. They are for informational purposes, intended for an audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. 

How the Fed and Treasury Rig The Debt Ceiling Roulette Game Matters

I could just repost the same thing every time I update this report. The Fed continues to rig the stock market, and that rigging continues to work. I know of no reason to expect this to change. Someday, it will, but not today. Make no mistake though, changes are coming, and you need to be ready for them. This report tells you what to look for.

Stock prices remain right in the middle of the channel surrounding the liquidity line on the Composite Liquidity Chart. What I wrote about this indicator in June, remains true today. The market isn’t overbought. Nor is it oversold. It’s just tracking the growth of systemic liquidity. Not too hot, not too cold, but just right. Goldilocks.

Earlier, in March, I wrote:

This indicator is so good that it looks rigged. If you’ve been with me for a long time, you’ve watched this with amazement, as I have, for years. When all these liquidity measures are combined into one, they form a track that stock prices mimic, and vice versa.

They are both cause and effect. It’s like quantum mechanics. They’re intertwined, separate, but one. Increasing liquidity causes stock prices to inflate. Inflation in stock prices causes liquidity to increase. The Fed just keeps pumping the fuel to make sure that the engine keeps running. And when it threatens to stop, the Fed just pumps more. It has had the ability to reflate the system when it has deflated.

Meanwhile, the US Treasury is acting as the paramedic rescue squad for now. It has been pumping massive amounts of cash into the money markets every week since February 23. It has been doing it with T-bill paydowns, which I’ve written about both in these reports, and in occasional news updates in the Wall Street Examiner.

Jaysus and Janet both are praying that those dealers and investors use that cash to buy enough longer term paper to push bond prices up, and yields back down. Keep in mind that yields are just the sideshow. The problem is that bond prices have fallen so much that dealers are facing enormous losses in their bond inventories. It renders them unable to maintain orderly markets in all their businesses.

Now $700 billion in T-bill paydowns later, on top of regular ongoing Fed QE, the Fed and Treasury have succeeded in driving a massive rally in Treasuries. That has given the Primary Dealers juicy profits over the past few months.

This has taken the pressure off the Dealers, who matter to the Fed, and transferred it to any hedge funds who were short Treasuries. If they lose money, the Fed doesn’t care so much, as long as the biggest ones aren’t at risk of going bust.

But the dealers must be saved at any cost, and for now, they have been. Once again, the Fed has managed to steer the market away from sure catastrophe. But this time, it took a partnership with the US Treasury, in the form of those massive T-bill paydowns pumping cash into the market. However, that’s a one shot deal. Once that cash is gone, it’s gone. And with the Federal debt ceiling back in place as of August 1, that cash will be gone, and soon.

There are a couple of likely scenarios ahead as the market faces the reimposition of the debt limit. Here are the most likely scenarios, along with how the Fed and Treasury are likely to manage the liquidity pool. Finally, as we track the flows in the weeks ahead, we’ll know what to do to manage our portfolios to take advantage, or to protect ourselves from the market crash that would be baked in if the Congress and the Primary Dealers behave in a certain way.

Or whether a muddle through scenario might play out.

I spell all of that out for you in this report.

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Gold’s Elevated Cyclical Risk Is Right Now

Gold has been rangebound and mining stocks have looked terrible. Both are entering periods of elevated risk.

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Here’s What the Treasury Buying Stampede Really Means

We’ve been following the story of the US Treasury paying down outstanding T-bills since late February. $680 billion of paydowns led to a big turnaround and rally in longer term Treasuries as the Treasury pumped that money into the accounts of former bill holders and simultaneously removed that paper from the market. Some holders sought greener pastures in longer term paper, leading to the rally in the 10 year yield and other maturities.

In recent weeks we’ve taken note of the Treasury reducing those paydowns, and we saw a few hiccups on the Treasury market. But over the past week, the rally resumed, thanks to this being the Fed’s monthly MBS purchase settlement week. Then the Treasury piled on again on Thursday, announcing another $48 billion in bill paydowns for this week.

The Fed holds MBS settlements in the third week of every month, for forward purchase contracts it made over the past two months. This week’s settlements total $128 billion, which is yooge. They started last Wednesday (July 14) with a down payment of $83 billion. The second installment is for $15 billion today. They finish up on Wednesday, injecting another $29 billion into the accounts of the Primary Dealers from whom they buy that paper.

Then late last week, the Treasury announced, in its infinite wisdom, that it would pay down another $40 billion in T-bills tomorrow (July 20) and $8 billion on Thursday. Drowning in cash, enough fixed income guys turned blue and bought further out on the curve on Friday and this morning to send bond prices soaring and yields crashing.

Apparently the dealers and others have wanted nothing to do with stocks, so they ploughed all of the cash into Treasuries. The stock selloff exacerbated the yield rally, and vice versa.

Traders and pundits tend to talk rotation when these events occur. For now, they’re blaming a resurgence of COVID cases, which is unwarranted because with a majority of US and European citizens at least partially vaccinated, few people are dying. It’s just mindless panic.

But here’s where Treasuries are really headed, and why. And what you should do about it.

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