“Wall Street Fear Has Yet To Grip Main Street”

ZeroHedge observes, “Earlier this week, when looking at a variety of market positioning and technical indicators, Goldman strategists laid out 7 reasons why, in their opinion, professional investors were bailing on the market even as retail investors continued to buy. These included:

  1. Since January, “Professional ETFs” have seen outflows while “Retail ETFs” have seen steady inflows.
  2. Futures show a reduction in net exposure for equity and bond investors over the past 7 months; however, institutional investors seemed to re-risk in equities during September.
  3. Borrowing costs are increasing quickly as rising rates exacerbate the impact of widening credit spreads.
  4. Equity volatility: increase in 2018 has been smaller than in 2007, but started from a higher level.
  5. Market Makers providing less electronic liquidity in SPX Futures markets.
  6. Corporate leverage is in decline: Decrease in Debt Issuance, increase in Cash Balances are only partially offset by Buybacks.
  7. Economic impact of equity declines.

Now, picking up on this odd trend which has seen pros dump their exposure to risk while retail investors dig in, is Bank of America, whose CIO Michael Hartnett writes in his latest flow shows that the fear from Wall Street has yet to grip Main Street.”

Read the article and enjoy your weekend.  There is more work to be done next week.

VIX rose above its Cycle Top at 20.07, closing above it. The Cycles Model shows probable weakness lasting another week, but the upcoming election may hold sway over volatility.

(Bloomberg) Stocks are chaotic. The reaction in markets for equity volatility is anything but.

Pravit Chintawongvanich, equity derivatives strategist at Wells Fargo Securities, flags that measures of short- and longer-term protection against haywire markets are showing no signs of overreacting. Those include the Cboe Volatility Index, which rises and falls along with demand for options.

“The dumb money is saying the economy is headed south,” he said. “The smart money says, ‘This too shall pass.’”

SPX declines into correction mode.

SPX fell through  its 2.5-year trendline, confirming its sell signal.  It closed beneath its December 29 closing price at 2673.61.  The Cycles Model now implies a choppy bounce back to retest the trendline at 2760.00, possibly by mid-term elections.

(FoxBusiness) Stocks continued a week of see-saw trading Friday as falling shares of major tech companies offset optimism over a strong third-quarter GDP report. The selling was led by large-cap tech companies, including Amazon and Google, both of which posted mixed quarterly results.

The Dow Jones Industrial Average fell 296 points, or 1.19 percent, though stocks pared much of their losses from earlier in the session. At its intraday low, the blue-chip index was down 539 points. The broader S&P 500, which briefly dipped into correction territory, declined about 1.7 percent. The tech-heavy Nasdaq Composite slid 2.06 percent.

NDX really loses its mojo.

NDX continued its decline beneath Long-term support at 7119.92 with bad news coming from all sides.  There is the possibility of a bounce next week, but the disappointments appear to be unrelenting.  The Presidential Cycle usually finds a bottom in October of mid-term elections.  However, the campaigning is getting more rancorous.  The outcome of the election is often based on whether the stock market is positive for the year at election day.

(ZeroHedge)  Regular readers will recall when back in March, Bank of America cautioned that after the tech bubble in 2000, the housing bubble in 2006, we were witnessing the third biggest bubble of all time: the e-Commerce bubble.

Well, after several weeks of sharp volatility which has hammered tech stocks, slammed momentum trades and hurt growth factors, the tech sector is once again sharply lower after hours largely on the back of disappointments from Google and Amazon, with the  ETF which tracks the Nasdaq 100 dropping about 2%, and threatening to slide back into a bear market.

The reason for this latest weakness in the QQQs may be that investors are finally realizing that the latest Nasdaq bubble may have popped, if for no other reason than what is shown in the Bloomberg chart below: namely revenue growth at the two e-commerce titans, Google and Amazon, appears to have finally peaked.

High Yield Bond Index breakls through the trendline.

The High Yield Bond Index has broken through its long-term trendline to close above Long-term support at 194.02. A sell signal may be confirmed beneath that support. High yield bonds are also anticipating further weakness through the end of the month.

(Bloomberg) Companies yanked back the reins on bond sales this month amid the widespread carnage in financial markets.

Just $6 billion of new U.S. investment-grade bonds hit the market this week, short of the $15 billion to $20 billion estimate, according to data compiled by Bloomberg. It’s the third time in four weeks issuance missed expectations and the worst week since August. October’s supply looks likely to fall well below estimates of $110 billion and the $114 billion of volume seen in the same period a year earlier.

UST rallies above Short-term resistance.

The 10-year Treasury Note Index rose above Short-term support/resistance at 118.83. The bounce is three weeks old and may be subject to a consolidation. However, the Cycles Model suggests a probable rally may continue over the next 2 weeks. The next barrier to overcome is Long-term resistance at 120.01.

