Now That I Have Your Attention…

I have been warning my readers for some time that this trend cannot continue.  Now we have just had a week where the SPX lost 3% and the NDX last 4%.  Maybe this is what it takes to jolt investors from their complacency.  No, the Fed does not have our backs.  If anything, they have just added the straw that broke the camel’s back.

While my techniques are different, the NorthmanTrader and I share similar views.  This week he writes, “Something significant has happened with US markets this week and whether you’re bullish or bearish I suggest: Watch closely.

Full disclosure: We’ve been approaching July from the sell side and I’ve been very transparent about this. In late June we identified the Sell Zone, I reiterated it on CNBC on July 5th, talking about the broadening wedge pattern and discussion the 2990-3050 zone on $SPX as key technical resistance. And throughout July I outlined technical problems with the rally on NorthmanTrader as well as in videos. Last week I talked about an imminent $VIXplosion, also on CNBC, when the $VIX was trading at 12, today it as hit 19.98 as of this writing.

That’s not to say I’m right or I told you so, it’s just an technical acknowledgement that so far the sell zone has proven to be worth a fade and the volatility pattern has kicked in.”

So, pay attention to what transpires this next week.  If it doesn’t inspire confidence, then take appropriate action.  You will be glad you did.

VIX rallied not only above Intermediate-term resistance and mid-Cycle resistance at 14.60-15.07, but also Long-term resistance at 17.02, closing above it. This has provided a confirmed buy signal.

(Bloomberg) A stock market that has been scaring Wall Street for months got a lot more frightening this week as Jerome Powell and Donald Trump helped deliver the worst drop of the year and volatility surged.

Thought markets were hard to fathom back when the trade war was cooling and the Federal Reserve preparing to cut rates? Try now, with Powell playing down his easing cycle and Trump slapping new tariffs on China. Solid jobs data couldn’t stem the slide. Stocks fell all five days while the VIX rose the most since 2018.

SPX rejected at the double trendlines.

SPX fell away from the double trendlines to close beneath Short-term support/resistance at 2934.33 but above Intermediate-term support at 2918.37.  This puts SPX on a provisional sell signal, awaiting a close beneath Intermediate-term support for confirmation.  “Point 6” remains beneath the December 26 low.

(MarketWatch)  The Federal Reserve’s interest rate cut this week is not the real reason why U.S. stocks are falling. The real culprit is the exuberant mood that has captured Wall Street in recent weeks, which in turn made the stock market vulnerable to a big drop. The Fed’s decision was little more than the straw breaking the camel’s back.

To appreciate just how exuberant that mood has become, consider the average recommended equity exposure among several dozen short-term stock market timers I monitor. (This average is what’s reported in the Hulbert Stock Newsletter Sentiment Index, or HSNSI.) In early July, this average reached its highest level since I began compiling the index two decades ago — 84.2%.

NDX falls to challenge Cycle support.

 

NDX declined to challenge Intermediate-term support at 7654.99, closing above it. A sell signal may be made beneath this level.  While there were a lot of newsworthy events this week, the decline was already overdue.

(Fortune)  A disappointing financial warning from a fairly small player in the corporate technology gear market unleashed a bloodbath among the stocks of major hardware vendors on Friday.

Silicon Valley-based NetApp warned on Friday morning that its sales in its quarter that just ended would be between $1.22 and $1.23 billion, or about 17% less than the same quarter a year ago. Just two months ago, the company had said it expected to bring in $1.315 billion to $1.465 billion. The company, which makes gear for storing data on corporate servers and in cloud services, also said it expected revenue for its next fiscal year would decline by 5% to 10% instead of rising by single-digit percentage points as previously forecast.

High Yield Bond Index declines beneath support.

The High Yield Bond Index declined beneath Intermediate-term support at 210.85 giving a sell signal. The Cycles Model warns the next step down may be a large one.

(SeekingAlpha) In a letter to investors dated July 25, David Einhorn revealed that Greenlight is shorting US corporate credit.

By now, the full letter is public on multiple websites and the passage that describes his position against credit is very brief, so I see no harm in quoting it verbatim. Here it is:

Additionally, we have taken a new macro position against U.S. corporate credit, both investment grade and high yield. Over the last few years, corporate debt has expanded dramatically, while covenant packages and other bond-holder protections have weakened considerably. Rating agencies have been complacent and allowed debt/EBITDA and debt/equity ratios to deteriorate without a corresponding reduction in credit ratings. Meanwhile, we are a decade into an economic recovery and there are signs the economy may be slowing.

Treasuries rallies above Cycle Top resistance.

The 10-year Treasury Note Index inverted to make a belated Master Cycle high on Friday. This Cycle inversion was likely a product of the FOMC rate cut. However, the Cycle Top usually spells the end of the line for this rally, despite the probe above it. Residual strength may last a few more days, but a reversal beneath the Cycle Top at 128.60 spells trouble for treasuries.

(MarketWatch)   Treasury yields plunged Thursday as traders reacted to President Donald Trump’s pledge to slap further tariffs on Chinese imports, as well as soft economic data, strengthening the case for further easing of monetary policy later this year.

