VIX closed above Long-term resistance at 14.25, confirming a probable buy signal in the VIX. The Cycles Model shows a likely surge in strength for the VIX through mid-October.

(Bloomberg)  Strategists are predicting a pickup in volatility after an usually quiet August, seeing choppy waters ahead for traders who took a summer break.

U.S. stock price swings were so muted last month that by some measures it was the calmest August since 1967. The Cboe Volatility Index, also known as the VIX or Wall Street’s fear gauge, averaged 13.6, lower than the five-year average of 14.6. Blame seasonality or traders who took a summer break, but strategists say don’t get too comfortable.

SPX reverses from its high

SPX reversed from its all-time high this week. Both price and time targets have been met. The Cycles Model now implies a powerful decline that may last through early November. The last time this has happened was in 2008.

(Bloomberg)  U.S. stocks fell for a fourth straight days after President Donald Trump’s threat to escalate the trade war with China roiled technology and multinational shares. The dollar climbed and Treasuries fell as wage gains bolstered the prospects for further rate hikes.

The Nasdaq 100 Index capped its worst week since March as Apple slumped on its warning that the Trump administration’s musing over levying virtually everything imported from China would hit a broad range of its products. The S&P 500’s weekly drop was the most since June and Boeing led declines in the Dow Jones Industrial Average. The dollar rallied versus major peers and the offshore Chinese yuan fell the most in a week. The 10-year Treasury yield pushed above 2.94 percent.

NDX begins September poorly

NDX had its worst start of September since 2008, challenging its weekly Short-term support at 7419.30.  A continued decline beneath that level trips the NDX sell signals. The Cycles Model suggests that the next several months may bring pain to equities. The weakest part of the Presidential Cycle may have arrived.

(Tumblr)  September of the 2nd year of the Presidential Cycle is historically the weakest month of the 4-year cycle.

Since working off its early year correction, the U.S. stock market has been on one of those inexorable runs that we’ve seen on so many occasions in recent years. Such runs have seen the market essentially steamroll any and all potential pitfalls that may arise. This recent run has been no exception as the stock rally has basically remained bulletproof to any exogenous hazards (real or fake). But just when the market is on this roll, even breaking out to new highs and apparently incapable of going down, a bout of selling strikes, seemingly out of nowhere. However, if we look a little deeper, perhaps we shouldn’t be surprised by the recent weakness.

High Yield Bond Index eases down

The High Yield Bond Index rally ended last Thursday.  Since then it has eased downward, but nothing is broken yet.  A sell signal is confirmed beneath Intermediate-term support at 193.69.  “Flag” consolidations such as this imply a resumption of the previous trend.

(CNBC)  Investors are showing more signs of concern about some of the market's biggest sources of return, including tech stocks and emerging markets, but they have been moving big into another risk-on asset this quarter: high-yield bonds.

The iShares iBoxx High Yield Corporate Bond ETF (HYG) is No. 2 among all exchange-traded funds in the current quarter in new money from investors, only outpaced by iShares S&P 500 ETF (IVV), bringing in near-$3 billion, according to XTF.com. That's more than the asset-gathering behemoth $100 billion Vanguard S&P 500 ETF (VOO). In August the iShares high-yield bond ETF ranked seventh among all ETFs for monthly flows, taking in close to $1.4 billion.

UST challenges Intermediate-term support support

The 10-year Treasury Note Index declined to challenge Intermediate-term support at 119.90. From here we may see UST rally back toward the Head & Shoulders neckline near 123.00. This rally may be painful for the speculative short sellers in treasuries as it may induce short-covering.

(ZeroHedge)  Here’s my math when this “balance sheet normalization” will end.

In August, the Federal Reserve was supposed to shed up to $24 billion in Treasury securities and up to $16 billion in Mortgage Backed Securities (MBS), for a total of $40 billion, according to its QE-unwind plan – or “balance sheet normalization.” The QE unwind, which started in October 2017, is still in ramp-up mode, where the amounts increase each quarter (somewhat symmetrical to the QE declines during the “Taper”). The acceleration to the current pace occurred in July. So how did it go in August?

The Fed released its weekly balance sheet Thursday afternoon. Over the period from August 2 through September 5, the balance of Treasury securities declined by $23.7 billion to $2,313 billion, the lowest since March 26, 2014. Since the beginning of the QE-Unwind, the Fed has shed $152 billion in Treasuries:

The Euro pulls back

The Euro made a near-50% retracement from last week’s high. It appears capable of resuming its rally with a potential target near Long-term resistance at 119.53. The rally may last through the end of the month.

