Markets are nearing exhaustion. Will the “cure” be worse?

The markets appear to be near exhaustion.  Unfortunately, the “cure” being prescribed is more debt.

Bloomberg opines, “Of all the much-debated causes of the 2008 financial crisis, there’s one on which almost everyone agrees: U.S. homeowners took on debts that would have been affordable only in an improbably benign world. Ten years later, according to a recent report by Bloomberg News, many of the largest U.S. corporations are getting into a similar predicament.

It’s too early to say whether the rising indebtedness will lead to another financial disaster. But one thing is certain: There’s no good reason for the government to encourage it.”

What do you think?

VIX pulled back from its highest level since February, closing above its Cycle Top at 19.67 while showing a loss for the week. The Cycles Model shows another likely surge in strength for the VIX through the next week.

(FoxNews) U.S. stocks are off to another volatile day of trading Wednesday, with the Dow giving up 400 points on the day. While the trading action has most investors taking huge losses, the VIX volatility index and its derivatives have produced major gains in the past week.

In the past week, the VIX is up nearly 60 percent, and the BRCL BK IPTH S&P 500 VIX SH FTRS ETN (NYSE: VXXOpens a New Window.) is up 18.6 percent. The VIX is a measure of the amount of volatility options traders are pricing in over the month ahead.

SPX closes above Long-term support.

SPX bounced off  its 2.5-year trendline, closing just above Long-term support/resistance at 2765.98.  Failure at the trendline implies a continuation of the sell signal.  The Cycles Model now implies a powerful decline with increased volatility that may last through late October.

(Bloomberg) Package maker Sealed Air Corp. fell the most in six months Thursday after saying higher raw material costs would crimp the bottom line. A few days earlier it was rising freight outlays at Fastenal Co., where $1.1 billion of market value was erased. On Oct. 9, paint maker PPG Industries Inc. mentioned rising expenses. The shares cratered.

From railroads to retailers, signs of price pressures are starting to show at U.S. industrial companies, contributing to the worst October start for the S&P 500 since 2008. Equities have had their three worst sessions since April in the space of eight days, narrowly escaping a fourth straight down week thanks to a Thursday rally.

NDX closes beneath Long-term support.

NDX tested the underside of  its 2.5-year trendline and failed, closing beneath Long-term support at 7118.70.  This may have negative consequences as the next support may be the 7-year Ending Diagonal trendline at 6250.00.  The weakest part of the Presidential Cycle often occurs in October.  The Cycles Model agrees that October may be especially hard on stocks.

(ZeroHedge)  In the latest Flow Show report from BofA’s Michael Harnett, the Chief Investment Strategist notes that, as expected, there was a major flow capitulation during the last week following the worst rout in the market since February. To wit, there was a massive $15.8BN outflow from equities, coupled with $8.1BN out of bonds.

Broken down by category, there were big outflows from US stocks ($14.8BN), mutual equity funds ($15.5bn) and, of course, Europe where some $4.8Bn fled following the latest Italian turmoil. Credit was not spared either with a “huge” $6.2 billion in IG bond redemptions, one week after what was already record outflow from investment grade.

Meanwhile, the recent reversal in investment sentiment continues with $11Bn in outflows from financials over the past 7 months, after $32bn in inflows since 1/17; in just the past 4 weeks there have been $2Bn in tech redemptions after $42Bn in inflows since January.

High Yield Bond Index bounces off the trendline.

The High Yield Bond Index appears to have bounced off its long-term trendline to close beneath Short-term support at 201.47. Should it decline further beneath the trendline, a sell signal may be confirmed beneath Long-term support at 194.08. High yield bonds are also anticipating further weakness through the end of the month.

(Zacks) Junk bond ETFs have had a muted run lately with popular funds SPDR Barclays High Yield Bond ETF (JNK– Free Report) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG – Free Report) shedding about $1.28 billion and $1.27 billion in assets since the start of October (as of Oct 16, 2018). The funds have lost about 0.14% and 0.02% in the past week (as of Oct 12, 2018).                                                                                                        According to TrimTabs Investment Research, high-yield bond exchange-traded funds saw $4.1 billion of funds gushing out in the five trading sessions through Thursday. The outflows marked around 10% of the overall junk bond ETF market, per an article published on MarketWatch. That outflows represented the largest week-long outflow for high-yield ETFs since TrimTabs has been tracking the data

UST consolidates above the low.

The 10-year Treasury Note Index consolidated above its Master Cycle low made on October 5. This may allow a rally back toward Long-term resistance at 120.12. The Cycles Model suggests a probable rally may continue over the next 2-3 weeks. Should a panic materialize, it may go as high as the neckline of the Head & Shoulders formation.

(CNBC) Short-term Treasury rates fell from multiyear highs on Thursday after European Central Bank President Mario Draghi criticized plans by certain member countries to increase borrowing limits, sending Italian and Spanish yields up sharply.