Investors continued to wrestle with Federal Reserve Chairman Jerome Powell’s remarks from Wednesday following the U.S. central bank’s decision to cut rates by 25 basis points.

The 10-year Treasury note yield TMUBMUSD10Y, -2.60%  fell 14 basis points to 1.894%, its lowest since Nov. 8, 2016. The benchmark maturity marked its biggest daily decline since last May.

The Euro continues making new lows.

The Euro probed near the neckline to a new 2 year low ending in a possible reversal on Thursday.  The sell signal may be lifted as it bounces to test Intermediate-term resistance at 112.35.  The Cycles Model suggests a period of strength for the next week.

(Reuters) – The U.S. dollar fell against the Japanese yen on Thursday afternoon after President Donald Trump said he would impose an additional 10% tariff on $300 billion worth of Chinese imports on Sept. 1.

Trump made the announcement in a series of tweets after an American delegation returned from trade talks in Beijing, saying China had failed to deliver on its promises to buy large quantities of agricultural products from the United States, and to curb sales of the synthetic opioid fentanyl.

The dollar was 1.32% weaker at 107.31 yen JPY= after hitting a two-month high overnight. The safe-haven yen rose as traders moved out of riskier assets. The dollar index .DXY turned negative after Trump’s remarks, last down 0.20% to 98.325.

EuroStoxx declines beneath critical support.

Note:  StockCharts.com is not displaying the Euro Stoxx 50 Index at this time.

The EuroStoxx 50 SPDR declined beneath the mid-Cycle support at 37.33 and Intermediate-term support at 37.25, triggering a sell signal.  The Cycles Model suggests a probable 6 week decline may lie ahead.

(Reuters) – A measure of stocks across the globe posted on Friday its largest weekly loss of the year while yields in U.S. and German debt were near or at multi-year lows, after China vowed to retaliate against a possible new round of U.S. tariffs.

Oil prices bounced back from losses that exceeded 7% the previous session and the yen scaled further against the dollar a day after its strongest daily gain in over two years.

The moves followed a sharp Wall Street selloff triggered by U.S. President Donald Trump’s threat Thursday to impose a 10% tariff on $300 billion worth of Chinese imports.

.The Yen rallies to Cycle Top resistance.

The Yen rallied to Cycle Top resistance at 94.04, confirming the buy signal.  This follows a Trading Cycle low at 91.83 on Wednesday before pushing higher. A breakout may propel the Yen to the upper Broadening trendline.

(Bloomberg)  Japan’s Government Pension Investment Fund is adding currency hedges just as the country’s most well-known exponents of the strategy cut back.

The world’s largest pension fund, which oversees the equivalent of $1.46 trillion, revealed in its annual report last month it was buying overseas bonds with hedges against possible yen fluctuations for the first time. Earnings reports from Japanese life insurers show they cut the proportion of the portfolio they hedge to 55% in March, from as high as 63% in September 2016.

Nikkei declines beneath critical supports.

The Nikkei Index reversed course, falling beneath critical support at 21448.92.  It topped just a week after its Master Cycle low on July 18. The breakdown has appeared as suggested.

(NikkeiAsianReview) . When Japanese Prime Minister Shinzo Abe was re-elected head of the ruling Liberal Democratic Party last month, he made a familiar pledge. His government, he said, would finally beat the deflation that has plagued the country for decades.

New threats, like the escalating U.S.-China trade war, will make that old battle even more difficult to win. But if Abe fails, it may be because the economy’s fate was sealed long before he became prime minister, when Japan “lost” a generation of workers who ought to be driving the economy today.

“In our company, there just aren’t any positions for us to get promoted to,” said a 40-year-old man working for a major financial institution in Tokyo. He and colleagues around his age frequently complain about their dim prospects for earning promotions and raises, he said.

U.S. Dollar tests the Cycle Top resistance.

USD tested Cycle Top resistance at 99.22 and trendline resistance just beneath it on Thursday before easing back.  This move gave the USD a Master Cycle inversion, suggesting a strong decline to follow.  Trump may get his wish after all.

(BusinessInsider)  The US dollar index rallied to a more than two-year high after the Federal Reserve cut interest rates for the first time since the financial crisis.

It’s not what Trump was hoping would happen.

The US president has long called for a weaker dollar, which would provide a boost to US exports. Meanwhile — in the midst of a global trade war — he’s accused both China and Europe of currency manipulation, a practice that he says he hates.

At the same time, he’s said that the US should engage in currency manipulation for an even playing field and has reportedly asked his aides to look into it, according to Bloomberg.

Gold makes its final probe.

Gold made a final probe above 1454.40 this week with an intraday high of 1461.90.  This is a very extended high (both time and price) and is due for a correction.  A breakdown beneath Cycle Top support at 1396.53 may produce a sell signal.

(Kitco News) – While gold has hit a fresh six-year high against the U.S. dollar, it is making even further gains another major Group of Seven currency.

Gold prices traded at all-time highs in Canadian dollar terms, hitting C$1,910.40 per ounce on Friday morning.