(CNBC) U.S. government debt prices rose on Tuesday as investors took cover in safe-haven assets amid a sharp sell-off in equities.

Declines of more than 2 percent in both the S&P 500 and the Dow Jones Industrial Average Tuesday sent investors into the relative safety of government bonds and precious metals like gold. Unease in Europe over Italy’s budget proposal also appeared to undercut German and American yields.

At around, 10:21 a.m. ET, the yield on the benchmark 10-year Treasury note fell to 3.117 percent, while the yield on the 30-year Treasury bond fell to 3.317 percent. Bond yields move inversely to prices.

The Euro closes beneath mid-Cycle support/resistance.

The Euro closed beneath mid-Cycle support at 114.74.  While some further consolidation may be needed, the decline may resume through mid-November.

(Reuters) – The euro fell to a two-month low on Thursday after European Central Bank President Mario Draghi said the bank would pursue its tightening policy despite fears about the monetary union’s economic and political future.

The ECB reaffirmed that its 2.6 trillion euro ($2.97 trillion) asset purchase programme will end this year and that interest rates could rise after next summer. The policy guidance has been consistent since June, even though the economic outlook has darkened while political turmoil in Italy looms over the currency bloc.

EuroStoxx approaches its Cycle Bottom.

The EuroStoxx declined to a new weekly low, but has not met either of two possible targets.   The first is the Cycle Bottom at 3049.21.  The second is the potential Head & Shoulder target.  An extension may prolong the bottom into next week to satisfy one or both of its goals.

(Reuters) – European shares were on course for their worst month since 2015 on Friday after a spreading global sell-off hit regional equity markets and missed results expectations sapped risk appetite.

The leading index of euro zone stocks .STOXX50E fell 1.4 percent with Germany’s DAX .GDAXIdown 0.9 percent and France’s CAC 40 .FCHI down 1.3 percent.

The pan-European STOXX 600 lost 1.2 percent and is down about 8 percent so far in October, a size of fall not seen since August 2015.

Overall the third-quarter earnings season has been marred by rolling sell-offs across global markets.

The Yen challenges at Intermediate-term resistance.

The Yen challenged Intermediate-term resistance at 89.49, but closed 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.

(EconomicTimes)  The Japanese yen and Swiss franc rose on Thursday as investors sought safety following a wave of selling across stock markets, although moves in currency markets were modest and suggested investors were far from panicking.

The euro also gained, recovering from two month lows hit on Wednesday and ahead of a European Central Bank monetary policy meeting later on Thursday.

Asian stocks followed their US counterparts into a sea of red overnight. The S&P 500 declined for a sixth .

Nikkei opens the trap door.

The Nikkei tumbled through the trendline into deep correction territory this week. The Cycles Model suggests that it may be due for a bounce either at this level or at the weekly mid-Cycle support at 20711.66. The bounce may lead to a a retest of the trendline.

(NHK) Strong volatility prevailed on the Tokyo Stock Exchange on Friday. Gains at the open were short-lived and the Nikkei Average briefly fell below the 21,000-level for the first time in seven months.

The Nikkei Index ended the day down 84 points or 0.4 percent lower, at 21,184. It was the lowest close since late March.

Many investors remain worried about US-China trade tensions and their effects on American corporate earnings and the Chinese economy.

U.S. Dollar tests the high.

USD tested its August 15 high, but came up short, closing beneath it.  There was a week-long period of strength that may have ended on Friday.  The Cycles Model originally had called for a bearish month of October, but the surge in strength may have inverted the Cycle, which ends this weekend.

(SeekingAlpha)  A key factor driving international asset returns in 2018 has been the strength of the U.S. dollar relative to currencies of other developed nations and especially emerging markets. The MSCI EAFE index, representing non-U.S. developed countries, returned 1.38% in local terms but -1.43% after conversion to U.S. dollars as of the end of September 2018. Currency effects can have a large impact on the returns of international stocks for investors measuring their wealth in dollars. As shown in Figure 1, before returns are translated to dollars, the MSCI EAFE index has shown lower volatility than the S&P 500 index and emerging markets stocks have the same volatility as the S&P 500 index but adding currency effects results in an entirely different picture.

.Gold may have made a Cycle high.

Gold rallied to 1246.00 on Friday, completing a probable Master Cycle high.  The journey to anticipated higher levels has been cut short by time and a standard price target has been met in a completed fractal.  Additionally, gold seems to have completed a right shoulder of a potential Head & Shoulders formation and confirming prior downside guidance.

(CNBC) Gold rose on Friday to a more than three-month peak as investors rushed to the safety of bullion as stock markets around the globe plunged, putting the metal on track for its fourth week of gains.

Spot gold rose 0.2 percent to $1,234.35 an ounce, having earlier gained nearly 1 percent to $1,243.32, its highest since mid-July.

U.S. gold futures settled at $1,235.80 per ounce, up $3.40.

Spot gold was on course for a fourth weekly gain, its longest winning streak since January.

