Weekend Update - Earnings, VIX And Crude In Spotlight
VIX closed above its Intermediate-term support at 13.29, leaving it on a buy signal. This week has been a consolidation week after breaking out above its Triangle formation. The next important milestones are the trendline at 22.50 and Cycle Top resistance at 24.15 where a long-term breakout of the downtrend may occur.
(ZeroHedge) Many ill-informed pundits have taken the recent absence of volatility to mean that it is gone for good. But many smart investors, like Tepper and Gundlach and Druckenmiller, who are paid to protect their clients’ money against large drawdowns are forgoing returns today (and incurring hedging costs to boot) in order to protect against an anticipated pickup in extreme events in the future.Why? Because they know that a financial market structure that is predicated on the inputs to the valuation models never changing in an adverse way is a market that cannot be saved forever.
SPX rises, but beneath resistance
SPX bounced, but closed beneath its Intermediate-term support at 2156.07, confirming the sell signal with weekly MACD ratifying it. Long-term support and mid-Cycle support between 2056.55 and 2069.76 appear to be the next targets in a developing decline. However, the more important targets may be those of the two Orthodox Broadening /Tops. The Broadening Top trendline and 5-year trendline intersect between 1925.00 and 1950.00. Should those supports be broken, a panic may follow.
(WSJ) Deal talks and earnings results sparked sharp moves in individual stocks, while the broader market was steady.
The S&P 500 was little changed Friday but was on track for a weekly gain. Major indexes have swung between relatively small losses and gains in recent sessions, and daily stock-trading volumes have been below the 2016 average.
On Friday, the Dow Jones Industrial Average rose 1 point, or less than 0.1%, to 18163. The S&P 500 rose less than 0.1% and was on pace for a 0.4% gain this week. The Nasdaq Composite rose 0.3% Friday.
NDX makes a reversal pattern
NDX completed what appears to be a valid reversal pattern by bouncing up to its Cycle Top resistance at 4867.54, leaving it on a sell signal. This may be a bit of a surprise for many, considering its performance until now.
(RealInvestmentAdvice) Howard Marks once stated that being a “contrarian” is tough, lonely and generally right. To wit:
“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, particularly when momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’)
Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.”
The problem with being a contrarian is the determination of where in a market cycle the “herd mentality” is operating. The collective wisdom of market participants is generally “right” during the middle of a market advance but “wrong” at market peaks and troughs.
High Yield Bond Index continues its decline
The High Yield Bond Index continued its decline toward Long-term support at 152.17. Earnings reports have begun, giving us a window to examine not only profitability but ability to service debt.
(ZeroHedge) Right now, if you are long high yield bonds, the odds of making a decent return going forward are definitely not in your favor. Credit spreads are tight, and they are tight to an ultra-low risk-free rate. Not a good combination. At the same time, the fundamentals of the companies that issued those bonds are deteriorating, and the market for new issuance of high yield bonds is drying up. If you own a high-yield ETF today, you are making the bet that these spreads will tighten further, which is really a bet that the underlying fundamentals of these companies will get better not worse. Seven or eight years into a recovery, when corporate earnings have been down for 5 quarters in a row, do you really think the odds are still in your favor?
USB retests the trendline
The Long Bond bounced from its low to test its trend line. The trend line held. It appears that a further decline to mid-Cycle support at 157.38 may be in order.
(WSJ) Longer-term U.S. government bonds remained stuck in a narrow range Friday as investors awaited further insight into the economy and central bank policies.
Bonds strengthened earlier this week following some softer-than-expected U.S. economic data, but have steadied since, with few catalysts to move the market significantly in one direction or the other.
In late-afternoon trading, the yield on the 10-year note was 1.740%, compared with 1.745% Thursday and 1.792% a week earlier.
The Euro broke the neckline
The Euro appears to have broken its Head & Shoulders neckline at 110.00, coming close to its Head & Shoulders target in short order. The breakdown brought more bad news in the form of an inverted Cup with Handle formation which indicates a further probable longer-term decline beneath its December 2015 low.
(ExchangeRates) The Euro to US Dollar exchange rate was on track to finish the week at its lowest value since February, as the USD continued to strengthen on a weak EUR despite a lack of ecostats throughout the day.
The shared currency could recover some of its losses in the coming week if Markit’s PMI scores, due on Monday morning, impress investors by indicating strong Eurozone activity in October.
