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October 27, 2017

VIX

 

VIX broke out against the prior week’s high, but ended the week below all critical support/resistance areas. A buy signal awaits it above Intermediate-term resistance at 10.70, with further confirmation above weekly mid-Cycle resistance at 14.64. It has an inverted Head & Shoulders formation that, when triggered, offers us a potential target for the next rally.

(RealInvestmentAdvice) I have argued that risk is under-priced because in large measure of the structural changes in the markets and participants positioning.

Risk is an ever-present condition that cannot be eliminated, though it can be shifted through time and redistributed in form.

In today’s market many believe that they have achieved protection over risk, but they actually are becoming its servant.

 

SPX challenges its Broadening Wedge.

SPX

SPX pulled back this week, then proceded to challenge its Cycle Top and Broadening Wedge trendline at 2579.33 again. A decline beneath the upper Diagonal trendline at 2550.00 may signal an end to the rally. A further decline beneath the Broadening Wedge formation at 2455.00 gives a sell signal and suggests a much deeper decline may follow.

(TheMacroTourist) I have been meaning to write this post for quite some time. As an ex-ETF trader, I have watched with bemusement as investors have both embraced and shuddered at the wide adoption of ETFs. But most pundits are missing the larger picture. ETFs are just a symptom of the bigger phenomenon. The true battle lies in the passive versus active debate.

Let me get this out of the way right off the bat. I have no dog in this hunt. I see both the benefits and the negatives to each side. Yet as a trader, I definitely have a view on which end of the boat is leaning lopsided right now.

 

NDX “throws over” the Ending Diagonal.

NDX

 

NDX has been testing the top trendline of its smaller Ending Diagonal since May. This week it made another all-time closing high by throwing over the Diagonal. Short-term support and the lower Diagonal trendline lie at 6031.13. A decline beneath that trendline may produce an aggressive sell signal.

(ZeroHedge) The Nasdaq is dramatically outperforming the rest of the major US equity indices today…

In fact this this is the biggest Nasdaq outperformance of the S&P since May 2009…

We saw some weakness in the stocks of tech megacaps recently, not so much because of a concern about mediocre earnings but rather because a concern about valuations being stretched,” said Walter Todd, chief investment officer at Greenwood Capital Associates.

“The numbers Google and Amazon reported may trigger a rotation back into tech megacaps and probably a further rally. ”

Putting the massive gains in context…

The Nasdaq 100 has added over $180 billion in market cap today – the biggest addition since the day after Aug 2015’s Flash Crash…

 

High Yield Bond Index reverses beneath its Cycle Top.

MUT

 

The High Yield Bond Index made an all-time high on Tuesday, then sold off, closing beneath its Cycle Top at 184.53. A break of the upper Diagonal trendline at 181.00 may tell us the rally is over. What’s happening in Europe is also happening in the US.

(Bloomberg) If 2017 is judged to be the year of big but boring refinancings for the European high-yield market, next year is shaping up to be a different proposition with leveraged buyouts and lower-rated credits expected to drive a bigger share of bond sales.

Yield-hungry investors have embraced the glut of supply in Europe so far this year, helping borrowers secure ultra-low funding costs and negotiate favorable terms on their bond transactions. This has been fueling issuers’ appetite, and may open the door to more LBO-driven activity, as well as supply from “riskier” credits in 2018, bankers have said.

 

USB reverses from a Master Cycle low.

USB

The Long Bond reversed on Friday from a two-week overdue Master Cycle low. This allows a 2-3 week rally that may allow USB to rise to mid-Cycle resistance at 157.96. In other words, the right shoulder of a potential Head & Shoulders may come closer to completion. However, should it go higher, there is the possibility of new all-time highs in USB.

(FoxBusiness) U.S. Treasury yields held their ground early Friday as traders awaited an important report on third-quarter economic growth that could set the tone for investing in government bonds, offering the latest reading on the strength of world’s No. 1 economy and the effects of a series of hurricanes.

What are yields doing?

The yield on the 10-year Treasury note was at 2.451%, compared with 2.452% late Thursday in New York. The 2-year Treasury yield stood at 1.623%, versus 1.618% in the previous session, while the 30-year Treasury bond yield traded at 2.957%, compared with 2.959% late Thursday.

 

The Euro breaks Intermediate-term support.

XEU

 

The Euro resumed its decline beneath Intermediate-term support/resistance, putting it on a sell signal. Its target appears to be Long-term support at 112.45 or possibly mid-Cycle support at 111.14.

(Reuters) – The euro fell on Friday, marking its biggest weekly loss of the year a day after the European Central Bank decided to prolong its bond purchases and signaled its willingness to stick with an ultra-loose policy stance.

The tension between Madrid and Catalonia’s secessionists also stoked selling in the single currency after the Catalan parliament on Friday declared independence from Madrid following a secret ballot. Spain Prime Minister Mariano Rajoy retaliated by sacking the Catalan government and set elections on Dec. 21.

