The Nightmare May Have Just Begun

The tripwire opening the trap door for stocks may have been in the bond market. We have been warned about this for so long that our eyes have glazed over as the rally in stocks seemed unstoppable.  This week the President (initiated by Congress) and Fed Chairman (see the $UST article) may have blundered into the tripwire and stocks plummeted.

Bloomberg comments, “If there’s one thing the prophets agree on, it’s that the end will come in the bond market. Even for stocks.

Prophesies of doom are everywhere. There’s billionaire investor Stan Druckenmiller, who says our “massive debt problem” will ignite a crisis. Oaktree Capital’s Howard Marks warns that public and private debt will be “ground zero when things next go wrong.” And Citadel’s Ken Griffin sees a credit binge ending badly.”

How will it all end?  Stay tuned!

VIX rallied above its Long-Term resistance and bullish flag formation at 14.45, confirming a buy signal. The Cycles Model shows a likely surge in strength for the VIX through late October.

(Bloomberg) The scariest Halloween costume imaginable pales in comparison to a Friday inversion of the VIX futures curve.

A severe sell-off in technology stocks has pushed the front-month VIX futures contract to a premium relative to the second-month contract.

VIX futures are based off the Cboe Volatility Index, a measure of 30-day implied volatility for the S&P 500 Index that’s often called the “fear gauge.”

SPX closes at Short-term support.

SPX challenged Short-term support at 2880.58 before closing modestly above it.  A decline beneath that level implies a sell signal may be given.  Both price and time targets appear to have been met.  The Cycles Model now implies a powerful decline that may last through early November. The last time this has happened was in 2008.

(Bloomberg) The longest bull market in history could be showing worrying echoes of one of the greatest crashes Wall Street has ever seen.

Robert Shiller, professor of economics at Yale University and a Nobel laureate, says the steep run-up in this market rally is similar to the excesses of the 1920s before the October 1929 market crash and Great Depression.

“The 1920s is quite a legend that people are often thinking about,” Shiller said Friday on CNBC’s “Trading Nation.” “I look at 1929 particularly as the end of the roaring ’20s and it ended in a bout of speculation. Between May and September of ’29 the stock market went up over 30 percent in just a few months.”

NDX opens October with a new high but stumbles badly.

NDX hit a new all-time high on Monday, but stumbled badly, breaking through Short-term support at 7495.48 and giving a sell signal.  It closed above Intermediate-term support at 7387.00.  The next target may be the seven-year trendline at 6250.00 or mid-Cycle support at 6055.49.  The weakest part of the Presidential Cycle often occurs in October.  The Cycles Model agrees that October may be especially hard on stocks.

(Fortune)  Yesterday’s bombshell Bloomberg Businessweek report, about the Chinese military sneaking spy chips onto server components used across the U.S., had an immediate and major impact on Asian tech stocks.

Apple (AAPL, -1.54%) suppliers Taiwan Semiconductor (TSM, -1.91%) and Largan Precision—the latter makes camera lenses for iPhones—fell by 1.6% and 7.3% respectively. LG Display, which was recently reported to be a new supplier of iPhone screens, fell by more than 1.8%. And component suppliers TDK (TTDKY, -4.33%) and Murata (MRAAY, -3.48%) dropped by 4.8% and 3.9% respectively.

Also hit hard was Lenovo (LNVGY, -13.07%), the Chinese PC manufacturer that makes ThinkPad and Yoga laptops. The Beijing-based company’s shares fell by almost 23% at one point on Friday, before recovering to a mere 15% drop by the end of the day’s trading.

High Yield Bond Index Makes a new all-time high.

The High Yield Bond Index appears to have made a new all-time high on Thursday, but may have been repelled by its Cycle Top at 207.67. Should it decline further, a sell signal may be confirmed beneath Long-term support at 193.92. It appears to have finally joined its passive ETF brethren that have made new highs.

(Forbes) For fixed income investors, 2018 has been a bit of a rocky road. While the S&P 500 is up 10.3% year-to-date, the fixed income landscape has had its share of difficulties. U.S. high yield has managed to quietly miss much of the pain that has hit Emerging Market Bonds, as well as higher quality U.S. corporate bonds and U.S. treasuries. U.S. high yield, as represented by the iShares iBoxx High-Yield ETF (HYG), is up +2.09% year-to-date. Meanwhile, unhedged emerging market bonds, as represented by the VanEck Vectors JP Morgan Local Currency Bond ETF (EMLC), are down year-to-date around -11.2%. U.S. dollar-hedged emerging market bonds, using the iShares JP Morgan U.S.D Emerging Market Bonds ETF (EMB) as a proxy, while faring better were still down almost -5.6%. The difference between hedged and unhedged emerging market bonds shows how strong the U.S. dollar has been recently.

UST due for a reversal.

The 10-year Treasury Note Index has now extended its anticipated Cycle low by a month, a very rare extension. However, the Cycle bottom is nearby at 117.16, which may allow a rally back toward the Head & Shoulders neckline near 123.00. This decline may be painful for the speculative longs in treasuries but the shorts may get their comeuppance soon.

