Weekend Update - Long View Of The Markets And Their Cycles
VIX challenged both Short-term and Intermediate-term resistance this week, but closed beneath the Short-term at 13.82. However, it has made a breakout above the last down-cycle high of 14.24. The next important milestone is mid-Cycle resistance at 15.79 where a buy signal may be made.
(Bloomberg) August 2015 was a terrifying time for investors, with the imminent withdrawal of Federal Reserve stimulus and China’s currency devaluation sending stocks on their wildest ride in four years. Twelve months later, it’s nothing but calm.
Stock turbulence has been banished as the CBOE Volatility Index, which saw its biggest one-day spike on record in last year’s selloff, now sits 40 percent below its decade average. Fed funds futures that priced in as many as four interest-rate hikes a year ago see only even odds of one before 2017. The yuan keeps sliding, but few seem to notice.
SPX reverses from its trendlines
SPX made a second challenge of the confluence of two upper trendlines of two different Orthodox Broadening Tops on Monday and failed to make a new high. It reversed beneath its Cycle Top resistance at 2188.89, closing above Short-term support at 2150.18. SPX has fulfilled all the fractal requirements for a completed uptrend.A significant low may be due by the end of the coming week.
(Bloomberg) What had been just a sleepy August is turning into an increasingly painful one for U.S. equity market bulls.
Notwithstanding an hour-long burst of optimism that followed Federal Reserve Chair Janet Yellen’s policy speech Friday, the buoyancy that lifted stocks for the first half of the summer has now been missing for the better part of a month. The S&P 500 Index fell 0.7 percent to 2,169.04 this week, the biggest drop since June, to erase its August gains.
NDX closes beneath its Cycle Top
NDX slipped beneath its weekly Cycle Top at 4804.08, but with no gain for the week.It has reached its fractal target of 4732.24 on August 3 and peaked on August 9. A slip beneath the Cycle Top may indicate a reversal is in motion.
(ZeroHedge) Unlike many of the sentiment indicators we’ve looked at recently, traders on one options exchange recently exhibited a record show of nervousness.
We’ve written a fair amount recently about the growing level of optimism, or complacency, evident in many corners of the stock market. Indeed, overly exuberant sentiment is probably the most troublesome factor in the markets right now. There is nary a time, however, when all signals and indicators are in alignment with one another. The present is no exception. And in fact, the traders on one options exchange recently demonstrated a record level of cautiousness.
High Yield Bond Index has declined to Short-term support
The High Yield Bond Index declined beneath its Short-term support at 161.15 for a probable aggressive sell signal. Wall Street is furiously issuing new products as they see the window closing soon.
(MoneyMorning) The high‐yield bond area has been a Petri dish for misapplied financial theories and assumptions for years.
High-yield bonds are properly understood as hybrid securities that possess the characteristics of both debt and equity. Yet most investors in this asset class focus on the "spread" at which a bond trades. The spread is the number of basis points (1/100th of a percentage point) above a benchmark yield at which a bond trades. In the case of high-yield bonds, Treasury bonds are considered the benchmark on the basis that they are riskless securities (an assumption that itself is questionable in view of the United States' increasingly precarious fiscal posture). Spread represents the risk premium that investors demand for owning a security that is riskier than a Treasury bond.
USB declines to Intermediate-term support
The Long Bond declined toward Intermediate-term support at 169.25.A break of that support may threaten the Long-term support and the Broadening Wedge trendline at 163.41.Should it break through Long-term support, a potential decline to its 34.4 year trendline at 142.40 may be indicated.
(WSJ) U.S. government bond yields rose Friday after comments from Federal Reserve officials revived bets that U.S. interest rates will rise this year.
The yield on the benchmark 10-year note rose to 1.631%, its highest level since the June 23 Brexit referendum and up from 1.576% on Thursday. The yield on the 2-year note, highly sensitive to the Federal Reserve policy outlook, rose to 0.845% from 0.786% Thursday.
The Euro reverses back to Intermediate-term support
The Euro appears to have completed the right shoulder of a potential Head & Shoulders formation. The Cycles Model suggests an abrupt and very strong decline may be just ahead.A significant low may be realized in the third week of September.
(ZeroHedge) In one generation, Europe will be unrecognizable.
- Eastern Europe now has "the largest population loss in modern history", while Germany overtook Japan by having the world's lowest birth rate.
- Europe, as it is aging, no longer renews its generations, and instead welcomes massive numbers of migrants from the Middle East, Africa and Asia, who are going to replace the native Europeans, and who are bringing cultures with radically different values about sex, science, political power, culture, economy and the relation between God and man.
