January 19, 2018
VIX ramped above Long-term support/resistance at 10.86, closing above it. This resulted in a a buy signal for the VIX. The calm may be broken. A breakout above the Ending Diagonal trendline suggests a complete retracement of the decline from January 2016, and possibly to August 2015.
(Bloomberg) Volatility was one of the never-ending talking points of 2017. Hardly a day went by without stories citing the almost eerie calm in U.S. stock markets. The Chicago Board Options Exchange Volatility Index, or VIX, finished the year with the lowest average daily level on record. During the course of the year, we saw the market’s fear gauge set a new record low when it closed at 9.14 on Nov. 3.
SPX goes parabolic.
SPX continues its parabolic rise above its Ending Diagonal channel in a throw-over formation. A decline beneath its Cycle Top and upper Diagonal trendline at 2720.39 suggests the rally is over and profits should be taken. A break of the Intermediate-term support at 2635.04 and the trendline nearby, generates a sell signal. Should that happen, we may see a sharp decline in the next two weeks.
(CNBC) Stocks closed higher on Friday as investors shrugged off worries about a possible government shutdown.
“The prospect of a government shutdown isn’t putting a lid on this boiling market—investors simply aren’t fazed,” said Mike Loewengart, vice president of investment strategy at E-Trade. “For traders, many are looking beyond the beltway and finding fundamentals in US companies as sound as they’ve been in a long time.”
NDX throws over its Channel trendline.
The NDX continues its rally this =week to throw over its Trading Channel trendline as well. A decline beneath the Cycle Top at 6627.78 suggests that the rally may be over. A further decline beneath lower Diagonal trendline and Intermediate-term support at 6355.50 may produce a sell signal.
(RealInvestmentAdvice) “Today’s equity market valuations have only been eclipsed by those of 1929, and 1999.”
In March of 2017, we examined traditional equity valuations in a new light to help better compare today’s valuations versus those of past business cycles. In particular, we adjusted the popular price-to-earnings (P/E) ratio for economic growth trends. The logic backing the analysis is that investors should be willing to pay a larger premium if economic growth is strong, and therefore corporate earnings are higher, and vice versa if economic growth is comparatively weak. The premise is similar to the popular price-to-earnings growth (PEG) ratio commonly used by equity investors. While P/E assesses the value of a stock on the basis of trailing earnings, PEG is more forward-looking using the expected growth of earnings. Essentially, the ratio tells us how much a current investor is willing to pay for a unit of expected earnings.
High Yield Bond Index reverses…
The High Yield Bond made a new all-time high on Wednesday, then reversed course, closing lower for the week. Last week I suggested, “The Cycles Model calls for a loss of strength over the weekend. Perhaps a reversal may be in the making?” While the trend is still up, there may be a significant low in the next two weeks. A sell signal may be generated with a decline beneath the lower Diagonal trendline at 183.00.
(Reuters) – U.S. fund investors pulled $3.1 billion from high-yield “junk” bonds during the latest week, Lipper data showed on Thursday, offering new warning signs about risk appetite despite global markets’ continuing triumph.
The junk bond withdrawals – from both mutual funds and exchange-traded funds (ETFs) during the week ended Wednesday – mark the largest of any week since November, according to the research service.
UST declines beneath the neckline.
The 10-year Treasury Note Index appears to have crossed the neckline of a potential Head & Shoulders formation. If so, it has a serious decline ahead of it. A Master Cycle low is due in the next two weeks which may involve a bounce at the Cycle Bottom resistance at 121.40. If so, the bounce may have its maximum resistance at the neckline.
(ZeroHedge) Update 12:03am ET: The shutdown has brgun. Per Reuters, the White House says it will reopen negotiations on immigration reform ‘when the Democrats start paying our armed forces and first responders’.
*SENATE LACKS VOTES TO ADVANCE STOPGAP PLAN AS SHUTDOWN LOOMS
The New York Times headline summed things up well: Senate Democrats Kill Bill to Keep Government Open Past Midnight. Despite last minute ‘compromise’ meetings, and continued “hopes” from various sides, The Senate failed to reach the 60 votes necessary to keep the government funded (even for a stopgap) and so, as of midnight tonight, the government will shut down.