(ZeroHedge) Speaking at an event at the Atlantic Festival in Washington, Jerome Powell’s second public appearance of the week, the Fed chair took the opportunity to underscore just why he remains so complacent about the US economy, saying “it’s a remarkably positive set of economic circumstances,” and “there’s no reason to think it can’t continue for quite some time.”

Powell also praised the recent wage increases, saying some gains are welcome and noting that “the Phillips curve is not dead, just resting.”

The surprisingly confident Powell then put on the hawkish afterburners, and repeated what he said after the last week’s FOMC announcement, saying that “interest rates are still accommodative” because “rates have just now, in real terms, moved above zero.”

The Euro declines beneath support.

The Euro declined beneath Long-term support at115.76 to test mid-Cycle support at 114.07 before closing above it this week.  Should it bounce at this level it may be capable of a rally to Long-term resistance at 119.34.  If so, the rally may last for several weeks.

(Bloomberg) Italian government bond yields hit four-year highs this week, which is hardly surprising after the country’s unexpected proposal for a bigger-than-expected budget deficit. At the 10-year maturity, the widening spread to German bonds shows the anxiety around the fiscal outlook:

But we mustn’t forget the other investor concern expressed in the spread: that of the government’s ambivalence toward Italy’s euro membership and its potential “Plan B” to reintroduce the lira. It would certainly be useful to assess how markets are pricing this risk, especially given the possible contagion impact on other euro-zone countries — and the euro itself.

EuroStoxx decline through mid-Cycle support.

The EuroStoxx declined beneath mid-Cycle support at 3403.15, giving it a sell signal.  The Cycles Model suggests a probable 3-week decline that may reach the Head & Shoulders target.

(CNBC) Europe finished Friday’s session on a negative note as investors digested the latest jobs report out of the U.S., while monitoring moves in the bond markets.

The pan-European Stoxx 600 closed down 0.86 percent, with all sectors closing around the flatline or in the red. Technology and basic resources tanked more than 2 percent each as a sector. On the week, the Stoxx 600 tumbled 1.77 percent.

The FTSE 100 sank 1.35 percent, weighed down by the miners; while France’s CAC 40 slipped 0.95 percent and Germany’s DAX dropped 1.08 percent.

The Yen consolidates above the trendline.

The Yen bounced above the lower trendline of the Orthodox Broadening Top in a brief consolidation.  The Cycles Model calls for an additional two week decline that may reach the proposed “point 6” in the structure of the Orthodox Broadening Top.

(SeekingAlpha)  Just over a week ago, I wrote an article stating that while the yen was continuing to drop against the dollar, we would likely see a bottom soon.

However, it looks like that bottom is still yet to come, with the dollar continuing to climb against the yen to a level of 114.48 at the time of writing:

Negative risk sentiment appears to have taken a back seat for the global economy right now, as a salvaging of the NAFTA deal between Canada, Mexico, and the United States has revived optimism on future growth in these countries, and thus the yen has seen a decline in demand.

With this being said, it is notable that when one takes a look at the daily chart for USD/JPY, we see that the RSI (relative strength index) has been trading above 70 on three occasions in 2018, indicating that the greenback is likely to be overbought against the yen on a technical basis:

Nikkei reverses from a powerful inversion high.

This week the Nikkei made a new 27-year high on Tuesday, then reversed course by over 600 points to close at a loss. The Cycles Model calls for a sharp decline to follow, much like the sell-off beginning in late January. But this time the sell-off may retrace more than two years of gains. The first item on the agenda may be to break the lower trendline at 22500.00.

(NikkeiAsianReview) John Templeton, the late, great stock picker, believed booms and busts come in four stages: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Perhaps no market is plotting this course more obviously now than Japan, the zigs and zags of which Templeton knew better than most. The mutual funds he pioneered invested in Japan well before the global herd in the mid-1960s. His four-step sequence played out in Tokyo in the 1980s, ending in a spectacular crash. Might this latest rally, one driving the Nikkei Stock Average to its highest levels since 1991, end badly too?

Only time will tell. Yet Japan’s bull market has arguably entered the euphoria stage, one that economic realities might not support.

U.S. Dollar challenges mid-Cycle resistance.

USD challenged mid-Cycle resistance at 95.37, closing beneath it.  Just beneath it is Short-term support at 95.26 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.

(CNBC)  The U.S. dollar weakened in choppy trading on Friday after data for September showed jobs gains that fell short of expectations while wages increases slowed on an annualized basis during the month, easing concerns about a large run-up in inflation.

Nonfarm payrolls increased by 134,000 jobs last month, the fewest in a year, though data for July and August was revised to show 87,000 more jobs added than previously reported. Average hourly earnings increased eight cents, or 0.3 percent, in September after rising 0.3 percent in the prior month.

With September’s increase below the 0.5 percent gain notched during the same period last year, that lowered the annual increase in wages to 2.8 percent from 2.9 percent in August, which was the biggest rise in more than nine years.

Gold closes above Short-term support.

