The Biggest Short Squeeze since Brexit…

Coming into Friday morning, it appeared that stocks would suffer another week of losses.  Friday morning’s miss in the payroll report, weaker wage growth and a drop in the participation rate should have brought on further carnage.  Instead, it brought on the biggest short squeeze since Brexit.  Just another day in the markets!

VIX tagged the 10-handle this morning as the Commercials staged a raid on the long Speculators. It only took a few minutes, but it suggests a lot of shares traded hands as the computers hunted down and took out the stops. Re-crossing the Intermediate-term resistance at 17.38 confirms the VIX buy signal.

(Bloomberg) Cboe Global Markets Inc. says not enough traders participated in the eye-catching April 18 VIX futures auction, meaning an innocent explanation — not manipulation — explains the events of that day.

“We want to be clear that we were disappointed with the 18th, and we saw it as a liquidity challenge and nothing more,” Cboe President Chris Concannon said during an earnings call on Friday.

SPX bounces at the 200-day Moving Average.

This week SPX challenged Long-term support at 2613.58 before rallying toward the 2-year trendline at 2720.00, but didn’t achieve it. It continues to be on a sell signal.  A close beneath Long-term support confirms the new outlook.  Note that SPX closed at a loss for the week.

(USNews) U.S. stocks made up for a shaky week with a strong finish Friday as Apple led a rally in technology companies. The tech giant hit an all-time high after Warren Buffett said he’d made another big investment.

Stocks got off to a mixed start after trade talks between the U.S. and China ended with few signs of progress. The April jobs report showed that hiring continued at a solid clip and wages continued to grow at a slow pace. Apple surged after Buffett said Berkshire Hathaway bought 75 million shares during the first quarter.

Alphabet, Cisco Systems and other technology companies rose, and retailers, banks, and household goods makers also rallied. Investors also cheered strong first-quarter results from companies including Shake Shack and Activision Blizzard.

NDX also bounces at Long-term support.

The NDX bounced toward its 2-year trendline, but failed to reach it, leaving an “inside week.”  However, it did manage to close above Intermediate-term support/resistance, calling the sell signal into question.  Declining through Long-term support at 6500.10 confirms the sell signal.

(ZeroHedge)  Today’s surge in AAPL stock, when news of more purchases by Warren Buffett in the first quarter unleashed a buying frenzy, sending the stock to a new all time high, had a secondary effect of accelerating the entire FAANG sector (Facebook, Apple, Amazon, Netflix and Google), which now makes up a bigger piece of the tech pie than ever before.

As the chart below show, FAANGs now accounts for over 27% of the Nasdaq Composite, a new all time high, doubling in the past 5 years.

It also triggered a warning from none other than Goldman Sachs which looked at a similar ratio, that of the Info Tech sector as a $ of the S&P, and conclude that “Large exposure = large risk

High Yield Bond Index declines through the 2-year trendline.

The High Yield Bond Index declined through the trendline, challenging Long-term support at 185.53, but closing above it. However, Long-term support may not hold.  A broken Diagonal trendline infers a complete retracement to its origin. This may happen in a very short period of time.

(SeekingAlpha) What will trigger the next distressed credit cycle and when will it begin?

I have no idea.

When it does come, I believe it will differ from past periods of corporate distress.

By now, you’ve probably heard that the majority of syndicated bank loans are “covenant-light.” Covenants are terms in a loan agreement that the borrower must adhere to such as a maximum leverage ratio. Historically, bank agreements contained “maintenance covenants” which allowed the lender to take action as soon as a covenant was breached.

UST begins a bounce from the Cycle Bottom.

The 10-year Treasury Note Index bounced from the Cycle Bottom at 118.95 in a retracement rally that may retest the Head & Shoulders neckline. This is a common occurrence and it is surprising that it hasn’t happened sooner. The Cycles Model suggests the retest may happen rather quickly.

(CNBC) U.S. government debt yields slipped on Tuesday even as the Federal Reserve pointed to higher inflation in its most recent meeting on monetary policy.

The U.S. central bank kept interest rates unchanged Wednesday, as was largely expected, but hinted at higher inflation over the coming months.

The committee noted that “overall inflation and inflation for items other than food and energy have moved close to 2 percent.” That was an upgrade from the March meeting in which the Federal Open Market Committee said the indicators “have continued to run below 2 percent.”

The Euro makes an exhaustion plunge.

The Euro may have completed a belated Master Cycle low on Friday.  Triangles are known to make a false breakout at the end of the formation.  It now has the capability of a parabolic rally to or above 127.00 by the end of May or early June.  Triangles are often known to signal a “one and done” final rally.

(Reuters) – Euro zone inflation unexpectedly slowed last month, adding to a string of data that points to a cooling economy and possibly makes it more difficult for the European Central Bank to curb its lavish monetary stimulus later this year.

