RISK OFF

In investing, the word “risk” is often misused.  Lance Roberts comments,

“If you are a young investor, you need to take on as much risk as possible. The more risk you take, the greater the reward.”

This is actually a false statement.

Let’s start with the definition of “risk” according to Merriam-Webster:

1: possibility of loss or injury peril

2: someone or something that creates or suggests a hazard

3a : the chance of loss or the perils to the subject matter of an insurance contract; also the degree of probability of such loss

3b : a person or thing that is a specified hazard to an insurer

3c : an insurance hazard from a specified cause or source 

4: the chance that an investment (such as a stock or commodity) will lose value

 Nowhere in that definition does it suggest a positive outcome for taking on “risk.”

…then why is the concept of risk in the investment world so warmly embraced?

VIX challenged the two-year trendline early in the week, but reversed course, closing above mid-Cycle resistance at 13.15. The buy signal is triggered on a close above mid-Cycle resistance so there is a probable buy signal in the VIX. The Cycles Model shows likely strength for the VIX through late August.

(SchaeffersResearch) The Cboe Volatility Index (VIX – 10.72) — considered the stock market’s “fear gauge” — has dropped roughly 16% already in August, and today is eyeing a sixth straight loss and its lowest close since January. However, recent VIX options activity suggests traders are speculating on (or hedging against) a surge for the index.

The VIX 20-day buy-to-open (BTO) call/put ratio has been rising in recent weeks, and recently clocked in at 5.55 — the highest since mid-July 2017 (during a similar Nasdaq winning streak, in fact). Echoing that, the 30-day implied volatility skew on VIX options is now at an annual low, suggesting near-term puts have rarely been cheaper than calls in the past year.

SPX reverses short of a new high.

SPX reversed beneath its upper 2-year trendline without making a new all-time high.  This week’s turn occurred on a Cyclical 30 months from February 11, 2016.  This also may be one of the longest SPX corrections in history, having rallied 179 days from bottom (February 9) to top (August 7) without making a new high.  Equities are entering their negative season, so care should be taken to protect what profits there are in 2018.

(NYTimes) The American stock market has been shrinking. It’s been happening in slow motion — so slow you may not even have noticed. But by now the change is unmistakable: The market is half the size of its mid-1990s peak, and 25 percent smaller than it was in 1976.

“This is troubling for the economy, for innovation and for transparence,” said René Stulz, an Ohio State finance professor who has written a new report on these issues for the National Bureau of Economic Research.

When I say “shrinking,” I’m using a specific definition: the reduction in the number of publicly traded companies on exchanges in the United States. In the mid-1990s, there were more than 8,000 of them. By 2016, there were only 3,627, according to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business.

NDX falls short of the high.

NDX rallied early in the week, but could not overcome the July 25 high at 7511.39.  On Thursday (the 30-month anniversary), something clicked and NDX reversed into a decline, although the week closed positively.  The Cycles Model suggests that the next several months may bring pain to equities.  The period of weak seasonality may be about to begin.

(Reuters) – The S&P and the Nasdaq inched towards a record on the back of high-flying technology trio of Apple, Amazon and Microsoft.

The tech-heavy index was up 0.33 percent at 7,914.22, a quarter of a percent away from hitting an all-time high.

The technology sector has been at the center of a sharp recovery in U.S. stocks since a market rout in February. The S&P is also less than half a percent shy of the record it hit in late January.

Shares of Apple rose 1 percent, while those of Amazon were up 0.8 percent and Microsoft 0.4 percent.

“There is low volatility in the markets as the S&P and Nasdaq are just below all-time record highs, and it seems like markets are complacent right now,” said Tom White, chief market strategist at TradeWise Advisors, in Chicago, Illinois.

High Yield Bond Index reverses in mid-week.

The High Yield Bond Index rallied to a marginal new 70% retracement of the February decline on Tuesday, then started its descent. A sell signal is confirmed beneath Intermediate-term support at 191.33. Sideways consolidations such as this imply a continuation of the previous trend.

(Bloomberg) High-yield bonds have delivered better returns than just about any fixed-income assets in 2018, and investors are becoming nervous.

It’s only natural that after years of outsized gains, corporate debt buyers will start to wonder when their peers will head for the exits. After all, a dearth of supply has kept U.S. speculative-grade securities afloat in recent months, raising the question of when the tide will turn. In the investment-grade market, dealer inventories for maturities greater than one year turned negative recently for the first time ever, according to Bank of America Corp. That may temporarily compress yield spreads but could also magnify pain in a reversal if market-makers are less willing or able to match buyers and sellers.

UST emerges from a Master Cycle low.

The 10-year Treasury Note Index emerged from its Master Cycle low last week and closed above Intermediate-term resistance at 119.71. This may put UST on a buy signal with additional confirmation at a breakout above 120.32. If so, we may see UST rally back toward the Head & Shoulders neckline near 123.00. This rally may be painful for the speculative shorts in treasuries.