(Bloomberg)  Europe’s credit market is racking up strong sales and seeing a pickup in high-yield issuance, even as an emerging-market rout roils other global assets.

Primary issuance this week topped 20 billion euros ($23 billion) for only the second time since July, following deals from AT&T Inc., Orange SA and Lloyds Bank Plc. Non-investment grade Dometic Group AB also priced euro notes three months after being said to have postponed plans for a sale, while a slew of cross-border transactions from borrowers including a Thomson Reuters Corp. unit are set to come to market.

The surge in activity reflects a seasonal September pickup following the Summer vacations and a rush to issue before a looming cut in European Central Bank asset purchases that’s already starting to drive up borrowing costs. This combination has outweighed concerns that sent emerging-market stocks into bear market including a stronger dollar, trade tensions, and turmoil in both Turkey and Argentina.

EuroStoxx approaching the danger zone

The EuroStoxx fell toward the Head & Shoulders neckline near 3270.00. Should Stoxx plunge through the neckline, the decline “locks in” to the target listed in the chart. The Cycles Model suggests up to a 2-week decline that may accomplish the damage that is threatened.

(Bloomberg)  European equities were little changed at the open, set for the biggest weekly decline in more than five months, as tremors across emerging markets spurred concern about growth.

The Europe Stoxx 600 Index was down less than 0.1 percent, poised for a 2.3 percent retreat this week, the worst since March 23. Banking is the only sector that’s up this week, led by Italian lender UBI Banca and Banco BPM as worries about Italian politics eased.

After bleeding cash for 25 consecutive weeks, European equity funds saw their first inflow in the past week of $0.3 billion, beating the meager $0.1 billion inflow into U.S. funds and trimming the $40 billion outflow since the year’s start, according to Bank of America Merrill Lynch. Investors had been looking forward to the Thursday deadline for public comment on proposed U.S. tariff hikes on an additional $200 billion of Chinese imports, but no fresh announcement was made.

The Yen consolidates at resistance

The Yen challenged Intermediate-term support at 90.33 this week as it consolidates for its next move higher, closing above Short-term support.  Although there appears to be stiff overhead resistance, XJY appears capable of reaching its potential target at 92.50. The pullback appears to be over.

(ZeroHedge)  USDJPY dived after hours (following a day of weakness) after reports from The Wall Street Journal  that President Trump told a columnist that he will take his trade fights to Japan next.

Yen strengthened as safe haven carry flows reverted home on the Trump headlines...

WSJ's James Freeman wrote  about a phone call he received from the president, in which Trump "described his good relations with the Japanese leadership but then added:

"Of course that will end as soon as I tell them how much they have to pay.'"

Nikkei “breakout” doesn’t last

Last week I labeled the rally above the Triangle as a false breakout. Since then it has fallen through Long-term support at 22413.25, putting it on a new sell signal. The Cycles Model calls for a new Master Cycle low in the next two weeks.

(JapanTimes)  Stocks fell further on the Tokyo Stock Exchange on Friday, led by a rout in semiconductor shares.

The 225-issue Nikkei average tumbled 180.88 points, or 0.8 percent, to end at 22,307.06, its worst finish since Aug. 21, after sliding 92.89 points Thursday. The average fell for the sixth straight session.

The Topix index of all first-section issues closed down 8.1 points, or 0.48 percent, at 1,684.31, the lowest since Aug. 13. It lost 12.55 points the previous day.

Semiconductor-related issues met with heavy selling after their U.S. counterparts fell Thursday.

U.S. Dollar repelled at mid-Cycle resistance

USD was repelled at mid-Cycle resistance at 95.42, closing beneath Short-term support at 95.05.  A trading pattern has been identified in which the USD may decline substantially in the next two weeks. There may not be another bounce to sell in to.

(CNBC)  The U.S. dollar rose against a basket of other currencies on Friday, as U.S. job growth surged in August, but investor concerns about a possible escalation of the U.S.-Chinese trade conflict held gains in check.

Nonfarm payrolls surged by 201,000 jobs last month, the U.S. Labor Department said on Friday. Average hourly earnings increased 0.4 percent in August, resulting in an annual increase 2.9 percent, the largest since June 2009.

Strengthening wage growth underscores tight labor market conditions and cements the likelihood of a third interest rate increase from the Federal Reserve this year when policymakers meet on Sept. 25-26.

Gold consolidates

Gold consolidated lower after testing Short-term resistance at 1215.79.  The decline may have been stopped on Monday due to a Trading Cycle low. This may rejuvenate the rally to reach for Intermediate-term resistance at 1246.98 in the next 2-3 weeks.     

