VIX slipped beneath the mid-Cycle and weekly Short-term support at 13.30 to challenge the two-year trendline support at 12.15. It completed the week closing at the trendline. It appears to have had a belated Master Cycle low on Thursday.

(Bloomberg)  Time is the enemy of the volatility seller, according to Morgan Stanley.

The level of implied volatility is too low and the time it takes to generate sufficient income from volatility-selling strategies too long for investors to profit from taking a negative position on price swings, strategists at the bank including Phanikiran Naraparaju, wrote in a note to clients this week.

“We find that equity, credit, G10 FX and rates need two quarters of current carry levels to be protected from mean-reversion in implied volatilities,” the strategists said. “The cycle is far too advanced to give volatility sellers enough time to be able to withstand this.”

SPX challenges the two-year trendline…again

SPX rallied to challenge its 2-year trendline at 2775.00, closing slightly above it. This is the third inversion of the equities Master Cycles, something I haven’t seen before.  While SPX may go higher in the coming days, the rally is very stretched and may be prone to a sudden reversal.

(CNBC)  Stocks rose on Friday, adding to solid weekly gains, but their rise was kept in check amid increasing tensions between the U.S. and key trade partners as the G-7 summit kicked off.

The Dow Jones industrial average closed 75.12 points higher at 25,316.53, as UnitedHealth and Home Depot contributed the most to the gains. The S&P 500 gained 0.3 percent to 2,779.03 as consumer staples rose more than 1 percent. The Nasdaq composite closed 0.1 percent higher at 7,645.51.

For the week, the major averages all rose at least 1.2 percent.

NDX makes a new closing high

The NDX has broken out above its March 13 high and made a new closing high this week. In the process it approached its Cycle Top at 7273.49, but did not challenge it. The Cycles Model suggests that Thursday may have been the last day of strength in equities.    

(Bloomberg)  The world’s favorite stocks fought through to their seventh rally in nine weeks, though not without landing a few blows on traders.

For about 24 hours on Thursday and Friday, losses in the FAANG block looked liable to snowball, bringing back memories of a similarly out-of-the-blue lurch almost exactly a year ago today. But the nervousness abated, possibly aided by precautions traders have taken to lock in gains that are again approaching historic dimensions.

More than $300 billion has been added in six weeks to the group, comprising Facebook Inc., Amazon.com, Apple Inc., Netflix Inc. and Google parent Alphabet Inc. But along with the rally has come a jump in the price of bearish equity options on Nasdaq 100 stocks, a sign of brisk demand for contracts that act as insurance should the rally falter.

High Yield Bond Index scrambles back from Long-term support

The High Yield Bond Index rose above Long-term support at 188.75 to challenge its long-term trendline. MUT remains on a sell signal beneath the trendline. The rally has the appearance of a breakout, but must rise above 192.66 to make that a reality.  

(ZeroHedge)  Less than a month ago, Moody's warned that  "the prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality," and adds that "the record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives."

This was followed by an ominous warning from Bill Derrough, the former head of restructuring at Jefferies and the current co-head of recap and restructuring at Moelis: 

"I do think we're all feeling like where we were back in 2007," he told Business Insider: "There was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time."

UST gaps down, finds a lower bid

The 10-year Treasury Note Index gapped beneath Intermediate-term support to find a bid at Short-term support at 119.57.The pullback was expected, in order to test technical support. If so, we may see UST rally back to the Head & Shoulders neckline near 123.00.  

(IBD)  General U.S. Treasury bond funds led the charge among U.S. fixed income in May, rebounding strongly from their 1.4% decline in April with a 1.27% jump on a sharp drop in yields, according to Lipper Inc. data. General municipal debt funds came in second, up 1.18%, after declining just 0.25% in April.

Bonds experienced a roller-coaster ride in May. The yield on the benchmark 10-year U.S. Treasury note climbed to a multiyear high above 3.1% on strong economic data. But geopolitical tensions sent it plunging to 2.82% by May 31. When yields fall, bond prices rise, pushing almost all bond funds into positive territory for the month.

The Euro bounces

The Euro may have finished is bounce this week. If so, it may be gearing up for a higher, more complex bounce toward Long-term resistance at 120.14 after a pullback. Normally a bounce like this may last 2-3 weeks. However, a rally above Long-term resistance may lengthen the retracement.    

