Weekend Update - VIX And Gold Show Strength
VIX closed above its mid-Cycle support/resistance, putting it on a confirmed buy signal. This week has been the breakout week after three weeks of indecision. The next important milestones are the trendline at 22.50 and Cycle Top resistance at 24.17 where a long-term breakout of the downtrend may occur.
(SeekingAlpha) With all of the uncertainties facing the market, the CBOE Volatility Index or VIX has naturally started to climb as the S&P 500 has had a downward trajectory. With the spot VIX rising, the contango in the VIX futures curve has narrowed significantly. And, while technical factors may be weighing on the market today and a short term oversold condition may lead stocks a bit higher, the break of the recent S&P low of 2119 is noteworthy. Unless there is a significant move up above the 2160s, the market is likely to use any near term bounce as an opportunity to sell.
SPX breaks down
SPX declined beneath its Intermediate-term support at 2151.01, confirming the sell signal with weekly MACD ratifying it. Long-term support and mid-Cycle support between 2055.35 and 2067.89 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 4.5-year trendline intersect near 1940.00. Should those supports be broken, a panic may follow.
(Bloomberg) At first glance, the stock market in 2016 is nothing like it was last year, when winners kept winning and gains seemed to be concentrated in a handful of stocks.
Nowadays leadership bounces around. Since January, the S&P 500 Index’s strongest group has shifted among utilities, energy producers and technology companies, as investors swapped defensive shares for those that respond to economic growth.
At the same time, not all is well in the breadth department. One ominous signal that marked trading in 2015 has begun to reassert itself, a pattern in which the benchmark index hovers near a 52-week high while the proportion of stocks that are similarly elevated dwindles.
NDX closes beneath Short-term support
After starting the week at a new all-time high, NDX closed beneath two important supports, the lower being 4810.64, putting it on a sell signal. This may be a bit of a surprise for many, considering its performance prior to this week.
(BusinessInsider) Bank of America Merrill Lynch is joining the chorus of strategists on Wall Street who are warning that the stock market is expensive. Savita Subramanian, an equity strategist at the bank, pointed to the median of the price-to-earnings ratio, which measures whether company stocks are fairly valued in relation to their earnings, for the stocks in the S&P 500 index.
"The S&P 500 median P/E is currently at its highest levels since 2001 and suggests that the average stock trades a full multiple point higher than the oft-quoted aggregate P/E," she wrote in a note on Tuesday.
Stocks are considered expensive because the median P/E ratio is well above its historical average, indicating higher prices than are justified by the underlying earnings-based value of the companies.
High Yield Bond Index breaks down beneath supports
The High Yield Bond Index broke down this week, making a deeper low beneath its support zone and confirming its sell signal. Earnings reports have begun, giving us a window to examine not only profitability but ability to service debt.
(24/7WallStreet) When most bond investors invest, they probably think of Treasury bonds, government agency bonds or high-grade corporate bonds. Just hearing the terms “junk bonds” or “speculative grade” bonds might make some people squeamish when it comes to the safety of their assets. Still, some investors flock to the junk and speculative bonds.
It turns out that the investing community may have no choice but to own junk-rated and speculative bonds.
USB declines beneath the trendline
After treading along the Broadening Wedge trendline for a year-and-a-half, the Long Bond declined beneath it this week. This breaks the uptrend in USB. The question whether there may be a new high appears to be answered: No. While a bounce is still possible, it appears that a further decline to mid-Cycle may be in order.
(WSJ) After a brief respite, selling pressure mounted Friday on long-term government bonds in the U.S. and Europe following fresh signs of an uptick in inflation in the world’s two largest economies.
The yield on the benchmark 10-year U.S. Treasury note settled Friday at 1.792%, the highest close level since June 2. It was up from 1.739% Thursday. Yields rise as bond prices fall.
U.K. government bonds were the hardest hit. The yield on the 10-year gilt reached the highest level since June and was up about 0.08 percentage point at 1.102% late Friday, according to Tradeweb. The selling pressure rippled into Treasury bonds, German bunds and other high-grade sovereign debt in the developed world.
The Euro declines to the neckline
The Euro appears to have declined beneath its Head & Shoulders neckline at 110.00. The breakdown may lead to weakness with a further probable decline beneath its January low. The 11-month trendline may be in jeopardy.
(WSJ) In among the foreign-exchange fireworks, the euro looks like the currency 2016 forgot—at least against the dollar. That could change as the end of the year approaches.
The euro has proved remarkably stable against the dollar this year. While the pound has plummeted and many emerging-market currencies have made strong gains, the single currency has moved for months in a narrow range centered around $1.12. But in the past week it has started to move, hitting its lowest point in two and a half months on Thursday morning just below $1.10.
EuroStoxx probes support, bounces
The EuroStoxx 50 Index probed Intermediate-term support at 2973.21 before closing the week above Long-term support/resistance at 2988.75. The wide swings suggest a return of volatility that may influence price to the downside, as the Bearish Flag suggests.