(Reuters) - Gold fell on Friday as the dollar resumed its rally versus a currency basket after stronger than expected payrolls data cemented expectations of a third interest rate increase in September this year.

A stronger dollar makes dollar-priced gold costlier for non-U.S. investors.

U.S. job growth accelerated in August, with wages notching up their largest annual increase in nine years, strengthening views the economy was so far weathering the Trump administration’s escalating trade war with China.

Crude is back beneath the Diagonal trendline.

Crude slipped back beneath Intermediate-term support/resistance at 68.70 and the Diagonal trendline this week, reinstating the sell signal.  A break of Long-term support may set up a cascading decline over a period of months with the first major low coming in toward the end of the September.

(CNBC)  Oil prices fell on Friday for the third straight session, weighed down by a strong dollar, weakness in the equity markets, and Tropical Storm Gordon's smaller-than-expected impact on U.S. Gulf Coast oil production.

U.S. West Texas Intermediate (WTI) crude futures fell 2 cents to $67.75 per barrel.

For the week, WTI was set to lose more than 3.5 percent, and Brent was on track to fall 1.6 percent.

Oil prices had posted gains early in the week as the approach of Gordon forced the closure of Gulf of Mexico oil platforms and threatened refineries on the Gulf Coast.

Shanghai Index consolidates beneath resistance

The Shanghai Index consolidated lower after an attempt at challenging Short-term resistance at 2766.19. It is likely that the pullback was sufficient to allow another probe higher. Should that be the case, there is a period of strength that may only last until mid-week. Trying to call the bottom here may be dangerous.

(ZeroHedge)  The Friday moment everyone has been waiting for, namely whether or not Trump would greenlight the next $200BN in China tariffs now that the comment period is over. Moments ago we got the answer when Trump, speaking to reporters on board of Air Force 1, just said that he is ready to impose another $267BN in China tariffs in addition to the $200 billion proposed that his administration is putting the final touches on. 

The implementation of tariffs on $200 billion of products from China “will take place very soon depending on what happens,” Trump told reporters on Air Force One on Friday. “I hate to do this, but behind that there is another $267 billion ready to go on short notice if I want.”

The Banking Index continues to consolidate above supports

BKX eased lower from its August 27 swing high without breaking any supports.   The strength we observed is waning, but a sell signal is not given until BKX declines through critical support at 108.51.  The Cycles Model calls for an initial decline through mid-Cycle support at 96.14 to set the pace, possibly as early as next week.

(ZeroHedge)  It is axiomatic among investors that rising interest rates are good for banks in terms of enhancing earnings.But this is not necessarily true.In fact, banks make money on widening interest rate and credit spreads, namely the different between the cost of money and the return on loans and investments.Rising rates can be a mixed blessing.

In the 1980s, sharply higher interest rates during the term of Federal Reserve Chairman Paul Volcker essentially destroyed the housing finance sector in the US. Fixed rate mortgages and rising interest expenses led to widespread insolvencies in the savings & loan sector that cost US taxpayers hundreds of billions in losses.Today the situation facing banks in the US is equally dire yet is largely unrecognized by the financial markets and policy makers.

(Bloomberg)  European stocks are having a really bad week, with one outlier: Italian banks.

The Stoxx 600 Banks Index was the region’s only gaining sector this week through Thursday. Italian lenders, battered recently by concerns that the nation’s budget will suffer under the new government’s expensive electoral promises, were the top performers.

A combination of factors fueled the sector’s recovery this week: valuations are at a two-year low, several market players, including Barclays Plc, called the selloff overdone and Italian populists tried to reassure the market by promising to respect all European Union fiscal restrictions. Even so, according to Crossbridge Capital LLP, investors holding Italian banks may still need protection from a higher source as volatility is likely to persist.

(ZeroHedge)  Roughly six months after Latvia's third-largest lender, ABLV, was thrust into insolvency following shocking allegations of bribery and money laundering, a similar story is playing out in neighboring Estonia, where the local branch of Danske Banke on Friday revealed that a suspected money laundering scheme is much more serious than investigators had previously realized.

Call it the local Wells Fargo: while initial reports that billions of dollars of illicit funds from shadowy sources in the former Soviet Union had flowed through the branch were largely ignored by the markets, the Wall Street Journal sent shares of Danske bank spiraling lower when it reported that as much as $150 billion was laundered through the bank between 2007 and 2015 - a staggering amount that dwarfs the size of the entire Estonian banking industry. Initial reports from earlier in the year had the suspected illicit funds at $8 billion.