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October 27, 2017

VIX

VIX declined beneath all but the July 26 low. However, it was a record weekly closing low. The inverted Head & Shoulders formation still survives due to the probability that today’s low may have been a late Master Cycle low.

(TheFelderReport) RealVision recently put together a compilation of several market pros’ views (including yours truly’s) regarding the very serious and unique risks investors face today. It’s now on YouTube so it’s free to watch but if you’re active in the markets I highly recommend a subscription to RealVision. In my humble opinion, it’s the only financial television worth watching.

 

SPX continues to challenge its Broadening Wedge.

SPX

SPX continues to challenge its Cycle Top and Broadening Wedge trendline at 2589.16. A decline beneath the upper Diagonal trendline at 2550.00 may signal an end to the rally. A further decline beneath the lower Diagonal trendline at 2500.00 gives a probable sell signal and suggests a much deeper decline may follow.

(Reuters) – A surge in shares of heavyweight Apple helped push up major Wall Street indexes on Friday, as investors also assessed a mixed U.S. labor market report.

Shares of Apple, the world’s most valuable publicly traded company, rose 2.8 percent as shoppers streamed into the company’s stores to buy its latest iPhone. Apple also gave a better-than-expected sales forecast for the holiday shopping season.

U.S. job growth accelerated in October after hurricane-related disruptions in the prior month, the Labor Department said. But wages grew at their slowest annual pace in more than 1-1/2 years in a sign that inflation probably will continue to undershoot the Federal Reserve’s 2-percent target.

 

NDX goes parabolic.

NDX

NDX has expanded its throw over above the Ending Diagonal formation. This week it made another all-time closing high. Short-term support and the lower Diagonal trendline lie at 6065.32. A decline beneath that trendline may produce an aggressive sell signal.

(IBD) U.S. stock indexes were mixed midday Friday, as the market disregarded a miss on October payrolls.

The Nasdaq rose 0.4%, while the S&P 500 added 0.2%. The Dow Jones industrial average rose 0.1% and the small cap Russell 2000 was flat.

Volume in the stock market today was down on both major exchanges.

October payroll increases rolled in at 261,000 — about 20% below expectations. Bulls looking for upbeat angles could point to upward revisions in August and September and the fact that the economy rebounded quickly from the effects of hurricanes.

 

High Yield Bond Index consolidates beneath its Cycle Top.

 MUT

 

The High Yield Bond Index made an effort to rise above Cycle Top resistance at 184.94 without success. A break of the upper Diagonal trendline and Short-term support at 180.93 may tell us the rally is over. What’s happening in Europe is also happening in the US.

(Reuters) – Calling the top in world markets and getting the timing of it right seems like a lottery, but predicting the catalyst for the turnaround may be less random.

High-yield, or so-called “junk”, bonds are on a tear that puts even record-busting stock markets in the shade. Last week, the yield on the Merrill Lynch global high-yield bond index fell below 5 percent for the first time ever. The European index yields barely 2 percent.

To put that into context, European junk bonds yield less than 10-year U.S. Treasuries trading around 2.35 percent.

 

USB rises above Long-term support.

USB

The Long Bond rallies above Long-term support at 152.53. This suggests another week or more of rally that may allow USB to rise to mid-Cycle resistance at 157.94. Should it break above that level, it may complete the right shoulder of a potential Head & Shoulders formation. .

(Economist) FOR the umpteenth time in the past decade, a great turning-point has been declared in the government-bond market. Bond yields have risen across the world, including in China, where the yield on the ten-year bond has come close to 4% for the first time since 2014. The ten-year Treasury-bond yield, the most important benchmark, has risen from 2.05% in early September to 2.37%, though that is still below its level of early March (see chart).

Investors have been expecting bond yields to rise for a while. A survey by JPMorgan Chase found that a record 70% of its clients with speculative accounts had “short” positions in Treasury bonds—ie, betting that prices would fall and that yields would rise. Meanwhile a poll of global fund managers by Bank of America Merrill Lynch (BAML) in October found that a net 85% thought bonds overvalued. In addition, 82% of the managers expected short-term interest rates to rise over the next 12 months—something that tends to push bond yields higher.

 

The Euro consolidates beneath Intermediate-term support.