Nicky Shiels, commodity strategist at Scotiabank, said these highs are just the latest event in an emerging theme of currency tensions.

“Gold’s price in every major currency seems to be at record highs, and that is a big statement indicator that we are in the middle of some sort of currency war,” she said.

Crude prices whipsaw during Fed.

Crude rallied to challenge Intermediate-term resistance at 58.69 on Wednesday.  Then it fell to 53.59 on Thursday only to close near the halfway point for the week.  The Cycles Model suggests the Broadening Wedge formation may be triggered in the next two weeks.

(OilPrice) The U.S. oil benchmark tumbled nearly 8 percent on Thursday in its biggest one-day drop in four and a half years after U.S. President Donald Trump rekindled fears of significant slowdown in economies and oil demand growth by announcing he would impose tariffs on US$300 billion worth of Chinese imports.

On Wednesday, WTI Crude traded at $58.58 a barrel at close, while on Thursday, the U.S. benchmark crashed by as much as 7.9 percent, or by $4.63 a barrel to close at $53.95. Oil prices took a heavy hit after President Trump said that the U.S.-China trade talks—after no-breakthrough negotiations this week —would continue in September, while the “U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country.”

Agriculture Prices probe beneath support.

The Bloomberg Agricultural Subindex continued its decline beneath Intermediate-term support at 40.17, closing the week at the lows.  It may have made a Master Cycle low on Thursday.  However, Cycle Bottom support at 37.54 may be an attractor that could pull the index down even further next week.

(ZeroHedge) A new report from Bloomberg shows US soybean exports to China collapsed in 1H19 to the lowest level in more than a decade.

The US exported 614,806 tons of soybeans to China in June, according to US customs data. That brought 1H19 China imports of soybeans from the US to 5.9 million tons, the lowest level since 2004, according to Bloomberg calculations.

US farmers, who harvest soybeans from September to November, have been some of the hardest hit in the trade war as Chinese buyers shift to Latin American markets for agricultural products.

Shanghai Index sliding to deeper lows.

The Shanghai Index rallied, testing Intermediate-term resistance on Tuesday, then declined through Short-term support at 2929.87 to close near the low of the week.  The period of strength may have been cut short by the FOMC announcement.  The decline may have resumed and it may persist through late September.

(MarketWatch) Asian markets fell in early trading Thursday, following the Fed’s first interest-rate cut in more than a decade.

Stocks slid on Wall Street after the Fed cut interest rates by 25 basis points and failed to clearly signal whether more cuts were on the horizon.

Meanwhile, trade negotiations between the U.S. and China concluded in Shanghai, with no major breakthrough. China did agree to buy more U.S. agricultural products, and the White House said talks are expected to continue in Washington in September. The ongoing trade war has hurt China economy, though a report Thursday found China’s factory activity improved slightly in June, though it was still in contraction.

The Banking Index repelled at its Diamond formation trendline.

— BKX was repelled at the upper trendline of its Diamond formation this week, but did not decline beneath the lower trendline.  It appears that the formation may be triggered on a decline beneath Long-term support at 96.86, where it intersects the trendline.  The Summer Rally may be over in time for the three worst months of the year for longs.

(Bloomberg) This week looms as a key one for Asian financial markets with no less than five central banks set to hand down decisions that may set the tone for the rest of the year.

Markets are predicting policy makers in India, the Philippines and New Zealand will all cut interest rates to shore up faltering growth, while those in Australia will pause after back-to-back moves, and Thailand looks set to avoid lowering borrowing costs at all.

Here’s a roundup of what rates markets are pricing in for each of the central banks reporting this week and some possible trades suggested by their diverging outlooks:

The Reserve Bank of Australia is first up on Tuesday, with markets expecting it to stay on hold after cutting rates in June and July to a record 1%. The next reduction is currently priced for December, with a further one expected in mid-2020.

There’s a growing perception the RBA may be unwilling to lower its benchmark below 0.5%, suggesting there is a possible floor for rates just a few basis points below next year’s pricing. This would appear to create an asymmetric risk, i.e., there’s a much more room for rates to rise than fall.

(ZeroHedge) China’s generation Z, not unlike millennials in the U.S., are developing an ugly addiction to debt. This was highlighted in a recent Bloomberg piece that highlighted examples like one 23 year old Shanghai resident who found himself $1,500 in debt to a smartphone app. 

His spending habits are made possible buy Huabei, a credit card that’s part of Alibaba’s ecosystem. He routinely spent more than his sole source of income, which was his parents 8,000 yuan (~$1,200) monthly allowance. When fell under a pile of debt, he tried to borrow his way out of it and pay in installments. It didn’t work, and his parents had to bail him out. Hubei charged him 0.05% per day, which is about 18.25% annualized.

(BloombergTV) It was expected to be incredibly grim for the banks this earnings season. You’ve got negative rates, you’ve got a struggling economy, poor results in trading from U.S. peers as well as for European banks. But not that most lenders have reported, the numbers haven’t been all that bad. Bloomberg’s Dani Burger reports on “Bloomberg Markets: European Open.”

All the best!

Tony

 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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