“We continue to see money flows out of riskier equity markets into safe-haven asset classes. That is one of the main drivers of this (gold) market,” said David Meger, director of metals trading at High Ridge Futures.

Crude breaks through the trendline.

Crude broke down, falling through the 18-month trendline at 69.00.   It further challenged Long-term support at 67.24, but closed above it.  Nevertheless, it is on a sell signal.  A short-term bounce to retest the trendline may be expected, but the larger view is for a collapse in price through the month of November.

(OilPrice) Baker Hughes reported a 1-rig increase for oil and gas in the United States this week, bringing the total number of active oil and gas drilling rigs to 1,068 according to the report, with the number of active oil rigs increasing by 2 to reach 875 and the number of gas rigs decreasing by 1 to reach 193.

The oil and gas rig count is now 159 up from this time last year.

Crude oil rallied somewhat on Friday, but not enough to erase three weeks of bearish activity in the industry that stripped roughly $10 off barrel prices. The slight uptick on Friday came as confused markets wrestle with two opposing ideas: the narrative that paints the oil market as having oil supply troubles as the Iranian sanctions loom, and poor equities performance yesterday combined with the narrative that future oil demand may not be as robust as previously thought.

Shanghai Index bounces from a probable Cycle low.

The Shanghai Index consolidated this week after a more than 9% stick-save from its Master Cycle low on October 19.  However, a bounce that cannot rise above the Cycle Bottom at 2725.98 may signal an extension to this decline.  Traders should wait for a retest of the low before wading in.

(Reuters) – China is struggling to restore confidence in its stock markets, which are being weighed down by a massive amount of shares that have been pledged as collateral as credit-starved companies seek to raise funds.

Analysts say the practice, which involves 10 percent of total outstanding shares, is a minefield for an economy already battling slowing growth and a trade war with the United States.

Tight credit markets in China means that many companies, especially small and medium-sized enterprises, have scarce recourse to banks or other sources of financing, and policymakers have yet to promise any actual money.

The Banking Index founders beneath mid-Cycle resistance.

— BKX fell through its mid-Cycle support at 98.24, as anticipated. However, there is reason to believe that the decline may extend a few more days.  It also has unmet downside targets.

(Reuters) – China’s banking and insurance regulator has urged lenders in Beijing to avoid forced liquidation of pledged shares, as part of efforts to help stabilize the country’s stock market, Chinese financial magazine Yicai reported, citing sources.

The Beijing branch of the China Banking and Insurance Regulatory Commission (CBIRC) said unrealized losses or lending risks associated with shares that banks hold as collateral against loans will not be part of regulatory inspections, according to Yicai.

CBIRC has also encouraged banks to further increase lending to listed companies facing temporary difficulties, Yicai reported.

CBIRC could not immediately be reached outside normal business hours.

(Bloomberg)  With the Brexit divorce date growing nearer, it remains possible that the U.K. will exit the European Union without a deal establishing the terms of their relationship going forward. That’s an alarming prospect for banks, as a no-deal Brexit probably wouldn’t allow for a transition period and could cause chaos in financial markets.

  1. Why is this such an issue for banking?

Because Brexit imperils the longstanding working relationships between the City of London financial district and firms on the European continent. Earlier hopes of maintaining the ties through regulatory cooperation and of keeping the so-called passport came to nothing. And even as many U.K. firms have applied for EU licenses and started to shift operations inside the bloc, banks on either side of the English Channel are hoping to avoid a cliff-edge plummet into uncharted territory on the morning after Brexit.

(Forbes) Barclays and Deutsche Bank, Europe’s two mightiest investment banks, have both released third-quarter results that, at first glance, appear encouraging. Barclays’ profits before tax were 23% up, to £5.36bn ($6.87bn), though were knocked back to £3.12bn ($4bn) by conduct & litigation charges including a $2bn fine from U.S. regulators for mis-selling toxic securities before the financial crisis. And Deutsche Bank reported a profit of €506m ($576.84m), significantly better than analysts had predicted.

But the devil is in the detail. And in both cases, the detail reveals trouble to come.

(ZeroHedge) A new Bloomberg report has exposed deepening Russian-Venezuelan ties as the Nicolas Maduro government attempts to thwart aggressive U.S. sanctions amidst continued economic collapse while cut off from the global economy. Bloomberg names a little known Moscow-based state-run bank called Evrofinance Mosnarbank as a “key player” based on high level sources with direct knowledge of the bank’s role in giving Venezuelan companies access to the outside world, confirmed by recent statements of Caracas officials themselves.

It’s not the first time the obscure bank has made headlines as last May it was revealed to be the world’s only financial institution to sponsor Venezuela’s experimental and now already in trouble before official launch state-backed cryptocurrency – called the petro – allowing investors to buy the petro by wiring a minimum of 1,000 euros to a Venezuelan government account at Evrofinance.

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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