– VIX extended its Master Cycle low until Tuesday, July 3. The extension came in the form of a zigzag, which is an irregular corrective pattern that buys time more than anything else. Tuesday’s low was only 50 basis points lower, but added two weeks to the cycle. The new Master Cycle low is juxtaposed against significant highs in the Liquidity Cycle, the SPX and Gold.
SPX has a final surge into July 4.
– Although SPX made a new high on Tuesday, it closed down for the week. What is interesting is that the Euro, Gold and other commodities all made significant highs this week, as well. The correlation among these assets is astounding. The implication is that all assets, excluding the Dollar and the VIX are due to decline in tandem.
“As Goldman notes today correlations across equities reached new record high levels during the financial crisis and remain extremely elevated compared to long-run averages. There are both structural (for instance, the dramatic rise in popularity of ETFs) and cyclical drivers that are causing this shift. This high level of equity correlations has huge implications for the investment community as opportunities for diversification are significantly reduced…”
NDX rally reaches its seasonal high.
– Typically, equities, especially the NDX. Reach their seasonal high in the first week of July. This year was no different. While the NDX closed above its 10-week moving average at 2566.00, this may mark the final peak leading into the worst season of the year for stocks.
(ZeroHedge) While Europe is dominating headlines this week, UBS’ Art Cashin suggests “mark your calendar and cross your fingers” as he notes the disproportionate prevalence of events that occur in September. Focusing on The Economist’s Greg Ip’s recent post on a possible seasonal pattern in banking crises, via this recent Reinhart & Rogoff extension paper by Laeven and Valencia, he notes: “The frequency with which the world goes to hell in September seems hardly random.” Beware the Ides of September.
The trap door opens for the Euro.
– The Euro has lost all support below its Head & Shoulders neckline. The Liquidity Cycle that my subscribers have been following suggests a solid decline through August to parity or below. What is intriguing is that this may be the first of several new cyclical lows through the fall of 2012. Parity with the Dollar may be only the first cyclical low.
The sea of red just got even redder as Japan, Korea, Norway, South Africa and Taiwan all dropped below 50, i.e., into contraction territory. From Bank of America: “Overnight and early this morning, a bevy of global manufacturing PMI reports were released. This provides us with an early reading on the state of manufacturing. Out of the 24 countries reporting so far, 10 saw month-over-month improvements in their manufacturing PMIs, while fourteen countries saw their PMIs worsen in June. Seventeen of the manufacturing PMIs were below the 50 breakeven level that divides expansion (+50) from contraction (+50). A majority of the below-50 PMI indices are located in the Euro area. The ongoing sovereign debt and banking crisis continues to weigh on the region’s economic activity and sentiment. The Euro area slowdown is beginning to impact the rest of the world.”
The US Dollar is primed for a breakout.
– The US Dollar advanced from its new Cup with Handle formation toward its weekly Cycle Top resistance and inverted Head & Shoulders neckline at 83.61. This formation now has an 80% probability of meeting or exceeding its (Cup with Handle) target. In addition, the inverted Head & Shoulders pattern has a 93% success rate, so the Dollar appears to be on its way to new highs..
(ZeroHedge) Last week the BEA published it preliminary take on the international investment position (IIP) of the country. As Citi’s FX team note, the IIP measures foreign investment assets minus native assets owned by foreigners. In the US, the IIP has been negative (meaning the US is a debtor nation) since 1985. The US’s IIP deficit reached USD 4.03trn in 2012, up sharply from 2.47trn in 2011. As a share of nominal GDP, the IIP deficit reached a record (for the US) of -27%.
Gold may be losing its grip.
– Gold failed to reach the upper Head & Shoulders neckline at 11640.00 and proceeded to lose the support of its 50-day moving average at 1598.49. The next goal is to break the massive neckline and begin a two week decline that may find a low beneath gold’s Cycle Bottom at 1190.84.July 3 (Bloomberg) — Hinde Capital’s Ben Davies talks about the price of Gold. He says it could hit $6000 an ounce. He speaks on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)
U.S. Bonds are at Cycle Top resistance.
– USB eked out a 51.82% retracement of the decline from its top at 152.56, but remain below Cycle Top Resistance. A fall below the 10-week support line at 148.20 is likely to bring on a flood of selling. Many analysts are calling for yet another surge in the long bond. So far there is no evidence of it.
(ZeroHedge) The Fed exerts a great deal of control over nominal interest rates. While the Treasury and Fed maintain the pretensions of an open and transparent market where national and international demand for government securities is generated organically, the reality is that the Fed can monetise anything that the market rejects to achieve any desired nominal interest rate.
Crude completed a minor retracement.
– West Texas Crude bounced back to the 10-week average at 87.72 before reversing back down. The next trip below the Head & Shoulders neckline at 80.00 may also go through Cycle Bottom support at 69.67 and possibly a massive crash in the coming Master Cycle low due in early August. The wave  consolidation extended last week and makes it easier to see. This decline may be similar, if not more intense than the 2008 decline.
Last Friday, ZeroHedge wrote, Following a 3-sigma fall yesterday, WTI crude has rebounded exuberantly amid the European ecstasy and the Iran Oil Embargo. Up almost 9% from late yesterday’s lows (a 6-sigma jump), it appears yet another squeeze is in play leaving refiners potentially tight on supply – as macro tail-risk is seemingly removed from the downside by the ‘nothing’ summit we just experienced. The bounce is over.
China stocks pause in their decline.
–The decline in the Shanghai index took a pause last week above Cycle Bottom support at 2126.75, which would give way to the Head & Shoulders neckline at 2120.00. The Cycles Model suggests that the decline should continue shortly. Perhaps a brief retracement is in the making, but since the retracements are over in the other world indices, I would not give it too much weight.
(ZeroHedge) Bears have got it right for almost 2 years now as far as stock investments are concerned, and the economy is now slowing down rapidly while the real estate market cools, just as the bears have predicted. Unfortunately, people increasingly blame short-sellers instead of admitting that they have been wrong.
Still, the cult has not died yet. The past few years have produced an impression of the Chinese government that it is invincible, and it has miraculous control over the economic machine, that the slowdown is “intentionally” engineered by the government and everything within the economy is still very much under control.
The India Nifty completes a 65.5% retracement.
The India Nifty extended its retracement above weekly mid-Cycle support/resistance at 5182.21. It becomes bearish again once it declines below its mid-Cycle support or 10-week support at 5061.85. The next objective is a test of the Head & Shoulders neckline and may bring downside acceleration to the India 50 index. The Cycles Model suggests that the decline in the CNX Nifty Index may resume through early August.
The Bank Index tested mid-Cycle resistance.
– BKX testede mid-Cycle resistance this week, but failed, creating a reversal pattern. A decline beneath its 10-week moving average at 44.71 puts BKX back on a sell signal and a probable decline to its smaller Head & Shoulders target at 31.03 in the next month. The lesser Head & Shoulders pattern may meet its target by early August. I expect to see the decline speed up considerably starting next week.
(ZeroHedge) …the BBC’s Robert Peston brings an unexpected actor into the (Lieborgate) fray: the English Central Bank and specifically Paul Tucker, the man who, unless Goldman’s-cum-Canada’s Mark Carney or Goldman’s Jim O’Neill step up, will replace Mervyn King as head of the BOE.
And the hits just keep on coming. Just as we said when it first broke, the Lieborgate scandal has considerably more play here and the latest and greatest is, via Bloomberg:
• Germany’s Bafin Holding Libor Inquiry on Deutsche Bank: Reuters
Anthony M. Cherniawski
The Practical Investor, LLC
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