EURUSD slipped to its worst levels since just after the UK’s Brexit vote on Thursday afternoon, as the day’s European Central Bank (ECB) news disappointed while the US Dollar surged on higher December Fed rate hike bets.
EuroStoxx rallies, but no new high
The EuroStoxx 50 Index rallied, closing the week at a gain but failing to overtake its September 8 high at 3101.75. The wide swings suggest a return of volatility that may influence price to the downside, as the Bearish Flag suggests.
(CNBC) European stocks closed flat on Friday afternoon's trade, the day after the European Central Bank (ECB) quashed talk regarding its future monetary policy, sending the euro to its lowest point since March.
The pan-European STOXX 600 was provisionally flat at the end of European trade with sectors mixed.
The U.K.'s FTSE 100 edged into the negative territory along with the French CAC 40, both closing 0.09 percent down. Meanwhile, the German DAX finished the trading week by the same margin but in the green by 0.09 percent.
The Yen reverses at its trendline
The Yen appears to have reversed from its10-month old trading channel. The much anticipated Master Cycle low occurred on October 18. There appears to be a new period of strength possibly lasting through the election, giving it time to attempt to make its Cup with Handle as it breaks above the Cycle Top resistance at 99.24.
(Bloomberg) Bond investors globally see more inflation on the horizon than at any time since May 2014 -- except in Japan.
Japanese five-year inflation swaps remain mired below 0.3 percent, resisting pressure from rising oil and commodity prices. Equivalent swaps in the U.S have surged to near 2 percent, while those in Germany are approaching 1.2 percent.
The Nikkei may have completed its retracement
The Nikkei appears to have fulfilled the final probe of its retracement from its February low, despite being unable to match its April 26 high at 17613.56. A reversal from this week’s high suggests that a decline may have begun that may probe the Head & Shoulders neckline in short order.
(Reuters) Japan's Nikkei share average edged down in choppy trade on Friday, snapping a five-day winning streak while investors await for major Japanese companies to report their mid-year results next week.
The Nikkei ended 0.3 percent lower at 17,184.59, falling for the first time in six sessions. For the week, it was still up 1.9 percent.
The broader Topix dropped 0.4 percent to 1,365.29 and the JPX-Nikkei Index 400 shed 0.3 percent to 12,231.17.
U.S. Dollar spikes the upper Descending Wedge trendline
USD spiked to the Descending Wedge trendline, closing on it. The Cycles Model now suggests a reversal may be in the works. The next month may unhinge the Dollar bulls, since all the traders are on one side of the boat. The unwinding of those trades may cause a rapid move to the other side.
(RealMoney) I don't see this dollar rally lasting very long, at least not as long as the current U.S. fiscal expansion continues and I suspect that will be the case all the way until next March. I have been mentioning next March because that will be the time when we're likely see the confluence of two things: The debt ceiling will have to be raised and, most likely, the new president will have already made some policy proposals that will either be passed or voted down by Congress. So the way I see it, next March will be a pivotal time.
Dollar buying now is based on portfolio shifts being driven by two things, both of which, are completely misunderstood.
Gold bounces at Long-term support
Gold bounced above its Long-term support at 1260.83, but pulled back from its high. The Cycles Model suggests a deeper low awaits Gold In late October, so it is probable that the decline may resume imminently.
(Reuters) Gold barely budged on Friday as rising demand from Asia was offset by a strong dollar but the precious metal remained on track for its first weekly rise since the week ending Sept. 30.
Gold has been hurt in recent weeks by the strength of the dollar, which has been helped by a slew of data indicating an improvement in the U.S. economy that could justify an interest
rate rise later this year.
Higher U.S. rates increases the opportunity cost of holding non-yielding assets such as bullion and creates a flight to investments that may offer higher returns.
Crude challenges mid-Cycle resistance
Crude challenged mid-Cycle resistance at 50.88, closing the week just beneath it. There is now the probability of an imminent decline that may test the February low. After 6 months of being range-bound, traders are sanguine about the outlook for crude.
(CNBC) Renowned energy trader Mark Fisher is not parsing words when it comes to buying crude oil and natural gas — on Friday, he advised buying any dip in the commodities.
Crude futures have rallied about 90 percent since bottoming out earlier this year in the upper $20s, but remain well below their 2014 highs above $100 a barrel. They have more recently been bolstered as OPEC prepares to launch its first coordinated output limits in eight years in order to prop up prices.