(Reuters) – The U.S. Treasury Department on Thursday sold a record high $18 billion worth of 30-year government bonds to investor demand that was in line with its recent average at a yield of 3.090 percent, Treasury data showed.

Indirect bidders, which include fund managers and foreign central banks, bought 62.25 percent of the latest 30-year bond supply, close to its recent average, analysts said.

On the other hand, the ratio of bids to the amount of 30-year bonds offered came in at 2.27, the weakest reading at a 30-year auction since February.

The Euro breaks through the neckline.

The Euro broke through the Head & Shoulders neckline, putting a “lock” on its downside target.  The Cycles Model suggests a probable decline through the end of August that may take it to its Cycle Bottom at 102.90.

(Reuters) – The euro sank to its lowest against the greenback in more than a year on Friday as a plunging Turkish lira sparked broad risk aversion, with investors worried about contagion to European banks.

Turkey’s lira plummeted as much as 18 percent on Friday as worries about President Tayyip Erdogan’s influence over monetary policy and worsening U.S. relations snowballed into a market panic.

The euro was hurt after the Financial Times reported that the European Central Bank had concerns about banks in Spain, Italy and France and their exposure to Turkey’s woes.

EuroStoxx reverses at Long-term resistance.

The EuroStoxx retested Long-term support/resistance at 3502.36 on Tuesday, then reversed down to a new monthly low.  The Cycles Model calls for an approximate five week decline that, in all likelihood, may take EuroStoxx to the Head & Shoulders target..

(Bloomberg) European stocks extended their losses on Friday afternoon as the meltdown in the Turkish lira spurred concerns about an economic crisis that could spread to other emerging markets and rattle the European banking sector.

The Stoxx Europe 600 Index retreated as much as 1.2 percent, the most in a month, on track to post a weekly loss of 0.9 percent. Technical charts showed the benchmark broke below both its 50- and 200-day moving averages, sending a bearish signal. BBVA fell 5.3 percent, UniCredit dropped 5.2 percent and BNP Paribas sank 4.1 percent.

“The current episode is a classic sign of risk aversion – shoot first and ask questions afterwards,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments. “In an investing environment where ETFs and passive funds are important for cross-border flows, so it is understandable to see the euro, European stocks and European bank shares prices all come under pressure.”

The Yen rises above Short-term resistance.

The Yen appears to have broken through Short-term resistance at 90.07.  Although there is more overhead resistance, XJY appears capable of reaching its potential target at 92.50.  The next period of strength occurs next week.

(Reuters) – The Japanese yen rose broadly on Thursday in an apparent reflection of concern among investors about an uptick in geopolitic tensions from the U.S.-China trade war to Brexit.

Global foreign exchange markets this summer have been dominated by political angst from U.S. sanctions on Russia and Turkey to rising tensions in the Middle East and in Europe.

The Russian rouble retreated to its lowest since November 2016 overnight, weakening beyond the psychologically important 65 per dollar threshold, after Washington said it would impose fresh sanctions on Moscow.

The Turkish lira touched a fresh record low against the dollar, weakening some 2.5 percent from Wednesday’s close after a Turkish delegation met U.S. officials to try to resolve disputes between the two NATO allies.

Nikkei loses Long-term support.

After a month of sideways consolidation, Nikkei declined through Long-term support at 22381.75. Violating that support confirms a new sell signal.

(EconomicTimes) Japan’s Nikkei fell to a one-month low on Friday as semiconductor-related shares tumbled after Morgan Stanley downgraded its view on the U.S. chip sector, which offset any boost from Japan’s better-than-expected economic growth.

The Nikkei share average ended 1.3 per cent lower at 22,298.08, the lowest closing level since July 12. For the week, it dropped 1 per cent.

In late trade, selling in stocks accelerated after the yen rose against the dollar as investors became risk averse.

U.S. Dollar makes a new retracement high.

USD may have completed its retracement to “Point 7” just above the Fibonacci 50% retracement level this week. There may be room for a marginal new high early next week, but the target has been met.  With that, the USD rally may be over.  Attention may be turned lower, as the Orthodox Broadening Top has a target that is quite deep.

(Bloomberg)  With the U.S. waging a trade war on several fronts, economists are starting to take seriously the idea that President Donald Trump could act on his preference for a weak dollar.

“While not our base case scenario, we cannot rule out a turn toward a more interventionist currency policy, particularly since the current administration has, at times, hinted at a preference for dollar weakness or objected to perceived Chinese currency manipulation,” Michael Feroli, JPMorgan Chase & Co.’s chief U.S. economist, said in a research note this week.

In a Twitter flurry last month, Trump accused China and the euro area of manipulating their currencies, and complained that a rising dollar is blunting America’s “competitive edge.” In a reference to interest-rate hikes by the Federal Reserve, the president said “tightening now hurts all that we have done.”