Relatively safer bonds, such as German bunds and U.S. Treasurys, caught a safety bid as equities in Europe and on Wall Street extended losses. U.S. yields initially rose Thursday after the Federal Reserve’s latest meeting minutes showed members were confident in the current path of interest rate hikes and wary of frothiness in financial markets.

The U.S. two-year Treasury yield hit a high of 2.907 percent, its highest level since June 25, 2008, before falling to 2.878 percent.

The Euro eases toward mid-Cycle support.

The Euro challenged Intermediate-term resistance at 116.10 before easing back down to challenge mid-Cycle support at 114.72.  The Cycles Model suggests another week of strength that may propel it toward its Long-term resistance at 119.11.  However, Cyclical strength may run out quickly once its target has been met.  If so, the decline may resume through mid-November.

(Reuters) – The euro recovered from one-week lows against the U.S. dollar on Friday as investors took profits on bets against the currency, after it was burdened this week by concerns about Italy’s spending proposals and Britain’s plans to exit the European Union.

The single currency had dropped after the European Commission on Thursday sent Rome a letter calling a draft budget an “unprecedented” breach of EU fiscal rules, the first step of a procedure that could end with Brussels rejecting the budget and fining Italy.

The failure to reach a deal for Britain to exit the EU has also weighed on the euro and the British pound.

EuroStoxx retests the Head & Shoulders neckline.

The EuroStoxx retested the Head & Shoulders neckline near 3270.00 before declining back toward its low.  The Cycles Model suggests a probable week-long decline that may reach the Head & Shoulders target.  An extension may prolong the bottom beyond next week.

(CNBC) European stocks pared earlier losses on Friday after Europe’s economy commissioner said no decision had yet been taken on Italy’s controversial budget plan.

The pan-European Stoxx 600 ended a shade lower, 0.06 percent down as Friday’s closing bell rang.

In terms of country performance, the FTSE 100 in the U.K., the Swiss SMI, Spain’s IBEX were all higher, while France’s CAC 40, Germany’s DAX and Italy’s FTSE MIB pared losses but finished lower.

Auto stocks was the worst-performing sector amid corporate news. Michelin fell 11.28 percent, its worst day in seven years, after announcing lower full-year forecasts.

The Yen is repelled at Intermediate-term resistance.

The Yen bounced to Intermediate-term resistance at 89.54, but was repelled lower.  The Cycles Model calls for an undefined period of decline that may reach the proposed “point 6” in the structure of the Orthodox Broadening Top.

(SeekingAlpha)  The Japanese yen has been falling against major currencies over the past month.

However, the bottom may be approaching and a heightened “risk-off” sentiment could push the JPY/USD upwards.

The yen is a currency to watch at this point in time.

Last month, I made the argument that we could be seeing a comeback in the Japanese yen.

My reason for making this argument was primarily that domestic consumption in Japan had been rising and lifting growth, and this could be sufficient to lift the yen further against major currencies.

Nikkei challenges the trendline.

The Nikkei challenged the trendline with a deeper low, but closed above it and Long-term support at 22510.00. The Cycles Model calls for a probable continuation of the decline to follow. Now that the trendline has been challenged, it is likely that a breakdown may last through the end of the month.

(JapanTimes) Stocks sank further on the Tokyo Stock Exchange on Friday, with investor sentiment dampened by a Wall Street plunge overnight.

The 225-issue Nikkei average slumped 126.08 points, or 0.56 percent, to end at 22,532.08. On Thursday, the key market gauge dropped 182.96 points.

The Topix index of all first-section issues closed down 11.79 points, or 0.69 percent, at 1,692.85, after falling 9.23 points the previous day.

U.S. Dollar continues its consolidation.

USD continues to consolidate near mid-Cycle support/resistance at 95.37, closing just above it.  Just beneath it is Intermediate-term support at 94.80 which, if broken, yields a sell signal.  The Cycles Model calls for a bearish month of October which may see the Cycle Bottom and Broadening Top trendline broken.

(Reuters) – Speculators’ net long bets on the U.S. dollar shrank in the latest week, to be slightly down from a 22-month high hit in the prior period, according to calculations by Reuters and the Commodity Futures Trading Commission released on Friday.

The value of the net long dollar position was $27.64 billion in the week ended Oct. 16, down from $27.79 billion in the previous week.

Speculators have been net long the dollar for 18 consecutive weeks.

U.S. dollar positioning was derived from net contracts of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars.

.Gold finds backing at Intermediate-term support.

Gold tested Intermediate-term support at 1218.08 and found it agreeable.  It may now continue its journey to either mid-Cycle resistance at 1265.31 or Long-term resistance at 1280.53.  The Cycles appears positive for gold through early November.

(CNBC) Gold prices edged up on Friday, the metal’s third week of gains as weaker stock markets spurred investors to seek refuge in bullion, which also gained technical momentum after scaling major milestones.

Spot gold added 0.14 percent to $1,226.66 per ounce. The metal gained 0.7 percent this week, after hitting a 2-1/2-month high at $1,233.26 on Monday.