XEU

The Euro consolidated at the lows after last week’s sell-off that put it on a sell signal. Its target appears to be Long-term support at 112.68 or possibly mid-Cycle support at 111.16. Any residual strength it may have had appears to have evaporated as it goes into a Master Cycle low in the next two weeks.

(PoundSterlingLive) The Euro has weakened due to long-term negative growth prospects but could a restocking drive keep the single currency supported?

The decision to reduce stimulus in the Eurozone was thought of as a sign of good health but markets are unimpressed, and the Euro will not rise until the longer-term prospects for growth pick up, says a strategist at leading French lender, Société Générale.

Growth leads to spending and higher inflation which makes central banks put up interest rates.

Higher interest rates tend to strengthen the currency as foreign investors tend to move their money to where it can earn more interest.

 

EuroStoxx makes a new two-year high.

STOXX50

The EuroStoxx 50 Index continued higher, reaching for the weekly Cycle Top resistance at 3728.36. While the rally appears strong, it may be nearing its limit.  The Cycles Model suggests that Stoxx may retain strength for another week or so, possibly challenging its Cycle Top. However, a reversal has the potential to set a cascading decline into motion over the next two months.

(Bloomberg) European stock investors riding the region’s economic and profit momentum are betting the 2017 rally has further to run.

Company chiefs and money managers alike are shifting their focus from the perils posed by a stronger euro to the tailwinds from the economic rebound. Even as European equities trade near a 2015 high, investors have been increasing exposure this year on bets the region’s growth will ignite earnings. Analysts haven’t been this optimistic about the outlook for European profits in the coming year since 2011.

The Yen retests its retracement low.

XJY

 

While the Yen may have made a Master Cycle low last week, it appears that weakness may linger for the next few days. We may anticipate a probable two to three week-long rally to follow that has the potential to break out above the prior highs. A lift above the resistance cluster between 89.23 and 89.75 puts the Yen back on a buy signal

(SeekingAlpha) Business Insider had the opinion that the Bank of Japan (statement) is boring because it kept its monetary policy unchanged for the umpteen time. I would disagree because this is only true on the surface. In Japan, monetary policy is decided from the top. It requires the buy-in from the Prime Minister himself unlike the United States where central bank independence is respected.

 

Nikkei exceeds initial target .

Nikkei

The Nikkei has gone from strength to strength as it powers the Nikkei to a new decades-long high. Should it extend yet further, it may rally to 22627.00, its next target/resistance area. The Cycles Model does not support the extended rally. In fact, it suggests a major low may be anticipated in two to three weeks.

(Livemint) The search for the world’s frothiest stock market is heating up. Most eyes are on the Donald Trump rally in New York. Some gaze at Narendra Modi’s Mumbai. Perhaps, though, we should be looking at Shinzo Abe’s Tokyo.

Abenomics is having a good moment. Japan is enjoying its longest run of growth in 11 years, unemployment is at 23-year lows and Prime Minister Abe’s big 22 October election win frees him to toss more stimulus at Asia’s No. 2 economy. But a 30% surge in the Nikkei 225 Stock Average over the past year? Seriously?

Tokyo shares are benefiting from the we-are-the-world stock boom. The extent to which it’s racing ahead of the 19% gain in the MSCI World index, though, raises questions.

 

U.S. Dollar makes a reversal pattern.

US Dollar

 

USD consolidated beneath its retracement high after pulling back. In doing so it may have made a reversal pattern. A decline beneath Short-term support at 93.04 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) – The dollar has moved from a supporting role to a featured player this earnings season, a boon to U.S. multinationals which have benefited from the biggest quarterly year-on-year decline in the greenback in three years.

Since the start of October, at least 35 U.S. companies have cited currency “benefits” or “tailwinds” and “weaker dollar” for boosting quarterly earnings, compared with few mentions a year ago, and some see that extending to the fourth quarter, a Reuters analysis shows.

 

.Gold remains on a sell signal.

Gold

Gold resumed its decline, but hasn’t yet broken beneath the prior week’s low. A further break of Long-term support at 1260.31 indicates that the decline may proceed beneath the lower trendline of the Broadening Wedge and possibly trigger that formation.

(CNBC) Gold prices have gained more than 10 percent this year on U.S. dollar weakness and increased global geopolitical tensions. Despite the move, Phil Streible, senior market strategist at RJO Futures, says the rest of the year could be turbulent for the yellow metal. And he has four reasons why. • Streible has rising expectations for interest rate hikes beginning in December, with three more in 2018. This could make the U.S. dollar more attractive to foreign investors, boosting the greenback, thus depressing gold prices.