(CNBC)  The euro is unlikely to see a massive upswing next week as central bankers meet to discuss the end of monetary stimulus in the region, analysts have told CNBC.

The common currency has been recovering from political shocks over the last few days, hitting its highest level on Thursday since May 15, at $1.1838. This at the same time that central bankers have signaled they are due to prepare the end of a four-year-long monetary stimulus program next week.

Although such discussions could push the currency higher, going into the meeting, due Thursday in Latvia, analysts are not predicting any solid gains in the euro.

EuroStoxx fill the gap

The EuroStoxx 50 Index rallied to fill the gap left by the prior week’s decline. It has made a 50% retracement and now has closed beneath Intermediate-term support at 3452.10. It remains on a sell signal.

(CNBC)  European bourses closed lower Friday as investors were worried about world trade ahead of this weekend's G-7 meeting in Canada.

The pan-European Stoxx 600 was off by more than 0.2 percent with most sectors losing value. Autos stocks were the worst performers, down 1.17 percent, as worries mounted over the impact of a potential trade war on the sector.

The FTSE 100 index closed 0.30 percent lower.

Italy's FTSE MIB was the worst performing index in the continent, down 1.89 percent. Traders continued to monitor political developments in the country, which has seen anti-establishment parties Five Star and Lega rise to power. The new government won a vote of confidence in parliament earlier this week.

The Yen bounces at Long-term support

The Yen bounced at Long-term support at 90.92, but could not rise above mid-Cycle resistance at 91.50. That suggests a possible bounce to Intermediate-term resistance at 92.90 before a resumption of the decline toward “point 6.”  

(Reuters) - The dollar rose on Friday after a four-day losing streak, while perceived safe-haven currencies such as the yen gained as investors grew cautious ahead of what is expected to be a contentious G7 meeting in Canada later in the session.

Despite Friday’s gains, the dollar was on track for its largest weekly drop since late March.

Next week’s expected hike in U.S. interest rates by the Federal Reserve, a European Central Bank policy meeting and a Brexit bill vote all pose risks for currency traders and could inject more volatility in the market. 

Nikkei challenges the two-year trendline

The Nikkei challenged the two-year trendline at 22500.00, closing above it.  A decline beneath the trendline and Short-term support at 22431.90 renews the sell signal. The potential for a decline over the next two months to the Cycle Bottom is very high.

(EconomicTimes)  Japan's Nikkei share average snapped a four-day winning streak on Friday as investors stayed on the sidelines ahead of major economic events, while large-cap stocks such as SoftBank and Fanuc weighed on the index. 

The Nikkei ended 0.6 per cent lower at 22,694.50, just above the settlement price of June Nikkei futures and options contracts at 22,825.20, announced after market close. 

The Nikkei is still up 2.4 per cent for the week, its biggest gain in 11 weeks. 
 

U.S. Dollar may have reached a retracement high

USD eased lower this week, making a new low. The Cycles Model suggests weakness may prevail through the end of the month. Once the lower trendline is crossed, the USD may be “locked in” to the target at the top of the chart..  

(Reuters) - Speculators' net short dollar bets rose slightly in the latest week, after shrinking for six straight weeks, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.

The value of the net short dollar positions, derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars, was $5.54 billion in the week to June 5. That compares with a net short position of $4.85 billion the previous week. To be short a currency means traders believe it will fall in value.

Gold consolidates

Gold continues to consolidate beneath Long-term resistance at 1309.55, closing beneath it and the neckline of a Head & Shoulders formation (not shown) that implies a minimum target of 1235.00 in the next month. Crossing the lower trendline of the Broadening Wedge and mid-Cycle support at 1279.00 implies a much deeper low may be in store.

(Reuters) - Gold firmed on Friday as a rise in risk aversion ahead of G7 talks this weekend lent support, but the yellow metal remained hemmed within its narrowest weekly range in over a decade as a recovery by the dollar capped gains.Expectations that the Federal Reserve will announce another U.S. interest rate hike next week also pressured gold. Higher rates lift the opportunity cost of investing in non-yielding assets, such as bullion. Spot gold inched up 0.1 percent to $1,298.11 per ounce by 1:35 p.m. EDT (1735 GMT), while U.S. gold futures for August delivery settled down 30 cents, or 0.02 percent, at $1,302.70 per ounce.

