Margin Debt Is Falling. Should You Be Concerned?

Lance Roberts of RealInvestmentAdvice takes on Mark Hulbert regarding the importance of falling Margin Debt on market performance.

Lance opens with, “This past week, Mark Hulbert wrote an article discussing the recent drop in margin debt. To wit:

“Plunging margin debt may not doom the bull market after all, reports to the contrary notwithstanding.

Margin debt is the total amount investors borrow to purchase stocks, which historically has risen during bull markets and fallen during bear markets. This total fell more than 6% in October, according to a report last week from FINRA. We won’t know the November total until later in December, though I wouldn’t be surprised if it falls even further.

A number of the bearish advisers I monitor are basing their pessimism at least in part on this plunge in margin. It’s easy to see why: October’s sharp drop brought margin debt below its 12-month moving average.”

 Are you intrigued?

The article may clear up some misinformation about the role of Margin Debt in bull and bear markets.

VIX corrected all the way to Long-term support at 15.96 before rallying above its weekly Cycle Top at 21.04. A breakout above the neckline of the Head & Shoulders formation may challenge the February 6 high. Wall Street doesn’t seem to be concerned.

(Bloomberg) The recent turbulence that’s roiled financial markets shouldn’t be feared — it’s normal, according to the co-head of UBS Group AG’s wealth-management unit.

“It’s quite surprising how what would be considered a relatively normal amount of volatility, if you think back a decade or two ago, now we’re hyperventilating about what are pretty normal market moves,” Tom Naratil, co-president of global wealth management at UBS, said in an interview in New York. “It brings more opportunities for us. We’re in the advice business, and uncertainty actually increases demand for advice.”

SPX repelled at the trendline, now at the neckline.

SPX finished its rally to Intermediate-term resistance and the 2.5-year trendline at 2800.00 before making a new monthly low just above the Head & Shoulders neckline at 2610.00.  The sentiment went from fear of missing out on the rally to “Look out below!’ as confidence was shattered by political mis-steps and bad economic news.

(Bloomberg)  After six weeks of stomach-churning swings, a cry’s gone up from stock pickers: Make it stop.

For the group that bemoaned last year’s one-way market as impossible to trade, it’s no small irony. Life’s only gotten harder since October as the S&P 500 lurches from rally to rout at an alarming rate. So with just three weeks left in the year, many active managers are looking to make up lost ground and say they’d welcome a return of that historical calm.

NDX is repelled at Long-term resistance.

NDX attempted a rally to Long-term resistance at 7140.19, but couldn’t make it.  The Cycles Model suggests weakness may continue for at least another week with potentially devastating results. The Head & Shoulders neckline is in striking distance, which may accelerate the decline.

(Bloomberg)  How bad has the start to December been for U.S. stock investors? Almost $1 trillion has been wiped from the value of stocks in just four days of trading.

The Russell 3000 has plunged 4.9 percent this week as of 3 p.m. Friday in New York, as the six-week rout in American stocks deepened amid concern global growth is slowing and the Trump administration will escalate trade tensions.

Apple’s 5.4 percent plunge lowered its value by $45 billion, while Amazon’s 3 percent slide left it worth $24 billion less than a week ago.

High Yield Bond Index reverses most of its gains.

The High Yield Bond Index continued ita rally toward the October 3 high, but reversed down beneath all critical levels except the Long-term support. It is likely on a new sell signal, but confirmation may be found beneath Long-term support at 193.97.

(CNBC) Stock markets have been gripped with fear this week over a deteriorating economic growth outlook and questions regarding the U.S.-China trade truce.

While investors have typically pointed to the yields on different U.S. government bonds for warning signs on growth, the secondary market of corporate debt may also be a key to market directionality from here.

During the first bout of stock market volatility in February, so-called investment grade and high-yield (or junk) bonds remained relatively resilient. However, in October and after the S&P 500 plunged 7 percent having its worst month since November 2008, credit markets also started exhibiting some signs of distress, underperforming equities.

UST rallies above Long-term resistance.

The 10-year Treasury Note Index continued its rally above Long-term support/resistance at 119.64 this week. UST may extend its rally into mid-December and may reach mid-term resistance at 122.93, according to the Cycles Model.

(RealInvestmentAdvice) So, have you heard the one about the “flattening yield curve?”

It almost sounds like the start of a bad joke because there have been so many discussions during this past year on it. However, it has been largely dismissed under the “this time is different” scenario as trailing economic data has remained strong and the recent stock market struggles are believed to only be temporary.

As I discussed yesterday, however, it is quite likely the message being sent by the bond market should not be dismissed. Bonds are important for their predictive qualities which is why analysts pay an enormous amount of attention to U.S. government bonds, specifically to the difference in their interest rates. This data has a high historical correlation to where the economy, stock, and bond markets are generally headed in the longer-term. This is because volatile oil prices, trade tensions, political uncertainty, the strength of the dollar, credit risk, earnings strength, etc., all of which gets reflected in the bond market and, ultimately, the yield curve.

