Exposing The Market’s “Magic Show”

Authored by Sven Henrich via NorthmanTrader.com,

It’s that time again, the magic levitation show, but this one is a peculiar one. I talked a bit about it in Zombieland, but the continuation on the same path this week ahead of the Fed meeting is actually getting quite embarrassing as all pretense that markets are anything but a Fed subsidy program are being dropped.

Synchronized quantitative easing Morgan Stanley calls. And it’s apparently working, after all now have new highs again in front of the Fed policy announcement tomorrow.

Just like the the previous 2 times this year:

Again we have wedges on both $SPX and $VIX heading into this Fed meeting.

What has made this action so unusual is the historic shriveling of volume and the nonstop gap, ramp and camp program we’re seeing now:

From my perch this type of action can persist and price can drift higher, but is subject to future gap filling and therefore, risk building.

All of this action is of course now coming in conjunction with the liquidity bombs the Fed is throwing on markets on a daily basis.

I talked about these issues a bit yesterday on CNBC:

[youtube https://www.youtube.com/watch?v=xRIgEnKY5Jg]

And so here we are today, the day before the Fed meeting and $SPX has again approached the upper trend line as $VIX has been compressing:

Tight wedges, consistent patterns suggesting another volatility spike to come.

The Fed will cut rates tomorrow with markets again at all time highs, just like in July and in September. What’s the primary driver of the rate cut decision tomorrow? Market expectations of course. The Fed can’t afford to disappoint markets.

The Fed is insisting they’re not running QE, but the market sure is acting like it is.

There is great hope that the Fed rate cut tomorrow will succeed this time to levitate prices above the trend line and keep it above. Perhaps that will be the case, but this renewed price levitation is again coming with negative divergence, uneven participation, and extremely tight price channels that are at risk of breaking if any sellers make their presence felt with volume.

For now enjoy the magic show, but keep in mind that all magic shows eventually come to an end and everyone is left wondering how they were deceived by the magician on the stage. Jay Powell will take the stage tomorrow and tell everyone that the economy is in a good place. But he’s using 3 rate cuts, $60B in monthly treasury bill buying and a daily $120B pro facility to pull off that magic trick.

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