Will Black Friday Turn Blue?

Is the American consumer coming down from a sugar high?  As retailers are gearing up for Black Friday and the coming holiday shopping season will the combination of high debt and higher interest rates put the damper on holiday sales?

ZeroHedge reports, “A sugar high – from debt-fueled tax cuts – is expected to wear off in the near term, contracting economic growth coupled with a deepening trade war, could lead to the next financial crisis.

One looming threat to President Trump’s booming economy besides tariffs, is the consumer, as their revolving credit, i.e., credit card, debt has recently hit all-time highs, during a period of rising interest rates, could create a squeeze, thus reducing their ability to buy things they do not need nor can afford during this upcoming holiday season.

According to a new report from Lipper Alpha Insights, Refinitiv Same Store Sales Index shows a 3.9% average for the first half of 2018.

However, there is a reason to believe that consumer spending is starting to stall from the previous two quarters (Q3 and Q2) as consumer debt servicing payments increase.

For Q4 2018, the Refinitiv Same-Store Sales Index is expected to print around 3.0%, well below the 4.9% from Q2, a sign that the consumer might have topped out before the holiday rush.”

Normally the positive season for stocks should be kicking in already.  Could it be that the American consumer is already tapped out?

…and what effect will that have on the markets?

VIX bounced off the low of November 8 to challenge its weekly Cycle Top at 20.40, but closed beneath it. Note the higher high and higher low as it gains technical strength. VIX is positioned for a resumption of the rally through the end of the month. Normal seasonality would call for calm through Thanksgiving week. However, this may not be a normal season.

(MarketWatch) What does it mean that the VIX is only barely higher than average, even as the stock market is experiencing remarkable volatility?

The VIX VIX, -9.21% is the CBOE Volatility Index. Though its calculation is complex — derived from the implied volatilities of S&P 500 SPX, +0.22%  options maturing over the subsequent month — it is generally known as an “investor fear index.” Contrarians interpret high levels to be bullish and low levels as bearish.

SPX is rejected at the trendline.

SPX was rejected as it tested  its 2.5-year trendline, closing beneath it and maintaining its sell signal.  It also closed well beneath its weekly Long-term support at 2782.06.  Technicians call this action “The Kiss of Death.”  The Cycles Model now implies a two-week decline that may test its weekly Cycle Bottom at 2103.60.

(RealInvestmentAdvice) In this past weekend’s newsletter, I touched on the outcome of the mid-term elections and why it would likely not be as optimistic as the mainstream media was portraying it to be. To wit:

“It is likely little will get done as the desire to engage in conflict and positioning between parties will obliterate any chance for potential bipartisan agenda items such as infrastructure spending.

So, really, despite all of the excitement over the outcome of the mid-terms, it will likely mean little going forward. The bigger issue to focus on will be the ongoing impact of rising interest rates on major drivers of debt-driven consumption such as housing and auto sales. Combine that with a late stage economic cycle colliding with a Central Bank bent on removing accommodation and you have a potentially toxic brew for a much weaker outcome than currently expected.”

NDX approaching the neckline.

NDX fell away from its Long-term resistance at 7127.14 in  probable resumption of the decline.  NDX remains on a sell signal as it approaches the Head & Shoulders neckline.  The Cycles Model suggests further declines through the Month of November.

(CNBC)  Stocks posted sharp weekly losses on Friday after a strong downturn in technology shares.

The S&P 500 fell 1.6 percent this week, while the Dow Jones Industrial Average and Nasdaq Composite both declined more than 2 percent.

Technology, the biggest sector in the S&P 500 by market cap, was the second-worst performer this week, falling 2.5 percent. The sector dropped following a 5.4 percent decline in Apple. Wall Street analysts worry iPhone sales will slow down. Tech-related shares like Amazon and Netflix were also down 7 percent and 5.7 percent, respectively. Sharp losses in Nvidia dragged down the chips sector and the overall tech sector on Friday.

 High Yield Bond Index retesting resistance.

The High Yield Bond Index challenged its Short-term resistance at 200.99, closing beneath it. It is on a sell signal. High yield bonds are also anticipating further weakness through the end of the November.

(Reuters) – A long-reliable warning signal for stock investors that the tide is about to turn against them briefly flashed caution amid last month’s sell-off but does not appear to be calling an end to the bull market just yet.

Like stocks, junk bonds – the high-yielding debt issued by the riskiest corporate borrowers – had a rough October, but nothing close to the magnitude of bloodletting over in equities.

Merrill Lynch’s benchmark index for junk bonds fell 1.6 percent last month, its biggest drop since 2016, while the S&P 500 .SPX sank nearly 7 percent and the Russell 2000 index of small stocks plunged 11 percent to mark the poorest monthly performance for both since 2011.

UST regains Intermediate-term support.

The 10-year Treasury Note Index broke out above its October high, closing above Intermediate-term support at 119.09. UST made its expected low on October 8 and has about two more weeks of potential rally, according to the Cycles Model.