Crude loses Intermediate-term support

Crude declined beneath its Intermediate-term support at 65.81, confirming a sell signal. It may attempt a bounce back to the upper trendline of the Broadening Wedge, but the Cycles Model doesn’t call for it. Instead, a Trading Cycle low is indicated for the next week

(Reuters) - Oil prices fell on Friday as concerns about surging U.S. output and falling demand in China weighed on the contract and JP Morgan cut its price forecast.

Brent crude futures LCOc1 settled down 86 cents, or 1.1 percent, at $76.46 a barrel. U.S. West Texas Intermediate (WTI) crude futures CLc1 ended 21 cents lower at $65.74 a barrel. For the week, Brent fell 0.5 percent, while U.S. crude slipped 0.3 percent.

In the past three weeks, prices have declined from three-year highs as the market has contended with supply concerns. On Friday, oil prices came under pressure after data suggested Chinese demand was waning and concerns lingered about growing U.S. output.

Hedge funds and other money managers cut their bullish bets on U.S. crude futures in the week ended June 5, the U.S. Commodity Futures Trading Commission (CFTC) said.

Shanghai Index makes a new low

The Shanghai Index slipped beneath Short-term resistance and the Head & Shoulders neckline at 3116.00, confirming the sell signal.  The Cycles Model suggests a strong decline, perhaps lasting more than a week.

(ZeroHedge)  Just hours after we warned that it was time to start worrying about China's debt default avalanche, and shortly after the PBOC lowered its credit quality restrictions for collateral, China offered its Medium-term Lending Facility (MLF) to inject CNY463bn (~$72bn) of liquidity.

As we detailed earlier, the recent blow out in Chinese corporate bond spooked none other than the PBOC, which last last Friday announced that it will accept lower-rated corporate bonds as collateral for a major liquidity management tool in a move that analysts see as designed in part to restore confidence in the country's corporate bond market.

The Banking Index bounces above Intermediate-term support/resistance

BKX rose above Intermediate-term resistance, temporarily negating the sell signal, after bouncing from Long-term support at 105.33 on May 29.  Cycles Model suggests that there may be some short-term strength through the coming week, but weakness may follow through the rest

(Forbes)  The five largest U.S. banks originated residential mortgages worth less than $87 billion in Q1 2018. This marks a sharp reduction from the figure of $110 billion in the previous quarter, and is also well below the $96 billion in mortgages originated a year ago. In fact, this was one of the worst quarters on record for these banks in the last twenty years. The only instance where these banks fared worse was in Q1 2014, when the end of the mortgage refinancing wave resulted in total originations dropping to $75 billion.

The sharp decline is primarily because of the reduction in overall activity levels across the mortgage industry from an increase in interest rates – something that can be attributed to the Fed’s ongoing rate hike process. While total mortgage originations for the industry also fell to $346 billion from $361 billion a year ago, a sharper decline in origination activity for the largest banks led their market share lower to 25% from 27% in Q1 2017.

(ZeroHedge)  Following last month's notable slowdown in the growth of consumer credit (to its weakest since Sept '17) expectations were for a bounce but April confirmed search trend data and saw a further slowdown.

As Bianco Research noted ahead of this data, consumer spending has been rolling over into the spring of 2018. The next chart looks at changes in searches for apparel, home improvement, autos, furniture, and more. The dwindling popularity of these types of search has reached the fastest pace of decline since 2009.

Credit searches are also falling, led by home financing. We have offered analysis of credit card delinquencies, which we expect to climb across the top 100 banks to 3.7% over the next year.

And so, against expectations for a $14.00bn rise in Consumer Credit (from $11.62bn), credit growth slowed to just $9.262bn, the weakest growth since September 2017.

(Bloomberg)  It's hard to recall the last time there was good news out of Deutsche Bank AG. Record fines and criminal charges. Restructuring plans with layoffs and write-offs, that don't seem to work. Losses. Senior management infighting. Credit-rating downgrades and new lows for the stock price.Added to a U.S. list of troubled lenders. 1  Only three of the 33 equity analysts following the German lender are positive on the stock, according to data compiled by Bloomberg.

It's no wonder that there's a heightened fear that some bad event will completely destroy faith in Deutsche Bank, leading to its collapse and a 2008-style financial crisis, just as Lehman Brothers Holdings Inc.'s bankruptcy ignited a global financial conflagration.