EuroStoxx bounced off Intermediate-term support
The EuroStoxx 50 Index bounced off Intermediate-term support at 2947.53, but could not regain its prior high. The Cycles Model identifies a Trading Cycle low due at the end of next week that may also combine with a significant Master Cycle low. That combination may be potent.
(CNBC) Positioning in this year's popular trades is building.
Investors prefer bonds over stocks, and European equities are well out of favor, according to the latest fund flow data.
European equities posted a record 29 straight weeks of outflows with a drawdown of $2.0 billion, according to EPFR Global data cited by Bank of America Merrill Lynch in a Thursday report. Meanwhile, investors poured $6.6 billion into bonds, marking the 19th week out of the past 21 weeks of inflows, the data showed.
The Yen pulls back toShort-term support
The Yen broke pulled back beneath weekly Cycle Top support/resistance at 99.33 to test its Short-term support at 97.71. The uptrend does not appear to be in any danger as it consolidates after its breakout above its prior high at 100.00. The probable new period of strength may last through late September, giving it plenty of time to attempt to make its Cup with Handle target.
(CNBC) The Japanese yen has been a star performer in 2016, and after a 20 percent move in less than eight months, everyone is wondering where this currency goes next.
It's a question being asked far beyond foreign exchange desks.
A stronger yen is helping some American multinational companies, including technology players like HP Inc. (HPQ) and automakers like General Motors (GM) that have complained in the past about a weaker yen giving a lift to their Japanese competitors' exports and an unfair competitive advantage.
The Nikkei challenges Intermediate-term support
The Nikkei continued its decline to Intermediate-term support at 16261.00 where it may bounce briefly. A failure at that support level may send the Nikkei to the Head & Shoulders neckline. A Trading Cycle low appears to be due by the end the week. The second “right shoulder” reinforces the potential decline and its target.
(Barrons) The Bank of Japan has long been criticized for cornering the Japanese government-bond market with its annual 80 trillion yen ($800 billion) purchase. The smaller, equity exchange-traded fund purchase program, first launched in 2013 to boost demand for risk assets, also distorts Japan’s stock markets and disproportionately benefits Nikkei 225 heavyweights such as Fast Retailing and SoftBank Group .
The BOJ, which started the ETF program in 2013 and has expanded it three times since, is currently buying JPY6 trillion of ETFs a year. By July, its ETF holdings already accounted for 1.9% of the market cap of stocks listed on the Tokyo Stock Exchange. After its July 29 policy meeting, the BOJ became even more active, buying on every trading day.
U.S. Dollarbounces off mid-Cycle support
USD rebounded off its mid-Cycle support to challenge Intermediate-term support at 95.37. The bulk of the bounce occurred on Friday as the Cycles Model suggested.It now appears that the USD may meet stiff resistance as it approaches Short-term resistance at 95.91, so the retracement may be short-lived.
(DailyFX) After a quiet week, the highly anticipated speech by Fed Chair Janet Yellen delivered today at the he Jackson Hole Economic Policy Symposium lived up to its billing. The US DOLLAR Index, mired in an apathetic lull the past several days, is in the midst of posting its widest daily trading range of the week on the back of Chair Yellen’s commentary.
The speech that was billed as a must-watch event by market participants as many were looking for a gauge for when the Fed might hike rates in the coming months. Indeed, even though the focus of the gathering was on the Fed’s long-term toolkit - “Designing Resilient Monetary Policy Frameworks for the Future” – Chair Yellen made clear almost immediately that the economy is approaching the Fed’sinflation and employment goals.
Gold bounces at Yellen’s remarks
Gold finally put in a delayed Master Cycle low at 1321.00 on Thursday. The Cycles Model now projects a period of strength through mid-September. A Triangle formation (daily chart) suggests a minimum rally to 1410.00.
(WSJ) Gold prices swung between gains and losses on Friday after a speech by Federal Reserve Chairwoman Janet Yellen sparked speculation over an interest rate increase as early as September.
Gold for December delivery settled up 0.1% to $1,325.90 a troy ounce on the Comex division of the New York Mercantile Exchange, after trading as low as $1,321.80 and as high as $1,346.00 following Ms. Yellen’s comments.
At the Jackson Hole Symposium on Friday, Ms. Yellen said concerns about economic growth have eased, and that the possibility of an interest-rate increase will continue to be influenced by economic data.
“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months,” Ms. Yellen said in prepared remarks.
Crude‘s puzzle may be solved
Crude made a high on August 19 and has begun its decline. The expected Master Cycle low may be due by the end of the coming week. Can this week’s decline match or surpass the February 11 low at 26.05? The alternate view also calls for a decline that may be equally dramatic, but over a three week period, instead of one week.