“The dovish surprise from the ECB was its openness to extend the duration of its bond purchase program,” said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.

 

EuroStoxx betters the May retracement high.

STOXX50

The EuroStoxx 50 Index broke out above the May retracement high on Friday. It has met the minimum requirements for this rally, but may extend further for a brief period of time.  The Cycles Model suggests that Stoxx may go into a panic cycle in the very near future. A reversal has the potential to set a cascading decline into motion over the next two months.

(CNBC) European stocks closed higher Friday, as investors tried to shake off political turbulence in the region and focus on upbeat earnings and the prospect of continuing stimulus in Europe.

The pan-European Stoxx 600 closed provisionally higher, with most sectors and major bourses in positive territory.

The French CAC touched its highest level in almost a decade on Friday, while Germany’s Dax set a fresh record high after dovish comments from ECB President Mario Draghi in the previous session. A sharp uptick in auto stocks also boosted the DAX, with Volkswagen posting a positive earnings report.

 

The Yen reverses from a retracement low.

XJY

 

The Yen made an overdue Master Cycle low on Friday and reversed from that low. We may anticipate a probable two to three week-long rally that may break out above the prior highs. A lift above the resistance cluster between 89.37 and 89.71 puts the Yen back on a buy signal

(EconomicTimes) In an exclusive interview with Tanvir Gill of ET Now, Russell Napier, Independent Investment Strategist, says Japan is running out of savings on which it ran for nearly three decades. There is breakout coming for Japan and the data point for that would be the Bank of Japan’s balance sheet.

 

Nikkei extends the Super Cycle Wave .

Nikkei

The Nikkei has extended its period of strength to power the Nikkei to a new decades-long high. Should it extend yet further, it may rally to 22375.00. However, the Cyclical strength is waning and exhaustion may have set in. A new Master Cycle low may be due in about two weeks

(JapanTimes) The benchmark Nikkei average surged on the Tokyo Stock Exchange Friday on the strength of brisk corporate earnings, surpassing the 22,000 threshold for the first time in almost 21 years and four months.

The benchmark Nikkei 225 average gained 268.67 points, or 1.24 percent, to 22,008.45, closing above the 22,000 threshold for the first time since July 5, 1996. On Thursday, the key market gauge rose 32.16 points.

The Topix, including all first-section issues, closed up 17.15 points, or 0.98 percent, at 1,771.05, the highest closing level since July 20, 2007. The index climbed 2.47 points the previous day.

 

U.S. Dollar breaks out above resistance.

US Dollar

 

 

USD broke out above Intermediate-term resistance at 93.26 to complete its retracement rallly. The Cyclical period of strength may have ended on Friday. A decline beneath Short-term support at 92.83 activates a sell signal that may lead to a panic decline. The lower trendline of the Orthodox Broadening Top at 90.00 may be the next attractor, but the Orthodox Broadening Top formation calls for a breakout beneath the trendline, as indicated by “point 6.”

(Reuters) – Speculators’ net short bets on the U.S. dollar fell to their smallest in nearly three months, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.

The value of the dollar’s net short position was $8.02 billion in the week ended Oct. 24, down from net shorts of $12.65 billion the previous week. Investors have pared back net short bets on the dollar for four straight weeks.

 

.Gold declines beneath Intermediate-term support.

Gold

Gold declined beneath Intermediate-term support at 1284.49, reinstating its sell signal. A further break of Long-term support indicates that the decline may proceed beneath the lower trendline of the Broadening Wedge and possibly trigger that formation.

(Reuters) – Gold edged higher on Friday, reversing earlier losses after the Catalonian

parliament’s independence declaration from Spain led investors to seek safety from political upheaval.

Catalonia’s declaration was in defiance of the Madrid government, which was preparing to impose direct rule over the region.

“Catalonia is a small microcosm of the total European situation. But what it represents is the idea of an unstable European Union,” said Dan Huffey, senior market strategist at RJO Futures in Chicago.

“(These are) all reasons why we would look for a safe haven like gold to rally,” he added.

 

Crude makes a new retracement high.

WTIC

Crude ramped higher in a probable Trading Cycle inversion, making a new retracement high. A sell signal may be made by crossing the support cluster between 50.39 and 49.10. The next Cycle low may occur in the next two weeks.

(Reuters) – Oil prices jumped about 2 percent on Friday, with global benchmark Brent crude rising above $60 per barrel, on support among the world’s top producers for extending a deal to rein in output and as the dollar retreated from three-month peaks.

Saudi Arabia and Russia declared their support for extending an OPEC-led deal to cut supplies for another nine months, the Organization of the Petroleum Exporting Countries’ secretary general said ahead of the group’s next policy meeting on Nov. 30. The pact currently runs to March 2018.