The Euro continues to consolidate.

The Euro continued to consolidate in a tight range beneath overhead resistance.  Granted, the triple resistance near 115.00 appears formidable, but the Cycles Model suggests a comeback in strength in December.

(Reuters) – The European Commission published on Wednesday non-binding proposals to boost the role of the euro in international payments and its use as a reserve currency to challenge the dominance of the dollar.

The move follows the decision by the United States to withdraw from an agreement with Iran on its nuclear program. That has forced many European companies to stop trading with Iran to avoid U.S. sanctions.

The European Commission called on companies and states to increase their use of the euro in energy contracts. It said it would study possible measures to promote the European Union currency in financial and commodity markets.

EuroStoxx declines beneath the Cycle Bottom.

The EuroStoxx declined beneath the Cycle Bottom, losing all Cyclical support.   While the time for a Master Cycle low is approaching this week, the decline has not met any of its targets.  The Cycles Model may allow for an extension of the Cycle for yet another week.

(CNBC) European stocks recovered some ground Friday, after slumping to a two-year low in the previous session but significant gains were capped by lack of thrust from Wall Street and Asia.

The pan-European Stoxx 600 provisionally closed up over 0.7 percent, with all sectors and major bourses in positive territory.

Europe’s tech stocks were among the top performers, up around 2 percent as worries of a fresh flare-up in tensions between the world’s two largest economies cooled. The arrest of Huawei’s global chief financial officer in Vancouver on Wednesday had threatened to derail progress in U.S.-Sino trade talks. However, tech stocks pared losses Friday, with Nokia and Ericsson both trading more than 3 percent higher.

.The Yen tests Intermediate-term resistance.

The Yen appears to be gaining strength as it tests Intermediate-term resistance at 89.07.  Should the yen break out above it, there may be a surge toward mid-Cycle resistance for an inverted Cycle high instead of the anticipated low.

(CNBC)  The dollar weakened against major peers on Thursday as U.S. Treasury yields tumbled and traders scaled back expectations on the number of rate hikes the Federal Reserve would implement amid weakening economic data and heightened market volatility.

The dollar fell 0.48 percent against the Japanese yen after news of the arrest in Canada of a top executive of Chinese tech giant Huawei prompted fears of a flare-up in U.S.-China trade tensions.

The yen tends to benefit during geopolitical or financial stress as Japan is the world’s biggest creditor nation and there is an assumption that Japanese investors will repatriate funds should a crisis materialize.

Nikkei declines toward the neckline.

 The Nikkei challenged Intermediate-term resistance at 22545.79 on Monday, but fell through all critical supports as it tumbled toward the Head & Shoulders neckline. It was reprieved by a bounce on Friday. The Cycles Model suggests that the decline may last into mid-December with a challenged, if not broken, neckline.

(Bloomberg) The sea of red that’s engulfing Asian stocks is enough to sap hopes even from the most optimistic traders.

The regional gauge fell 1.8 percent, heading for its biggest daily plunge in six weeks as markets from Tokyo to Hong Kong and Mumbai sank. In just three days, the rally seen last week in anticipation of Presidents Donald Trump and Xi Jinping’s trade discussions has more than vanished, with Asian equity values taking their losses from a January high to $6.2 trillion.

U.S. Dollar declines to support.

USD declined to Short-term support at 96.27 after failing a retest of the November high.  The Cycles Model calls for the decline to continue this week.  A financial jolt may send USD beneath near-term supports.

(Reuters) – The dollar fell against the euro on Friday, after data showed U.S. employers hired fewer workers than forecast in November, raising worries that U.S. growth is moderating and the Federal Reserve may stop raising rates sooner than previously thought.

Nonfarm payrolls increased by 155,000 jobs last month, while the unemployment rate was unchanged at near a 49-year low of 3.7 percent. Economists polled by Reuters had forecast payrolls increasing by 200,000 jobs in November.

Average hourly earnings rose six cents, or 0.2 percent in November after gaining 0.1 percent in October. That left the annual increase in wages at 3.1 percent, matching October’s jump, which was the biggest gain since April 2009.

Fed policymakers are still widely expected to raise interest rates again at their Dec. 18-19 meeting, but the focus is on how many rate hikes will follow in 2019.

.Gold rallies higher.

Gold broke out above its October high at 1246.00 this week.  While Cyclical strength may subside, there is an opportunity to continue its rally as far as Long-term resistance at 1280.62.  Gold may be extending the right shoulder of a potential Head & Shoulders formation before resuming its downtrend.  Perfect symmetry would occur at 1260.62.

(CNBC) Gold prices hit a five-month peak on Friday and continued to trade close to that level as the dollar slid following weaker-than-expected U.S. jobs data that raised the possibility that the U.S. Federal Reserve might go slow on interest rate hikes next year.