Last month the rate slipped to an annual 1.2 percent, missing economists’ expectations in a Reuters poll that it would remain at the March level of 1.3 percent.

The weak reading follows disappointing GDP, output, export and sentiment figures, which suggest that euro zone economic growth has peaked after a five-year run and will at best slow to a more moderate level, below optimistic forecasts at the start of the year.

EuroStoxx completes the right shoulder.

The EuroStoxx 50 Index added height the right shoulder of a Head & Shoulders formation, making a 64.8% retracement of the decline from the October 23 high.  While the high was made on Wednesday, the rest of the week was spent in a consolidation.  A break of the Head & Shoulder neckline and mid-Cycle support at 3300.00 may create a panic decline lasting through mid-May.

(CNBC) European shares closed higher Friday as investors monitored trade talks between the U.S. and China and digested key economic data.

The pan-European Stoxx 600 closed provisionally more than 0.6 percent higher with the majority of sectors and major bourses edging higher. Media stocks were among the best performers, with Pearson leading the gains in the sector. The educational publisher said in a trading update that it was on track to grow to underlying profit this year. The stock shot up by more than 7.6 percent.

Looking at the European benchmark, Ferrari led the gains and its share price hit a record high, after better-than-expected earnings led to a number of ratings upgrades for the automaker. The stock was up 7.7 percent.

The Yen reverses at Long-term Support.

The Yen reversed off the Long-term support at 90.82 to begin the next phase of its rally. The Cycles Model suggests that a rally may develop that has the potential to reach or exceed the Cycle Top resistance at 98.61 in the next 2 weeks.

(ETFDailyNews)  When we look thus far at 2018, data from Japan’s Ministry of Finance has indicated that more than $30 billion has left Japanese equities from foreign investors.1 Clearly, foreign investors haven’t been happy with Japan as an allocation, and a probable factor contributing to this activity is that people have seen the headline number for the Japanese yen/U.S. dollar exchange rate touching below 105–quite a strong level!

Warning: Yen Does Not Move in a Single Direction

While foreign investors would clearly prefer to see the yen/U.S. dollar exchange rate touching levels above 110 and moving toward 120, we caution them not to forget about Japan just because the yen is currently on the stronger end of its trading range. Markets can move quickly, and during bouts of yen weakness, Japanese equities can be interesting tactical trading ideas.

Nikkei performance flattens.

The Nikkei retained the flat-topped correction of its decline. A decline beneath the trendline and Intermediate-term support at 22112.79 renews the sell signal. The potential for a decline to the Cycle Bottom is very high.

(Reuters) – Japan’s Nikkei share average slipped on Wednesday amid caution ahead of the Federal Reserve’s policy decision and U.S. jobs data, although the dollar’s rise against the yen and positive sentiment toward tech stocks helped curb some of the losses.

The Nikkei ended the day down 0.16 percent at 22,472.78 and the broader Topix dropped 0.15 percent to 1,771.52.

Japanese markets will be closed on Thursday and Friday for public holidays, leaving Wednesday as the last day for investors to unwind some of their positions ahead of the Fed’s decision later in the global day. On Friday, U.S. jobs data will be released.

 

U.S. Dollar surges above Long-term resistance.

USD rallied above Long-term support/resistance at 91.78, meeting the half-way point to its anticipated target at “Point 7.”  The rise in the USD is finally being recognized by the media.  A panic Cycle may develop in equities, boosting the flow back into the USD as a safe haven.

(CNNMoney)  The once puny dollar is starting to look mightier again. And that could be bad news for Corporate America.

The US Dollar Index, which measures the value of the greenback against the euro, the yen and several other major global currencies, has been on a tear. It’s risen more than 3.5% in just the past two weeks and is now up slightly for the year.

It wasn’t that long ago that the dollar was languishing, and big companies such as Nike (NKE), Costco (COST), Oracle (ORCL) and FedEx (FDX) were crediting the weaker dollar for boosting their earnings.

.Gold tests Long-term support.

Gold furthered its decline to challenge Long-term support at 1304.87.  Gold is now on a sell signal.  The Cycles Model suggests weakness in gold through mid-May.  This may be the beginning of a panic Cycle decline in precious metals.

(Reuters) – Gold prices rose slightly on Friday as the U.S. dollar backed off its highs, initially

rising after U.S. jobs data was weaker than expected. However the data was still strong enough to support the case for more interest rate increases.

Spot gold rose 0.2 percent to $1,314.23 per ounce by 3:09 p.m. EDT (1909 GMT), heading for a third consecutive weekly decline, while U.S. gold futures for June delivery settled up $2, or 0.2 percent, at $1,314.70.

Crude prices stall at a critical level.