This week, U.S. crude traded at a 15-month high near $52 a barrel.
Shanghai Index nudges higher
The Shanghai Index probed above Short-term resistance at 3057.87, staying beneath its August 16 high. It is “in the window” for a strong decline, possibly a crash. The fractal Model suggests the Shanghai is due for another 1,000 point drop, possibly starting next week. The Master Cycle low is overdue by approximately a week. That may compress a probable decline into just a few days.
(ZeroHedge) If one looks at China's reserve data released by the PBOC, one would be left with the impression that China's capital outflows - the bogeyman that sent global risk assets tumbling in late 2015 and early 2016 -have moderated notably in 2016 after the surge during the summer of 2015 and in early 2016. However, as we explained previously, the PBOC has a habit of hiding what is truly happening below the surface, using legitimate mechanisms such as forward contracts, as well as some less legitimate ones. So to get an accurate perspective of what is happening with China's fund flows, one has to look at a monthly dataset provided by SAFE, which presents the capital flow data in a way that can't be "fudged."
The Banking Index at the apex of a Diagonal
BKX spiked to the apex of an Ending diagonal formation, closing near the high. The break point is at the weekly Short-term support at 71.55. Once broken, we may expect to see a very sharp (panic) decline.
(ZeroHedge) Moments ago Deutsche Bank stock, which has been well away from the headlines in the past two weeks, spiked following a Manager Magazin report according to which the Qatar and Abu Dhabi Sovereign Wealth Fund together with Chinese investors would be willing to raise their stake in DB to 25% in the case of a capital increase. This is hardly new, and has been regurgitated in some capacity over the past month, however it was sufficient to move the stock some 4% higher.
The German outlet also reports that the biggest European lender is increasingly confident of paying a fine significantly below $14 billion, thereby avoiding a new for a capital increase.
What is interesting is that according to Manager, the Qatar and Abu Dhabi investors are being advised by the infamous Michele Faissola who recently was charged for market manipulation by Italy in relation to DB's transactions with Monte Paschi and who may have had a role in some of the recent prominent banker suicides as we reported last week.
(ZeroHedge) It's official: Donald Trump is now a systemic threat.
As part of the Mexican stress test, alongside more traditional calamities such as recession, economic crisis, and market crash, the Mexican financial authorities have ordered local banks to assess the potential impact of Donald Trump winning the U.S. presidential election, Reuters reports. Citing six bank sources, Reuters says that alongside a "normal" annual stress test, the banks were asked to conduct an additional test to examine the macroeconomic effects and volatility resulting from a potential Trump victory on Nov. 8.
The local regulator, the Financial System Stability Board (CESF) said that as a result of the ongoing risk surrounding the U.S. electionand an expected tightening in Federal Reserve monetary policy, it had examined the results of stress tests of the country's financial system. "These exercises showed that the banking sector maintains adequate levels of capital and liquidity to face adverse scenarios," the CESF, which includes representatives from the Finance Ministry, the Bank of Mexico and the banking regulator CNBV, said in its statement.
(ZeroHedge) John Stumpf is now gone from Wells Fargo, but his - and the bank's - problems may be just starting.
According to a report by the LA Times, California Department of Justice is investigating Wells Fargo on allegations of criminal identity theft over its creation of millions of unauthorized accounts, according to a search warrant sent to the bank’s San Francisco headquarters this month. The warrant and related documents, served Oct. 5 and obtained by The Times through a FOIA request, confirm that California AG Kamala Harris, in the final weeks of a run for U.S. Senate, has joined the growing list of public officials and agencies investigating the bank in connection with the accounts scandal.
As Reuters adds, the AG warrant seeks to seize documents at Wells, and cites probable cause that felonies were committed at the bank.
(WSJ) Big mortgages are all the rage at the largest U.S. retail banks.
Lending for jumbo mortgages, those that exceed $417,000 in most U.S. markets, surged at J.P. Morgan Chase & Co. and Bank of America Corp. in 2015, according to new data. The banks originated $37.1 billion and $23.3 billion, respectively, of jumbos—up 88% and 68% from 2014. U.S. Bancorp’s jumbo lending increased around 50% to $8.3 billion.
The figures are based on Inside Mortgage Finance’s analysis of recently released mortgage data by banks and other lenders under the Home Mortgage Disclosure Act.
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