The Euro gives back some of its weekly gains.
The Euro made a new 3-year high on Wednesday, but gave back most of its gains by Friday. That may not mean that the rally is finished, yet. The Euro may be moving higher through mid-February, according to the Cycles Model.
(Bloomberg) The euro’s bull run may face a hiccup should Germany’s leaders fail to break a four-month political impasse that has left Europe’s largest economy without a majority government.
The common currency could fall as low as $1.17, a level not touched since mid-November, should the Social Democratic Party decide not to pursue a coalition with Chancellor Angela Merkel, according to Morgan Stanley. The SPD is holding a special convention on Sunday to decide whether to pursue formal talks with Merkel’s Christian Democratic Union-led bloc.
EuroStoxx continues to climb the trendline.
The EuroStoxx 50 Index continued its rally, climbing to a 76.7% retracement. The rally appears to have extended but may be over this weekend.
(FoxBusiness) Investors shrug off concerns over possible U.S. government shutdown
European stocks rose on Friday, with gains for industrial and tech shares helping the region’s benchmark bag a third straight weekly win, as investors appeared to set aside concerns about a possible shutdown of the U.S. government.
What are stocks doing?: The Stoxx Europe 600 index rose 0.5% to close at 400.88, marking its highest close since early August 2015, according to FactSet data.
The Yen challenges mid-Cycle resistance.
The Yen challenged mid-Cycle resistance at 90.39, closing beneath it. This has the earmarks of a consolidation as it awaits the spending gap outcome in Washingtom. The uptrend may resume after a brief pullback. There may be a lot of stored up energy ready to be put to use.
Going long on the yen is the biggest currency wager for AMP Capital Investors Ltd.’s Nader Naeimi. Singapore-based hedge fund Kit Trading Fund Ltd. started a bet on the yen last week, predicting the currency will appreciate about 10 percent to 100 per dollar. Options traders are the most bullish on the yen among developed-market currencies.
The Nikkei continues to work its way higher beneath the trading channel trendline but has given back some of its weekly gains. A break beneath the Cycle Top at 22971.84 and Short-term support suggests the rally may be over, producing an aggressive sell signal. Confirmation comes at the crossing of the lower Diagonal trendline near 21500.00.
(EconomicTimes) Japan’s Nikkei share average edged up on Friday with financial stocks leading the gains after US yields rose, while GMO Internet soared after an activist fund called on the company to change its governance structure. The Nikkei rose 0.2 per cent to 23,808.06. For the week, it gained 0.7 per cent.
U.S. Dollar challenges its Cycle Bottom.
USD challenged its Cycle Bottom, closing beneath it, suggesting that support may be broken. The decline is in earnest, since the Cycles Model calls for a probable continuation of the decline to the week of February 5 with a likely termination near “point 6.”
(Reuters) – The U.S. dollar took a harsh beating in 2017, on the way to its nearly 10 percent fall, its worst annual performance since 2003. The currency is still reeling this year.
The dollar index, which measures the greenback against a basket of major currencies, recently fell to a three-year low.
Moves by central banks around the world toward monetary policy normalization, increased political uncertainty in the United States and the dearth of volatility across markets have hurt the greenback. Worries about a possible U.S. government shutdown is just the latest factor that could weigh on sentiment for the dollar in the near term.
Gold completes an irregular correction.
Gold completed its run up to 1345.00 on Tuesday, then eased back from the high. This activity has created an irregular correction. However, time is of the essence as gold may be heading for a low near the end of January.
(Barrons) This could be the year that gold prices hit a record.
A massive move in gold, driven in part by declines in the U.S. dollar and Treasury bonds, excessive optimism in the stock market, and rising inflation, may help send prices above $1,900 an ounce this year, surpassing the all-time high from 2011. “Gold has been in a stealth bull-market phase for the past few years with little notice from most investors,” says Peter Spina, chief executive of precious-metals information provider GoldSeek.com. “Gold at $2,000 is a long shot, but not an improbable target by any means.”
Crude reverses, but still uptrending.
