Acceleration

Let me summarize this post for you. With only a week’s worth of full participation left this year’s Santa Rally can most likely be written off as a no-show, most but not all of it fueled by ever decreasing global Dollar liquidity. The interest rate announcement scheduled for Wednesday will most likely paint the EOY candle for 2018. But unless the Fed changes its outlook back to at least neutral throughout 2019 expect further downside acceleration in equities.

Here’s a graph of the Effective Federal Funds Rate as issued by the St. Louis Fed, which now shows it > 2.2. Of course you would be right in pointing out that rate increases have been going on since early 2016, but what’s different now is that central banks around the world are tightening too, thus global liquidity is draining at a much faster pace.

The result of that is that the supply of dollars globally is becoming increasingly scarce. Which of course is in part to a stronger US economy, slower credit growth in China, and repeated statements by the Fed to remove money from the financial system.

Which is why this year’s final interest rate decision by the Fed, scheduled for Wednesday afternoon, has the potential to launch some mighty fireworks, but not of the sorts we were planning to enjoy two weeks from now. And I think at this point the repercussions of even hinting at further tightening of the FFR next year are pretty clear:

I don’t think this medium term chart of the E-Mini futures warrants much explanation. Both daily MAs are already pointing toward and the weekly is about to follow suit. Charts like these very rarely resolve with a  happy ending if you get my drift.

Here’s the short term view on relative realized volatility with something that may not immediately jump out to you. The cyan candles show times when to most likely expect an RV expansion. And the direction of the following week usually continues on for a while, except maybe for the one that occurred mid to late November (bottom middle of the chart)

Now if you look on the very with, where we are right now, then you’ll notice that we once again triggered an RV expansion signal last Friday and despite having a bonafide VIX buy signal on the books the E-Mini is now drooping lower.

Someone on in the comment section belabored the fact that nobody had done statistics on VIX Buy Signals over the past year and he’s right. They worked extremely well, i.e. 90% of the time, between 2009 to 2017 (we’ve posted about all of them) but just the fact that they are starting to be less reliable speaks for itself. And to that end VIX Sell signals may be the ones to look out for going forward.

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