.Gold consolidates near its low.

After retesting its neckline, Gold appears to be consolidating near its low.  The Cycles Model and Head & Shoulders formation agree that Gold could go considerably lower.  However, there is a short-term period of strength next week that may allow Gold to revisit the neckline.

(Bloomberg) Gold is showing resistance near $1,200 an ounce, suggesting prices are for now finding a floor near a one-year low.

Since last week, the metal’s declines have stalled as it gets closer to the price often touted as a key psychological level, trading no lower than $1,204.58. While a stronger dollar and U.S. economic growth are hurting bullion’s appeal, concerns that Turkey’s financial crisis could spread may be preventing a further selloff.

“We are seeing the metal put up a fight against the stronger dollar, with the contagion risk attracting some demand,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said by email.

There are other signs investors are losing faith. Holdings in exchange-traded funds are at a six-month low and money managers have never been so bearish.

Crude declines beneath Intermediate-term support.

Crude declined beneath Intermediate-term support/resistance at 69.03, triggering a sell signal.  The Cycles Model projects a potential decline through the month of August with heavy losses.

(OilPrice) Beijing’s decision to not impose tariffs on U.S. crude oil imports has relieved local state refiners, who have been expanding their purchases from U.S. suppliers, sources from the industry told Reuters.

China last slapped 25-percent import tariffs on U.S. products worth US$16 billion, but stopped short of adding crude oil to this list. The crude oil imports were worth around half of this, based on Sinopec’s forecast of an average daily rate of U.S. oil imports of 300,000 bpd.

One Reuters source says Sinopec, the largest refiner and buyer of U.S. crude in Asia, had lobbied with Beijing to make sure it will not add crude oil to the tariff list.

Also, “The U.S. will be the single largest source of new oil supplies outside OPEC. It’s in China’s interest to diversify supplies,” another source told Reuters.

Shanghai Index makes a 50% retracement.

The Shanghai Index retraced 50% of its decline from 2915.30, indicating that the bounce may be over, or nearly so.  The larger trend is down.  Exhaustion of the decline may not set in until early September.

(Reuters) – China stocks edged up on Friday to post their best week in a month, aided by strong gains in shares of technology companies.

** The blue-chip CSI300 index ended 0.2 percent higher at 3,405.02 points while the Shanghai Composite Index closed flat at 2,795.31 points. ** For the week, CSI300 is up 2.7 percent while the SSEC gained 2 percent, both posting their best week since mid-July. ** However, both the SSEC and CSI300 are down more than 10 pct since late May ** Technology shares have rallied after China said it has revamped a national leadership group charged with planning and studying its key technological development strategies, signalling a potential policy boost for home-grown tech firms. ** The tech-heavy start-up board ChiNextP rallied 2 percent this week, snapping a three-week losing streak. ** But gains in the market were capped as worries lingered over the trade frictions with the United States. ** China’s top newspaper rebutted growing criticism in government circles that Beijing should have taken a lower profile to head off its trade war with the United States, saying on Friday that, like an elephant, China cannot hide its size and strength.

The Banking Index reverses from the top of the trading range.

— BKX appears to have completed a Master Cycle high on Wednesday, reversing toward critical support later in the week. The strength we observed is waning, but a sell signal is not given until BKX declines through critical support.  The Cycles Model calls for a reversal with a decline through the Head & Shoulders formation.

(Bloomberg) The European Central Bank has grown concerned about the exposure of some euro zone banks to Turkey following the lira’s plunge, the Financial Times reported.

Banco Bilbao Vizcaya Argentaria SA, UniCredit SpA and BNP Paribas SA are particularly exposed after the Turkish currency lost more than a third of its value this year, the newspaper reported, citing unidentified people familiar with the matter.

The ECB’s Single Supervisory Mechanism has begun over the past couple of months to look more closely at European banks’ ties to the country, the FT said, adding that the watchdog doesn’t see the situation as critical yet. The risk is that Turkish borrowers may not be hedged against the lira’s weakness and could start to default on foreign-currency loans, the newspaper said.

(Bloomberg) Turkey entered a full-blown financial meltdown on Friday, sending tremors through global markets, after President Recep Tayyip Erdogan declared his refusal to bow to U.S. political demands and market pressures.

The unraveling was swift, highlighting the fragility of Turkey’s economy after years of a growth-at-all-costs policy bias that left its companies saddled with hundreds of billions of dollars in foreign debt. The lira plunged as much as 17 percent on Friday alone, bringing its loss for the year to 42 percent and raising the specter of contagion into Europe and across other emerging markets.

While the trigger was U.S. sanctions for Turkey’s imprisonment of an American pastor, many investors say the $900 billion economy was already headed toward a cliff, and only needed a push. The sell-off represented a vote of no-confidence in a new system of government that handed Erdogan unrivaled authority, essentially paralyzing the bureaucracy in Ankara.

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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