 

Crude prices may stop meandering.

WTIC

Crude extended its Trading Cycle inversion for yet another week but it may bring the meandering oil market to a halt at or near the weekly Cycle Top at 58.02. A sell signal may be made by crossing the support cluster between 51.31 and 49.77. The next Cycle low may occur in the next two weeks.

(Reuters) – Oil prices dipped in see-saw trade on Wednesday, hitting their highest in more than two years and then retreating after weekly U.S. government inventory data showed the latest crude stock draw was not as big as an industry trade group had reported.

While oil settled lower, both global marker Brent LCOc1 and U.S. crude CLc1 benchmarks remained near the highest levels since July 2015, as lower global supply pushed markets higher.

Sponsored

“The market had a bit of a pull back today … prompted by a bit of profit taking,” said Gene McGillian, manager of market research at Tradition Energy in Stamford, Connecticut.

 

Shanghai Index declines, but still above support.

Shanghai Index

The Shanghai Index continued its decline, but closed above weekly Short-term support at 3371.69. Whatever strength that may remain may dissipate by the end of the week. The potential for a sharp sell-off rises as the Short-term and Intermediate-term support at 3314.57 are breached.

(ZeroHedge) We know… there are several candidates to choose from. For example…

It might be Anbang – the acquisitive insurance behemoth – see “Anbang Just Became A ‘Systemic Risk’: Revenues Crash As Its Chairman Is “Detained”

It might be China Evergrande – the developer of “ghost” properties and described by J Capital’s, Anne Stevenson-Yang as “the biggest pyramid scheme the world has yet seen” – see “Stevenson-Yang Warns ‘China Is About To Hit A Wall”.

Or…it might be HNA. The highly-leveraged Chinese conglomerate, which has been on an overseas acquisition binge, is paying more for a 363-day dollar loan than serial defaulter, Argentina, paid on a 100-year loan earlier this year.

 

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) During the Party Congress, even China’s somewhat watered down versus of the free markets was suspended so as not to disturb the glorification of Xi Jinping as the nation’s greatest leader since Mao. Returning to “business as usual”, some commentators have been disturbed by the continued rise in government bond yields with the 10-year hitting 3.93% earlier this week.

We also noted Huachuang Securities Co. comment that bond holders may be about to get hit by “daggers falling from the sky,” if the Party adopts more aggressive deleveraging policies. In a far less sensationalist way, the Wall Street Journal has attempted a post-mortem on the recent sell-off in the Chinese government bond market.

(ZeroHedge) It’s often said in financial markets that correlation does not mean causation. On some occasions, however, denying the causation seems so outlandish to be, frankly, preposterous. As a case in point, Institutional Investor (II) discovered a newly published academic work investigating the investment returns of SEC employees. It turns out those guys are surprisingly good.

According to IIemployees at the Securities and Exchange Commission may benefit from divesting companies ahead of investigations, research shows.

Employees at the U.S. Securities and Exchange Commission earn investment returns similar to the insider traders they prosecute, according to new research from Columbia University and Arizona State University.

Why aren’t we surprised.

(Reuters) – With the announcement of Jerome Powell as the new Federal Reserve Chair, banks are likely to see a battle between a boost from deregulation supported by the new Fed leader and the challenge of a flattening yield curve as monetary policy is likely to remain on course.

A steepening yield curve is seen as a boon to banks, as they borrow on lower shorter-term rates and lend on higher long-term rates, which helps generate profits through increased net interest margins. But the curve has flattened under current Fed policy which is expected to continue under Powell, who has worked alongside current Fed Chair Janet Yellen for the past five years.

(Bloomberg) Italian bank executives and central bankers, take note: people trust you less and less.

Just 16 percent of Italians have confidence in the country’s lenders, down from an already meager 17 percent in June, according to a poll by the SWG research group of Trieste on Friday. Only 24 percent trust the Bank of Italy, plunging from 36 percent in June.

One likely reason: a tortuous bank crisis that caused losses for savers and led the government to rescue three lenders with taxpayers’ money this year. The vanishing confidence is likely to show in campaigns for national elections expected by next spring.

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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