U.S. gold futures were settled down $1.40 at $1,228.70.

“Gold has done really well to hold up here, given the Fed was really hawkish. Sensitivity to equity markets is helping gold at the moment,” Macquarie commodity strategist Matthew Turner said.

Crude edges down to the trendline.

Crude fell through Intermediate-term support at 70.09 to test the 18-month trendline at 68.50.   WTI is on a short-term sell signal.  A further decline beneath the trendline suggests a change in intermediate-term trend.

(CNBC) Oil prices rose on Friday on signs of surging demand in China, the world’s No. 2 oil consumer, although prices were headed for a second weekly decline on swelling U.S. inventories and concern that trade wars were curbing economic activity.

Brent crude futures rose 43 cents to $79.66 a barrel, a 0.5 percent gain. West Texas Intermediate (WTI) crude futures settled 47 cents higher, or 0.7 percent, at $69.13 a barrel.

For the week, Brent crude was 0.3 percent lower. WTI fell nearly 3 percent this week and below four-year highs reached in early October.

WTI’s discount to Brent <WTCLc1-LCOc1> widened to its most since June 8, hitting $11.00 a barrel.

Shanghai Index bounces from a probable Cycle low.

The Shanghai Index bounced from a possible Master Cycle low on Friday, giving it a potential reprieve that may last for the next two weeks or longer.  However, a bounce that cannot rise above the Cycle Bottom at 2742.73 may signal an extension to this decline.  Traders should wait for a retest of the low before wading in.

(Bloomberg) Chinese stocks jumped the most in more than two months after top financial officials voiced support for the battered equity market.

The Shanghai Composite Index rose 2.6 percent to 2,550.47, its biggest gain since Aug. 7. The gauge earlier fell as much as 1.5 percent, breaking below the key 2,500 level. The Shenzhen Composite Index also gained 2.6 percent, while the ChiNext Index of smaller companies rallied the most since June. While the afternoon’s accelerated gains raised the question of whether authorities were taking a more direct approach, the gauges still posted a weekly drop.

China’s Late Stock Rally Has All the Hallmarks of State Buying

The Banking Index bounces at mid-Cycle support.

— BKX bounced at mid-Cycle support after triggering the Head & Shoulders neckline at 105.00 last week, confirming the sell signal. The Cycles Model implies a continued decline for another week.  However, there is reason to believe that the decline may extend up to election day..

(ForbesEquity makes banks stable. Maybe we should go all out with 100% equity.

The campaign for financial deregulation should have you worried. Is bank supervision tight enough to prevent another meltdown? Is it loose enough to let the economy grow? The Trump Administration will tell you that it is scoring on both counts, but you may harbor doubts.

Here, we’ll review what the regulators are up to, scorecard the biggest banks on a somewhat unconventional measure of safety and then take a look at a radical scheme to make the financial sector at once safer and freer.

(ZeroHedge)  Just as Goldman Sachs is putting the breaks on what had been a rapidly expanding consumer lending business amid growing doubts about how its $4 billion portfolio might perform during a downturn, US Bank is gambling on the riskiest form of consumer credit, offering old-fashioned pay-day loans with a digital twist.

Last month, US Bank introduced “Simple Loan”, an online-lending platform that combines the ease of Quicken Loans’ app-based platform with usurious interest rates.

(ZeroHedge)   In what may be the deadest canary in the commercial real estate coal mine yet, Bank OZK shares have plunged 26% today after the bank reported abysmal third-quarter earnings that trailed expectations, with net income tumbling but what caught traders’ attention was two commercial real estate charge-offs of $45.5 million on the bank’s Real Estate Specialties Group (RESG) credits for unrelated projects in South and North Carolina.

The Little Rock-based regional bank, with just over $22 billion in assets, also reported that net income declined 23% to $74.2 million in its third quarter from the same period in 2017 due to these write-offs. Bank OZK’s earnings have been closely monitored by analysts since it is such an active real estate lender. The bank reported that the two write-offs during the third quarter were in its Real Estate Specialties Group (“RESG”) portfolio and were related to properties in South Carolina and North Carolina from loans originated in 2007 and 2008, the Real Deal reported.

(ZeroHedge) With the euro weakening against the Swiss franc (recently trading at session lows of 1.14) and Italian stocks and bonds tumbling once again on reports that the European Commission is planning to reject the Italian draft budget plan submitted earlier this week – a repudiation of Italy’s populist leaders that was widely anticipated – the Telegraph’s Ambrose Evans-Pritchard offered a glimpse into how middle-class Italians are reacting to the deteriorating relationship between Italy and the EU, and its attendant impact on the country’s banks and capital markets. In a trend that’s eerily reminiscent of the banking run that precipitated the near-collapse of the Greek banking system (most recently in 2015), Italians are scrambling to convert their euros into Swiss francs and stash them across the country’s northern border with Switzerland.

Have a great weekend!

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