(CNBC) European stocks finished Friday sharply higher, as a positive morning trade on Wall Street, a strong rally in banks, and better-than-expected inflation data from China helped lift sentiment.
The pan-European STOXX 600 finished up 1.29 percent, with all sectors posting solid gains. However, following a number of weak sessions, the STOXX 600 closed up only 0.09 percent on the week.
The U.K.'s FTSE 100 ended 0.51 percent up on Friday, while the FrenchCAC 40 and German DAX extended gains, closing 1.49 and 1.60 percent higher.
The Yen is testing its trendline
The Yen is testing its 10-month old trading channel. This week’s low marks the probable end of a delayed Master Cycle. There appears to be a new period of strength lasting through late October, giving it time to attempt to make its Cup with Handle as it breaks above the Cycle Top resistance at 99.28.
(Bloomberg) The yen fell, extending a third weekly decline against the dollar, as mounting speculation the Federal Reserve will raise interest rates this year rekindled policy divergence with Japan.
The Japanese currency dropped after better-than-forecast data on Chinese consumer and producer prices sapped demand for safety. The chance of the Fed raising interest rates by year-end have increased this month, pushing up Treasury yields and boosting demand for the dollar. Traders will look for clues on how policy makers view the U.S. economy later today when Fed Chair Janet Yellen speaks in Boston, while they’re also awaiting a report which economists expect will show a recovery in retail sales.
The Nikkei attempts a new high
The Nikkei appears to have attempted a new high this week, but failed to breach the September 6 high. Maximum resistance appears to be at round number resistance at 17000.00. A reversal on Tuesday suggests that a decline may have begun that may last through the end of October.
(EconomicCalendar) A recovery attempt in the Japanese Yen was short-lived, triggering a turn higher in the Nikkei after a sharp decline yesterday. Trading conditions were choppy in the first half of the session, with the bulk of gains realized after the lunch break. The index closed at 16,864, advancing 0.49% on Friday.
USD/JPY has been battling with horizontal resistance near the 104.00 handle this week. The pair failed near the resistance level on Tuesday and had managed to briefly scale above it on Wednesday, but gains were not sustained. The currency pair turned higher after posting a low during North American trading, and a steady rally shows the pair regaining the level once again.
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 of the boat.
(Reuters) Speculators lifted favorable bets on the U.S. dollar for a third straight week, with net longs hitting their highest in more than eight months, according to Reuters calculations and data from the Commodity Futures Trading Commission released on Friday.
The value of the dollar's net long position rose to $14.72 billion in the week ended Oct. 11, from $10.52 billion the previous week.
The dollar has been underpinned by recent strong U.S. economic data that cemented expectations of an interest rate hike by the Federal Reserve at its December monetary policy meeting.
Gold consolidates at Long-term support
Gold consolidated this week after challenging its Long-term support at 1256.17, closing beneath it again. This does not bode well for a bounce. A deeper low awaits Gold In late October, so it is probable that the decline may resume.
(Reuters) Gold fell on Friday as the dollar rose after U.S. economic data came in within analysts' expectations, cementing assumptions of an interest rate increase by the Federal Reserve by year-end.
U.S. retail sales rebounded 0.6 percent in September while producer prices also rose broadly to record their biggest year-on-year increase since December 2014.
The dollar gained 0.4 percent against a basket of six major currencies.
Spot gold was down 0.3 percent at $1,254.26 an ounce by 2:12 p.m. EDT (1812 GMT). U.S. gold futures settled down 0.2 percent, at $1,255.50.
Later in the session, Federal Reserve Chair Janet Yellen gave a broad review of where the U.S. economic recovery may still fall short.
Crude meets mid-Cycle resistance
Crude rallied to its high of 51.60 on Monday, then drifted beneath mid-Cycle resistance at 51.28, ending a delayed period of strength. There is now the probability of a month-long decline that may test the February low. After 6 months of being range-bound, traders are sanguine about the outlook for crude.
(Reuters) Oil prices fell slightly on Friday as traders balanced a stronger dollar and another increase in the U.S. oil rig count against expectations that more OPEC talk of output cuts will keep crude above $50 per barrel.
The dollar .DXY posted its best weekly performance in more than seven months against a basket of currencies, weighing on prices of greenback-denominated commodities, including crude oil. [FRX/]
A closely watched report by oil services provider Baker Hughes, meanwhile, showed U.S. drillers added four rigs in the week to Oct. 14. It was the 16th week in a row that oil drillers had gone without making cuts, indicating more production to come. [RIG/U]
Despite that, oil prices fell just slightly.
Shanghai Index attempts to rally
The Shanghai Index challenged Short-term resistance at 3053.29 this week. However, 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 next Master Cycle low is due in the next week.