Spot gold was up 0.86 percent at $1,248.28 per ounce, having hit $1,245.60 per ounce earlier, its highest since July 13.

With a rise of nearly 1.7 percent this week, gold looked set to clock its best gain since at least the week of Aug. 24.

U.S. gold futures settled at $1,252.60 per ounce.

Crude rises from the bottom.

Crude is now making headway in its rally.  The bottom appears to have been tested and the Cycles Model suggests rally to the year-end may be due.  The proposed target may be Long-term resistance currently at 68.47.

(RigZone) Crude oil futures did something Friday that they haven’t done in more than two months: they finished the week higher.

The January West Texas Intermediate (WTI) contract gained $1.12 Friday, settling at $52.61 a barrel. The WTI traded within a range from $50.60 to $54.22, and Friday’s settlement reflects a 3.3-percent increase over the Nov. 30 closing price.

Brent crude oil for February delivery settled at $61.67 a barrel Friday, reflecting a $1.61 day-on-day increase and a 3.6-percent week-on-week improvement.

“WTI and Brent finished the week higher for the first time in nine weeks despite a plethora of conflicting market signals,” Tom Seng, Assistant Professor of Energy Business at the University of Tulsa’s Collins College of Business, told Rigzone. “It seemed to be ‘Trump vs. China’ and ‘Trump vs. Saudi Arabia’ in the spotlight.”

Shanghai Index repelled at Intermediate-term resistance.

The Shanghai Index was repelled by Intermediate-term resistance at 2670.04 earlier this week.  While the Cycles Model suggests another week of strength, round number resistance at 2700.00 may be the limit.  Should it fail, the decline resumes through the year-end and a potential bottom near 2000.00.

(EconomicTimes)  China’s main equity market indexes ended flat on Friday in thin trade as investors remained cautious after the arrest of a senior Huawei executive sparked a global sell-off on fears it could derail hopes for a lasting U.S.-China trade detente.

At the close, the Shanghai Composite index was flat at 2,605.88 points. But despite the sharp fall on Thursday, it gained 0.7 per cent for the week.

The blue-chip CSI300 index also ended flat at 3,181.56 points, with its financial sector sub-index higher by 0.07 per cent, the consumer staples sector down 0.25 per cent, the real estate index up 0.66 per cent and the healthcare sub-index down 4.31 per cent.

The Banking Index declines to the neckline.

— In a wide-ranging week, BKX rallied to Intermediate-term resistance at 103.43, then declined to the Head & Shoulders neckline at 93.40, which may cause a panic decline.  The Cycles Model calls for a significant low by mid-December which may meet the implied Head & Shoulders target.

(AmericanBanker) here were probably dropped jaws and a lot of head-scratching in banking policy circles Friday following a report that claimed an apparent grammatical error in the regulatory relief law enacted last year created a much bigger exemption from the Volcker Rule than Congress intended.

But there are a lot of reasons why the grammatical oversight in the legislation may be less of a big deal than first believed.

Yahoo Finance published an article reporting that some large institutions are focused on the provision that exempted banks with less than assets of $10 billion from the Volcker Rule, a post-crisis ban on proprietary trading named for former Federal Reserve Chairman Paul Volcker.

(CNBC) The banks have been under fire this week.

The KBE bank ETF has tumbled 6 percent since Monday with major banks like Citigroup and Bank of America tanking by more than 8 percent.

After sounding the alarms for the group, Matt Maley, equity strategist at Miller Tabak, has had a change of heart.

“I’ve been very bearish on the group all year long but we’re now getting to some levels here,” Maley said Thursday on CNBC’s “Trading Nation.” “If you look at the KBE bank ETF which just has banks in it and no credit cards or insurance companies, it’s getting down to its 200-week moving average. That level is also the same level that we saw at its lows in 2017.”

(Bloomberg) Huawei Technologies Co. Chief Financial Officer Meng Wanzhou was charged with conspiracy to defraud banks and should not be granted bail because she may flee, a lawyer representing Canada said during a court hearing on Friday.

The U.S. alleges that Huawei used an unofficial subsidiary called Skycom to do business in Iran for Iranian telecom companies, breaching U.S. and European sanctions against the Middle Eastern country, according to Crown attorney John Gibb-Carsley.

Banks in the U.S. cleared money for Huawei, but unbeknownst to these financial firms, they were conducting business with Skycom in contravention of the sanctions, the lawyer said.

In her dealings with the banks, Meng hid ties between Huawei and Skycom, when in fact Skycom employees worked for the Chinese telecom-equipment giant, Gibb-Carsley added. He noted that some Skycom workers used Huawei email addresses and employees in Iran used a different set of stationary. Canada is presenting the case against Meng on behalf of the U.S., which wants to extradite her.

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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