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Brent futures LCOc1 rose $1.14, or 1.9 percent, to settle at $60.44 a barrel after hitting a session peak of $60.53, the highest since July 2015 and more than 35 percent above 2017 lows touched in June.

 

Shanghai Index extends its high.

Shanghai Index

The Shanghai Index consolidated beneath last week’s high where the decline was halted at Short-term support at 3350.76. This may also be known as an inversion rally, which was discussed last week. Once the inversion is complete, the potential for a sharp sell-off rises.

(ZeroHedge) It is hardly a secret that thanks to nearly $4 trillion (at least) in credit creation in 2017 – more than the rest of the developed world combined – China has been the proverbial (and debt-funded) “growth” dynamo behind the recent period of “coordinated global growth.” Unfortunately, much if not all of this was window dressing for the just concluded 19th Communist Party Congress, which in not so many words, made Xi Jinping into a de factoemperor with no apparent or otherwise heirs.

The problem is that with the Congress now over, so is the period of coordinated global growth.

 

The Banking Index extends the run for the Broadening Top.

BKX

— BKX extended its run for the upper trendline of its Broadening Top formation and Cycle Top resistance at 105.66. The residual strength left for this week may have run out on Friday. If the Orthodox Broadening Top formation is correctly identified, the next level of support may be the mid-cycle line at 80.07.

(ZeroHedge) Last week, WSJ stoked fears that the Feds might be ramping up another probe into abuse and manipulation in the foreign exchange market when it reported that Wells Fargo had abruptly terminated four bankers from its FX business and transferred another. Now, Wall Street’s paper of record is reporting that Federal prosecutors are investigating Wells for abuses in its FX shop – but the scope of the investigated is limited to one disputed trade.

According to WSJ, prosecutors have subpoenaed information from Wells and from the recently fired bankers as they investigate a trade and ensuing dispute between Wells and one of its clients, Restaurant Brands International Inc.

RBI owns several fast-food franchises, including Burger King, Tim Hortons and Popeyes Louisiana Kitchen. In an amusing twist, both companies count Warren Buffett’s Berkshire Hathaway as one of their largest shareholders.

(ZeroHedge) In all the euphoria over yesterday’s “dovish taper” by the ECB, markets appear to have forgotten one thing: the great Central Bank liquidity tide, which generated over $2 trillion in central bank purchasing power in 2017 alone – and which as Bank of America said last month is the only reason why stocks are at record highs, is now on its way out.

This was a point first made by Deutsche Bank’s Alan Ruskin two weeks ago, who looked at the collapse in global vol, and concluded that “as we look at what could shake the panoply of low vol forces, it is the thaw in Central Bank policy as they retreat from emergency measures that is potentially most intriguing/worrying. We are likely to be nearing a low point for major market bond and equity vol, and if the catalyst is policy it will likely come from positive volatility QE ‘flow effect’ being more powerful than the vol depressant ‘stock effect’. To twist a phrase from another well know Chicago economist: Vol may not always and everywhere be a monetary phenomena – but this is the first place to look for economic catalysts over the coming year.”

He showed this great receding tide of liquidity in the following chart projecting central bank “flows” over the next two years, and which showed that “by the end of next year, the combined expansion of all the major Central Bank balance sheets will have collapsed from a 12 month growth rate of $2 trillion per annum to zero.

(ZeroHedge) Spanish stocks have given back all of their gains from yesterday‘s chaotic on-again-off-again headline-hockey surrounding Catalan independence as it appears all but inevitable that the separatists will pull the trigger any minute now.

The contagion has spread to European bank stocks which have tumbled to unchanged on the week…

(Bloomberg) Community banks and credit unions face a lot of challenges today, and they make a good case for lightening some unnecessary regulatory burdens. But instead of focusing on these smaller institutions, Congress is considering easing up oversight for some of the biggest banks in the country. This would increase the risk of another financial crisis.

In the aftermath of the crisis, Congress determined that banks with more than $50 billion in assets — roughly the 40 biggest in the country — posed an outsized risk to the economy. The 2010 Dodd-Frank Act directed the Federal Reserve to apply stricter oversight and regulation to such institutions. The law was carefully drawn to force the Fed to impose tougher capital, liquidity, and leverage requirements, while it also empowered the central bank to make adjustments based on a bank’s size and complexity.

Have a great weekend!

Anthony M. Cherniawski

The Practical Investor, LLC

2205 Hopkins Avenue

Lansing, MI 48912

www.thepracticalinvestor.com

Office: (517) 331-5200

 

Disclaimer: Nothing in this email should be construed as a personal recommendation to buy, hold or sell short any security.  The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model.  At no time shall a reader be justified in inferring that personal investment advice is intended.  Investing carries certain risks of losses and leveraged products and futures may be especially volatile.  Information provided by TPI is expressed in good faith, but is not guaranteed.  A perfect market service does not exist.  Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment.  Please consult your financial advisor to explain all risks before making any investment decision.  It is not possible to invest in any index. 

 

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