Crude stalled very near the 50% retracement level of its decline from April 2011 to February 2016 (70.52).  This often recognized as a standard retracement of a long-term trend, taking 26 months.  A break beneath the Cycle Top and trendline at 65.72 may indicate a change in trend.  A further decline beneath Intermediate-term support at 64.45 confirms it.

(Bloomberg) Money managers curbed their enthusiasm for oil just before the U.S. benchmark price surged to almost $70 a barrel.

Total wagers on West Texas Intermediate crude slid to the lowest since early January, with bets that it will rise shrinking for a second week. That was days before Iran accused President Donald Trump of “bullying,” while the U.S. signaled it’s preparing to pull out of a nuclear accord that’s allowed OPEC’s third-largest producer to export more crude.

Hedge funds could be proven right in the longer run, though, if tensions subside and the market’s focus shifts back to abundant American supplies.

Shanghai Index mired at the Lip of a Cup with Handle formation.

The Shanghai Index remains mired at the Lip of a bearish Cup with Handle formation.  The Lip of the formation has been tested and broken, reinforcing the sell signal.  The Cycles Model suggests a lengthy decline, perhaps until mid-June.

(ZeroHedge) In April we told you about how some of the “unintended consequences” of Trump’s steel tariffs, such as an Illinois farmer who put the brakes on a $71,000 grain mill, but had to hold off on the purchase because the seller raised the price 5% to account for the rising price of steel, or Iowa grain mill producer Sukup Manufacturing, which had to hike their prices for grain storage bins.

The Wall Street Journal now reports that the US-China “trade spat” is now affecting US exporters of soybeans, pork and other commodities.

Since early April, when China announced tariffs on some U.S. agricultural goods and threatened to target others, Chinese importers have canceled purchases of corn and cut orders for pork while dramatically reducing new soybean purchases, according to U.S. Department of Agriculture data. Chinese importers’ new orders of sorghum, a grain used in animal feed, have dwindled while cancellations increased.

The chill in agricultural trade is sending jitters through the U.S. Farm Belt, which for years has dispatched farmers on trade missions to cultivate the Chinese market. –WSJ

The Banking Index tests Long-term support.

— BKX tested Long-term support at103.72, closing above it.  It remains on a sell signal. Cycles Model suggests that the Banking Index may have several weeks of decline ahead of it.

(Forbes)  When you discuss bank stocks, the ones to cover are the four ‘too big to fail’ money center banks and the five largest super regional banks. If these underperform, there are no reasons to own them.

In my opinion the four “too big to fail” banks, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo are also “too big to regulate.” These four banks control 42% of the total assets in the banking system and this makes them impossible to regulate.

  • Citigroup faces fines of up to $335 million for raising credit card rates on consumers who missed monthly payments.
  • Wells Fargo continues to get fines on fraudulent activities against its clients. Even the New York Federal Reserve could not detect any fraud issues when they vetted them before naming them a primary dealer on April 18, 2016, just as other regulators began to find account irregularities.
  • JPMorgan Chase plans to open additional local branches putting more pressure on local banks. This will force additional community bank closures.

(CNBC) Stock buybacks may be on the rise, but noted analyst Dick Bove warned that is something banks shouldn’t be doing.

“I am a big believer that buying back stock is a horrible thing to do for a bank. It’s like an oil company giving away oil for stock. You don’t do it. You don’t give away capital for stock either if you are a bank,” the chief strategist at Hilton Capital Management said on “Closing Bell” Friday.

Public companies are expected to return more money to shareholders this year in the form of stock buybacks and dividend increases. Through the end of April, S&P 500 companies are on track to give back a record $1 trillion to investors, according to S&P Dow Jones Indices.

(ZeroHedge) A Swiss bank has replaced seven employees with five software robots in order to speed up workflow, according to Bloomberg.

In a pilot project, St. Galler Kantonalbank AG opted for the second option. The bank is so satisfied with the test results that it wants to decide on further assignments by the end of May. –Bloomberg

When St. Galler Kantonalbank (SGKB) needed to transfer around 5,000 securities positions into its own IT systems during the acquisition of M.M. Warburg Bank Schweiz AG’s private banking business, the five robots were put on the job, and “did their job well,” according to SGKB. Now they’re exploring other applications for digital employees.

(ZeroHedge) Just a week after ‘the purge’ beganDeutsche Bank is closing its office in Houston as part of a strategy to pare its U.S. operations, according to an internal memo seen by Bloomberg.

As part of Deutsche’s drastic restructuring, we noted previously, the purge began last week when Deutsche fired 300 U.S.-based investment bankers on Wednesday with another 100 pink slips expected over the next 24 hours.

In total, the biggest German bank plans to cut more than 1,000 jobs, or over 10%, of total US jobs in its initial restructuring phase. According to Bloomberg, the US hosts about 10,300 Deutsche Bank employees, or about a tenth of the firm’s global workforce.

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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