(ZeroHedge) Earlier this week, DoubleLine’s Jeff Gundlach held his latest webcast with investors in which he warned that as a result of rising hedging costs, US Treasury bonds have become increasingly unattractive to foreign buyers. This can be seen in the chart below which shows the yield on the 10Y US TSY unhedged, and also hedged into Yen and Euros. In the latter two cases, the yield went from over 3%, to negative as a result of the gaping rate differential between the Fed and ECB or BOJ.

This is also why, as the next chart from Gundlach showed, foreign holdings of US Treasurys have been declining in recent years, and dropped to just over 36% as a percentage of total holdings, the lowest in over a decade, as domestic holdings of US paper have risen to just shy of 50%, and near all time highs.

The Euro breaks above mid-Cycle support/resistance.

The Euro made a made a Master Cycle low on November 12, allowing a multi-week rally.  Should the rally break above Intermediate-term support at 115.39, it may reach Long-term resistance at 118.22 as its retracement high.  The rally has the potential of lasting through the end of November.

(CNBC) The euro and sterling rose on Wednesday as traders monitor the latest developments between the European Union and Britain on the latter’s departure from the economic bloc, and the EU and Italy on the resubmission of the latter’s 2019 budget.

Hopes the U.K. parliament would approve a draft accord for Brexit have bolstered the two currencies, while the euro has been bogged down by uncertainty on how EU officials would react to Italy’s latest fiscal proposal after they rejected them last month for violation of certain EU rules.

“The focus is on Brexit and Italy. They have been putting pressure on sterling and the euro the past few days,” said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California.

EuroStoxx is rejected at the neckline.

The EuroStoxx probed the Head & Shoulders neckline at 3270.00 on November 8, but was rejected.   This week the decline appears to have resumed, so the chart targets are still in play.  EuroStoxx remain on a sell signal.

(CNBC) European stocks were lower Friday afternoon, as investors continued to closely monitor the ongoing political turmoil in the U.K.

The pan-European Stoxx 600 finished down around 0.12 percent during Friday deals. On the week the European list of blue chips shed 2.68 percent.

Europe’s banking index suffered more losses Friday, down around 0.74 percent as U.K. lenders struggled amid heightened fears the country could soon crash out of the European Union without a Brexit divorce deal. Metro Bank, Lloyds and RBS all shed value.

The Yen regains Short-term support.

The Yen bounced this week, regaining Short-term support at 88.56.  The Cycles Model calls for a probable rally lasting into early December with a probable target near the mid-Cycle resistance at 90.22.

(Investing)  The British pound struggled to stay afloat in Asian trade on Friday having suffered a tumultuous slide overnight, as investors feared political turmoil in the country could see it crash out of the European Union without a divorce deal.

Both the dollar and the yen benefited from a deepening crisis for UK Prime Minister Theresa May after the resignation of key ministers from her government imperiled her Brexit plan.

Nikkei rejected at the trendline, resumes the decline.

The Nikkei rallied to the trendline on November 8, but was rejected. The decline appears to have resumed and the sell signal is back in place. The Cycles Model suggests that the decline may last into early December.

(Reuters) – Japan’s Nikkei fell on Friday as a drop in semiconductor-related stocks weighed after U.S. chip designer Nvidia Corp disappointed the market with worse-than-expected earnings, while Nintendo also fell sharply.

Gaming giant Nintendo Co, which uses Nvidia’s Tegra processors for its Switch consoles, stumbled 9.1 percent to post its biggest daily drop since July 2016. Traders said Nvidia’s results raised concerns about Switch’s potentially weak sales.

Nintendo was the most-traded stock by turnover and closed at 31,860, its lowest closing level since May 2017.

The Nikkei share average ended 0.6 percent lower at 21,680.34.

U.S. Dollar makes a new high.

USD extended its period of strength through Monday, November 12 when it made a new Master Cycle high.  Since then it has pulled back, but hasn’t fallen through mid-Cycle support at 95.40.  The action formed a new Broadening Wedge which may be triggered as it declines beneath the lower trendline near 88.00.

(BusinessTimes) The US dollar weakened and Treasury yields slid on Friday after a top Federal Reserve official said US interest rates were near a neutral rate, while the S&P 500 ended positive after a seesaw session helped by optimism over US-China trade ties.

Oil prices steadied but still posted their sixth straight week of losses. Uncertainty over Britain’s exit from the European Union clouded currency and other markets.

Markets were shaken by comments made by Richard Clarida, newly appointed Fed vice chair, in a CNBC interview that US interest rates were nearing Fed estimates of a neutral rate, and being at neutral “makes sense.”

He also said there was “some evidence of global slowing.”

.Gold bounced from Round Number support.

Gold bounced off Round Number support at 1200.00 in a potential resumption of its rally.  The Model calls for strength over the next two or more weeks.  Gold may be extending the right shoulder of a potential Head & Shoulders formation before resuming its downtrend.

(Reuters) – Gold rose as much as 1 percent on Friday as the dollar fell after U.S. Federal Reserve officials made cautions comments that fed doubt about the outlook for interest rate hikes, while palladium hit a record high driven by worries about short supplies.