Gold pushed away from what may be an early Master Cycle low last Friday at 1184.30 to close above Short-term support/resistance at 1203.09.  Should the rally rise above Intermediate-term resistance at 1223.87 it may continue its journey to either mid-Cycle resistance at 1267.29 or Long-term resistance at 1282.52.  This may happen in the next two weeks.

(CNBC) Gold prices rose on Friday following a monthly U.S. employment report falling to its lowest level in a year.

Spot gold rose 0.3 percent at $1,202.40 an ounce. It had gained 0.6 percent so far for the week, on track to mark its biggest weekly gain in six. U.S. gold futures were up 0.3 percent at $1,205.70 an ounce.

Nonfarm payrolls rose just 134,000, well below Refinitiv estimates of 185,000 and the worst performance since September 2017 when a labor strike weighed on the numbers. The unemployment rate fell two-tenths of a percentage point to 3.7 percent, the lowest since December 1969 and one-tenth of a percentage point below expectations.

Crude spikes above the upper Diagonal trendline.

Crude spiked above the Diagonal trendline and Cycle Top at 74.22 to make a new four-year high on Wednesday.  A decline through the Cycle Top puts us on alert for a reversal pattern.  A further decline beneath Shor-term support at 69.61 may evoke a sell signal.

(OilPrice) One of the few variables that could spoil the oil prices, which many see destined to climb higher, is the pitfalls facing global demand.

Global synchronized growth already came to an end earlier this year, although the U.S. is still going strong. However, it remains to be seen how long that can last, with the juice from the tax cuts set to wear off, tariffs raising consumer prices, a rise in retail gasoline prices and interest rates grinding higher.

But, the real danger to global oil demand is higher oil prices themselves, which to be sure, isn’t exactly a revelatory conclusion. However, while Brent crude surged to $85 per barrel, up from the mid-$60s at the start of the year, the price increase is astronomically higher in emerging markets, where currency weakness has wreaked havoc.

Shanghai Index is on Holiday until Sunday night.

The Shanghai Index rallied above its Cycle Bottom resistance and closed above Intermediate-term support/resistance at 2809.98.  It is likely that may be another probe higher over the next week or more.  Should that be the case, the rally may attempt to reach the Head & Shoulders neckline near 3050.00.

(ZeroHedgeOne week ago, President Trump stood up at a meeting of the United Nations Security Council and accused China of attempting to tamper with US elections – mimicking some of the same allegations that had first been levied against Russia nearly two years prior. In his speech, Trump claimed that China was working to undermine Republicans, and even the president himself, warning that “it’s not just Russia, it’s China and Russia.” While the media largely shrugged off this proclamation as more presidential bombast probably inspired by the burgeoning US-China trade beef, the administration continued to insist that it was taking a harder line against Chinese efforts to subvert American companies to aide the Communist Party’s sprawling intelligence apparatus. As if to underline Trump’s point, the FBI had arrested a Taiwanese national in Chicago the day before Trump’s speech, accusing the 27-year-old suspect of trying to help China flip eight defense contractors who could have provided crucial intelligence on sensitive defense-related technology.

The Banking Index challenges the neckline.

BKX challenged the Head & Shoulders neckline at 105.00 on Wednesday before bouncing out of the formation. BKX has already declined through critical support at 108.88 and is on a sell signal.  Should it break through again, there may be a panic decline lasting several weeks.

(CNBC)  Fears over rising interest rates dinged major stock market averages but benefited one sector that has been waiting to reap the benefits of higher yields.

Financials were the only positive major sector Thursday on the S&P 500, with bank stocks the strongest performers. Specifically, community and regional institutions were the clear winners, as is typical in a rising-rate environment.

The group, as gauged by the SPDR S&P Regional Banking ETF, rose as much as 1.5 percent in morning trading before paring gains. The industry, which has badly lagged the market in 2018, is on pace for its best week since July.

(Bloomberg) Danske Bank A/S lost a tenth of its market value on Friday as the fallout of its Estonian money laundering scandal turns Denmark’s biggest lender into the year’s worst financial stock in Europe.

The head of the Financial Supervisory Authority in Denmark has ordered Danske Bank A/S to hold more capital to prepare it for hefty fines and protect it from the market fallout of the dirty money saga. Jyske Bank estimates that Danske may now be facing a fine of about $1.8 billion, while warning the figure could well be higher.

(RollingStone) Ten years ago, George W. Bush signed into law the Troubled Asset Relief Program, better known as the TARP bailout. The rescue forked over $700 billion of taxpayer money to bail out giant Wall Street banks that were already too big, and were about to get bigger.

On Wednesday, Sen. Bernie Sanders (D-VT) and Rep. Brad Sherman (D-CA) introduced new legislation on TARP’s anniversary. It is aimed at the central, still-unaddressed issue of the last disaster: the ungovernable size of the country’s biggest banks.

Dubbed the “Too Big to Fail, Too Big to Exist” act, the Sanders-Sherman bill revolves around a simple concept: If a bank controls assets that collectively represent more than 3 percent of the country’s GDP, or about $584 billion, it has to shrink or be broken up.

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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