(Forbes) Most experienced commodity traders know that crude oil is one of the more volatile commodity markets where the gains as well as the risks are high. Having followed the crude oil market for thirty years I am still amazed how many try to trade this market based on fundamental analysis. Over the years through my past crude oil training sessions in Singapore and London I have made a number of converts.
This week the new head of one of the oldest commodity trading firms recommended shorting crude oil at $50-$55 according to Bloomberg based on bearish fundamentals. Those who follow the crude oil market may remember the negative headlines on crude oil as prices dropped in early 2016. The decline was based on the perceived weak demand, concerns over the economy and a rising trend in oil rig counts.
Shanghai Index reverses from two resistance zones
The Shanghai Index reversed back through its Long-term resistance at 3073.92 after failing its probe at the mid-Cycle resistance zone at 3171.90. The first installment in the coming decline may be short in duration, but strong.
(ZeroHedge) There has been no shortage of crises in the Western World lately with heightened concerns over Brexit, Italian Banks, Portugal's sovereign debt rating, Fed decisions, etc, all rattling the nerves of investors. But amid all the chaos in the West, Donna Kwok of UBS recently pointed out that China has been relatively "calm". That said, UBS sees 3 things that could disrupt the relative "calm" in China by the end of the year. In summary, downside risks remain in China's continued effort to work through sizable inventory overhangs in their real estate market as well as in the restructuring of State Owned Enterprises (SOEs) which need to undergo substantial capacity reductions and management realignments. Failure of property developers to return to the market with new developments and/or an increase in unemployment related to capacity reductions at SOEs could derail the "China Calm."
The Banking Index finally meets mid-Cycle resistance
BKX finally challenged mid-Cycle resistance at 70.92on Friday. The Cycles Model calls for a Master Cycle low due on or near the end of August. That low may be at or near the Bearish Pennant minimum target.
(ZeroHedge)12-months US Libor squeezed higher in anticipation to changes in US regulation on prime money-market funds, kicking in on October 14th. However, Fasanara Capital's Francesco Filia warns that critically, it is unclear whether such technical factors will fade, partially or in full, once the new regulation kicks in and uncertainties clear. Coincidentally, rates on short-dated govies also moved higher in past weeks in anticipation of potential rate hikes by the FED.
In addition to the tighter financial conditions in the inter-banking market that the squeeze on swap rates implies, to domestic and foreign users (as also reflected by TED spreads and OIS/Libor spreads being the widest since 2011), we note that Libor rates are now close to long dated US rates, resulting in a much flatter yield curve.
Interestingly, the US yield curve is now flat between 12months Libor and 10yr Treasury yield,for the first time since 2008.
(CNBC) American banks spent the second quarter crying all the way to the, well, bank.
Despite an increasing regulatory burden and amid lackluster share performance, the industry logged record profits for the period, topping the second quarter of 2015, according to figures from SNL Financial and S&P Global Market Intelligence.
Profits for the three-month period totaled $43.6 billion, compared to the $43.01 billion in Q2 of 2015, a 1.4 percent beat. On a sequential basis, the April-to-June period topped the previous quarter by $4.56 billion, an 11.7 percent rise.
(ZeroHedge) When we last looked at the blowout in US short-term funding rates, most notably Libor, which has been broadly attributed to regulatory reasons ahead of the October 14 money fund reform deadline, we pointed out that with trillions in debt tracking Libor, it was only a matter of time before something snapped.
Since then Libor has slowed down its dramatic ascent, so far plateauing in the low 0.8% range, however, the materially "tighter financial conditions" have remained.
Yet while many have been looking for clues in the US banking sector about financial stress, they have been so far unsuccessful. The reason for that, as IFR reports, is that they were looking in the wrong place.
Instead, it is not US but Japanese megabanks who have emerged as the biggest victims of a worsening squeeze in the US $1 trillion commercial paper market, "as high swap costs leave them with few satisfactory alternatives for dollar funding."
(ZeroHedge) Deutsche Bank's war of words with the ECB is not new: it was first unveiled in February when, as we wrote at the time "A Wounded Deutsche Bank Lashed Out At Central Bankers: Stop Easing, You Are Crushing Us." Europe's largest bank, with the massive derivatives book, then upped the ante several months later in June, when its chief economist Folkerts-Landau launched a shocking anti-ECB rant in which it warned of social unrest and another Great Depression.
Ironically, these infamous diatribes hurt more than helped: telegraphing to the market just how hurt DB was as a result of the ECB's monetary policy, the market punished its stock, which has been recently trading within spitting distance of all time lows, in effect making Deutsche Bank's life even harder as it now has to contend not only with its own internal profitability problems, but also has to maintain a market-facing facade that all is well. So far, it has not worked out very well, prompting numerous comparisons to another infamous bank
Have a great weekend!
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