Crude reversed this week, but still in an uptrend, as it has not declined beneath its Cycle Top at 61.79. The fly in the ointment is that there may be an important low coming in near the end of the month, according to the Cycles Model. A decline beneath the Short-term support at 59.99 gives a probable sell signal.
(Reuters) – Oil prices ended down on Friday and broke a four-week winning streak after a rally that had taken benchmarks to three-year highs, as investors sold positions on re-emerging U.S. production concerns.
Brent crude futures LCOc1 fell 70 cents, or 1 percent, to settle at $68.61 a barrel after hitting a session low of $68.28. On Monday, they hit their highest since December 2014 at $70.37.
U.S. West Texas Intermediate (WTI) crude futures CLc1 settled at $63.37 a barrel, down 58 cents, or 0.9 percent. WTI marked a December-2014 peak of $64.89 a barrel on Tuesday.
Shanghai Index approaches its Cycle Top.
The Shanghai Index appears to be approaching its Cycle Top resistance at 3536.81. A period of strength and Cycle Turn are due at mid-week, but may come at any time. The potential for a sharp sell-off rises as the next levels of support may be breached.
(ZeroHedge) Roughly 1 year ago we explained why the “fate of the world economy is in the hands of China’s housing bubble.” The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth would keep rising. However, unlike the US where the stock market is the ultimate barometer of the confidence boosting “wealth effect”, in China it has always been about housing as three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US with the remainder invested financial assets.
Beijing knows this, of course, which is why China periodically and consistently reflates its housing bubble, hoping that the popping of the bubble, which happened in late 2011 and again in 2014, will be a controlled, “smooth landing” process.
The Banking Index rallies upon its Cycle Top.
— BKX continued to rally up on its Cycle Top at 113.04 as it reached yet another Fibonacci relationship this week. The cluster of relationships has been fulfilled. A decline beneath the Ending Diagonal trendline and Short-term support at 106.64 suggests a potential sell signal. If the Orthodox Broadening Top formation is correctly identified the next move may be beneath the trendline near 80.00.
(CNNMoney) The Federal Reserve’s regulatory czar laid out his plans Friday to relax regulations on Wall Street banks.
Regulators have imposed stricter rules on banks for a decade since the 2008 financial crisis. But Randal Quarles, appointed last year by President Trump, said it was time to “step back” and evaluate whether the rules governing the largest banks are working as they should.
“Given the breadth and complexity of this new body of regulation — it is inevitable that we will be able to improve them, especially with the benefit of experience and hindsight,” Quarles said in prepared remarks to the American Bar Association conference.
(ZeroHedge) American Express shares are down at one-month lows in the after-market following its announcement that the firm will suspend its share buyback program for the first half of 2018 to rebuild capital after the Tax Act.
As previously disclosed, the quarter reflected a substantial charge related to the Tax Act. The $2.6 billion charge represents our current estimate of taxes on deemed repatriations of certain overseas earnings and the remeasurement of U.S. deferred tax assets and liabilities. For 2018, the company expects an effective U.S. tax rate of approximately 22 percent before discrete tax items.
(ZeroHedge) Morgan Stanley just became the latest bank to announce a major tax hit to Q4 earnings, while beating on both the top-line and adjusted EPS (net of tax charge), even as debt and trading revenues tumbled, offset by rising investment banking fees. In 4Q, Morgan Stanley recorded a net discrete tax provision of $990MM, including $1.2BN provision due to tax law, primarily from remeasuring deferred tax assets (DTA), partially offset by $168MM benefit for remeasuring reserves and related interest relating to status of multi-year IRS tax examinations.
(ZeroHedge) It’s official: as of midnight Saturday, the US government has shut down following a failure in the Senate to strike a funding deal. Government funding was due to run out after Dec. 8 but was twice extended, most recently through Jan. 19, at which point the US encountered what’s officially called a “spending gap,” which triggers an official halt to Washington’s work.
In retrospect, this is hardly a novel development, as history shows there have been 18 previous closures starting in 1976, with the last one taking place in September 2013. Almost all of the funding gaps occurred between FY1977 and FY1995. During this 19-fiscal-year period, 15 funding gaps occurred.
Anthony M. Cherniawski
The Practical Investor, LLC
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Lansing, MI 48912
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