Spot gold rose 0.7 percent to $1,221.04 an ounce by 12:05 p.m. EST (1705 GMT). The session high was the highest since Nov. 8 at $1,225.29. Gold was on track to gain about 1 percent this week.

U.S. gold futures gained 0.5 percent to $1,221.50.

Crude crashes 29% from its high.

Crude crashed through mid-Cycle support at 57.33, closing beneath it.  A bottom was made on November 13, but it appears to be early.  Caution is advised as long as it remains beneath the mid-Cycle resistance.  As such, it remains either neutral or on a sell signal for another week or so.

(OilPrice) Saudi Arabia has been slashing oil exports to the United States over the past two months, in what looks like a move to force a reduction in the world’s most transparently reported inventories that could put the Saudis on a collision course with U.S. President Donald Trump, who has repeatedly said that oil prices should be much lower.

The Saudis started to reduce shipments to the United States in September, and this month they are loading around 600,000 bpd on cargoes en route to the United States, down from more than 1 million bpd in July and August for example, CNBC reports, quoting figures from ClipperData.

According to ClipperData estimates, Saudi oil exports to the United States could soon reach their lowest levels on record.

Shanghai Index challenges its Cycle Bottom.

The Shanghai Index continues its bounce, challenging its Cycle Bottom resistance at 2686.24.  Short-term Cycle strength is running out, so if it can close above it and overcome Intermediate-term resistance at 2710.34, the retracement may continue into December.  Otherwise, a pullback is in store to retest the low.

(StraitsTimes) First came the clampdown on shadow banks. Then it was gaming companies and drugmakers. Now education firms are in the Chinese government’s crosshairs, roiling stocks and reminding investors how quickly their fortunes can change in a country rife with regulatory risk.

RYB Education and Bright Scholar Education both plunged by records in US trading, while Vtron Group and China Maple Leaf Educational Systems sank in Shenzhen and Hong Kong after the government unveiled new rules that prohibit companies from financing for-profit kindergartens via the equity market.

The losses echoed declines in Chinese peer-to-peer lenders, gamemakers and pharmaceutical firms after regulators increased scrutiny of the industries this year.

The Banking Index challenges mid-Cycle support.

— BKX challenged mid-Cycle support at 99.03, closing above it. However, a resumption of the decline may break through the neckline of the Head & Shoulders formation, causing a panic decline.  The Cycles Model calls for a significant low by mid-December which my meet the implied Head & Shoulders target.

(Forbes) In a report published on November 15 by Moody’s Investors Services, Moody’s analysts confirmed what I have been suspecting for a few months. U.S. banks’ Common Equity Tier 1 (CET1) has been decreasing. The fact that common equity and retained earnings are decreasing concerns me, because they are what help banks sustain unexpected losses.

U.S. banks’ median Common Equity Tier 1 (CET1) ratio decreased by 40 basis points to 10.7% during the third quarter.

The decrease in capital is primarily due to banks paying out dividends, since their capital plans were approved in the most recent Comprehensive Capital Analysis and Review (CCAR). A few banks front-loaded their dividend distributions. In its report, Moody’s analysts stated that they “still expect payouts in excess of 100% of earnings to prevail over the next three quarters.

(ZeroHedge) Five months after the IMF sounded the alarm over junk bonds, it has now moved on to the credit market bogeyman du jour and overnight joined others such as the Fed, BIS, Oaktree, JPMorgan, and Guggenheim in “sounding the alarm on leveraged loans.”

We warned in the most recent Global Financial Stability Report that speculative excesses in some financial markets may be approaching a threatening level. For evidence, look no further than the $1.3 trillion global market for so-called leverage loans, which has some analysts and academics sounding the alarm on a dangerous deterioration in lending standards. They have a point.

This growing segment of the financial world involves loans, usually arranged by a syndicate of banks, to companies that are heavily indebted or have weak credit ratings. These loans are called “leveraged” because the ratio of the borrower’s debt to assets or earnings significantly exceeds industry norms.

(ZeroHedge) Total household debt hit a new record high, rising by $219 billion (1.6%) to $13.512 trillion in Q3 of 2018, according to the NY Fed’s latest household debt report, the biggest jump since 2016. It was also the 17th consecutive quarter with an increase in household debt, and the total is now $837 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008. Overall household debt is now 21.2% above the post-financial-crisis trough reached during the second quarter of 2013.

Mortgage balances—the largest component of household debt—rose by $141 billion during the third quarter, to $9.14 trillion. Credit card debt rose by $15 billion to $844 billion; auto loan debt increased by $27 billion in the quarter to $1.265 trillion and student loan debt hit a record high of $1.442 trillion, an increase of $37 billion in Q3.

Have a great weekend!

 Disclaimer: Nothing in this email should be construed as a personal recommendation to buy, hold or sell short any security.  The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model.  At no time shall a reader be justified in inferring that personal investment advice is intended.  Investing carries certain risks of losses and leveraged products and futures may be especially volatile.  Information provided by TPI is expressed in good faith, but is not guaranteed.  A perfect market service does not exist.  Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment.  Please consult your financial advisor to explain all risks before making any investment decision.  It is not possible to invest in any index. 

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