(ZeroHedge) On August 31, in what was dubbed a "historic event", the World Bank became the first issuer of bonds denominated in SDR and settled in yuan when it sold 500 million SDR units worth of bonds in China. Then, overnight, in yet another historic event, Standard Chartered Bank (Hong Kong) said on Friday that it has obtained approval from the People’s Bank of China to be the first commercial issuer of bonds denominated in Special Drawing Rights (SDRs) in China’s interbank bond market.
According to Reuters the size of the issuance programme is 100 million SDRs – approximately 925 million yuan, or $139 million – and the bonds will be settled in yuan.
A successful offering would mark the first ever time a commercial issuer has issued securities have been issued in the synthetic reserve currency in 35 years.
The Banking Index makes a new retracement high
BKX spiked to a new retracement high on Monday, but drifted lower for the rest of the week. This indicates that the entire cycle is probably being delayed. Expect the decline to resume imminently.
(ZeroHedge) The big day has finally arrived: starting today, as previewed repeatedly over the summer, the SEC's 2a-7 money fund reform adopted in 2014 officially requires many prime money market mutual funds (those that invest in non-government issued assets such as short-term corporate and municipal debt) to float their net asset value. More importantly, these prime MMFs are allowed to delay client withdrawals under adverse market conditions.
The rule aim to prevent the sort of chaos that hit the money market after Lehman Brothers Holdings Inc.’s 2008 bankruptcy, which helped spark the financial crisis. The goal is to give investors a way to monitor a fund’s health by tracking its fluctuating net asset value, and to contain the fallout that could be caused by many investors cashing out at once, the SEC wrote in the final rules.
As as result, many Prime MMFs are and have been converting their assets to government funds, not buying CDs anymore and moving into Treasurys and agencies. As the chart below shows, nearly $1 trillion in assets have rotated out of prime money markets into government funds, as a result sending Libor rates through the roof, to the highest level since the financial crisis, with consequences that have yet to be determined.
(ZeroHedge) Just a week after Qatar investors were 'used' as the headline ammunition for short squeeze momentum ignition in Deutsche Bank's stock, WSJ reports the beleaguered bank's biggest shareholder is getting worried, questioning management's long-term strategy. The shares are slipping further as the German government rules out any state aid for the most dangerous bank in the world.
Following yesterday's dip, Deutsche stock is bid today but remains the same 12-12.50 range it has been in for a week... as credit markets remain near record wides...
(ZeroHedge) The hits for Deutsche Bank just keep on coming. One day after a report that the German lender has imposed a hiring freeze in the latest bid to reassure investors that it has expenses under control and is stemming the outflow of cash, moments ago Reuters reported that Deutsche Bank's finance chief told his staff that job cuts at the bank could be double that planned, a step that could remove 10,000 further employees.
Such cuts would likely take many years but setting such a goal could reassure investors that the bank is determined to tackle costs that sources said the European Central Bank sees as bloated. Unless, of course, they are forced to cut much faster. If 10,000 job losses were ultimately to follow the 9,000 announced by management in October 2015, roughly one in five of the bank's workforce around the globe would be affected.
(ZeroHedge) One year ago, when it was still widely accepted conventional wisdom that NIRP would "work" to draw out money from savers who are loathe to collect nothing (or in some cases negative interest) from keeping their deposits at the bank, and would proceed to spend their savings, either boosting the stock market or the economy, we showed research from Bank of America demonstrating that far from promoting dis-saving, those European nations which had implemented NIRP were, "paradoxically", also observing a jump in their rate of savings.
In what arguably was the first shot across the bow of conventional economic wisdom, BofA first admitted something which at least to its own conventional sensibilities, was quite amazing: NIRP is achieving the opposite of what it was meant to achieve.
Zero-to-negative interest rates (ZIRP, NIRP) have been implemented by central banks as a disincentive to save, thereby increasing the circulation of money.However, it seems to have had the opposite effect.People are even more inclined to save than before.Chalk up another misstep by ivory tower central planners.However, instead of admitting their error, they are doubling down by proposing the elimination of cash to save the economy.
Frank Shostak at Mises Institute writes, “Given the still-subdued economic growth many experts are of the view that the presence of cash has constrained central banks from setting negative rates to stimulate the subdued economic activity. In a future economic or financial crisis, current low rates would restrict the effectiveness of monetary policy, so it is held.
The presence of cash, it is argued, prevents the central banks from lowering policy rates to a level, which is going to meaningfully revive economic activity. What prevents the dramatic lowering of rates is that this is going to severely hurt savers who keep their cash in various bank accounts and so this is seen as politically unacceptable.
The abolition of cash, it is held, is going to enhance the ability of the central banks to use negative rates (perhaps as low as minus 5 percent per year) and this would provide central banks with additional flexibility and tools to deal with a slowdown.”
In the process of saving the economy, they will destroy pensions, banks and insurance companies that have provided capital for growth and a haven for future value.It won’t work.
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