The Banking Index Makes a Spirited Retracement. Weekend Update January 27, 2017

VIX declined to the lower trendline of its massive Ending Diagonal formation this week. As a general rule, VIX doesn’t stay at its lows very long. An aggressive buy signal may be forthcoming should the VIX rally above its Short-term resistance at 12.06. The breakout above the higher resistance zone at 13.48-14.04 implies higher targets to come. The abrupt turn made in August 2015 may be repeated here.

(Schaeffer’s) Stocks have resumed their record-setting run this week, with the release of several White House policy announcements seemingly breathing new life into the Trump rally. What’s more, a round of well-received blue-chip earnings helped send the Dow soaring past the psychologically significant 20,000 mark. As such, the CBOE Volatility Index (VIX) — or the market’s “fear gauge” — is hovering at its lowest levels since July 2014. Nevertheless, while put volume on VIX futures ran at an accelerated clip on Wednesday, 1.6 times the average intraday rate, the overriding trend in recent weeks has been toward long calls.
SPX challenges the 7-month Broadening Top.

SPXSPX extended to of the upper trendline of its Orthodox Broadening Top which began in July. A decline beneath the Cycle Top support at 2261.18 and Short-term support at 2254.31 gives the SPX a sell signal. A break of those supports may send the SPX to its cycle Bottom at 1907.20, or possibly lower.

(ZeroHedge) The Dow Jones Industrial Average provides us with some pretty strong evidence that our “stock market boom” has been fueled by debt.  On Wednesday, the Dow crossed the 20,000 mark for the first time ever, and this comes at a time when the U.S. national debt is right on the verge of hitting 20 trillion dollars

Is this just a coincidence?  As you will see, there has been a very close correlation between the national debt and the Dow Jones Industrial Average for a very long time.

(RealInvestmentAdvice) Of course, the push to all-time highs has also led to a further extension of the overbought and overly exuberant conditions of the market. As noted yesterday, the stock-bond ratio is at levels that have previously denoted trouble for the markets.

The NDX challenges the upper trendline of the Orthodox Broadening Top.

NDXNDX challenged the upper trendline of its Orthodox Broadening Top for another week, making a new high by the close of the week. It must cross beneath its Cycle Top support at 4995.53 to give it a possible sell signal. A further break of the weekly Short-term support at 4961.29 confirms a sell signal.

(ZeroHedge) While the S&P500 market may remain pinned just why of all time highs, this appears to be from ongoing short covering, and is not – at least in the latest week – the result of new money entering the market. Quite the opposite: according to the latest BofA fund flow analysis based on EPFR data, in the latest week, US equities saw $6.3 billion in outflows, the largest weekly redemption from US mutual funds and ETFs in four months, since before the presidential election. And as investors pulled cash out of US stocks, they quickly reallocated it back into bonds, with all major classes seeing inflows, with notable mentions for government bonds, which had the biggest inflows since July 2016, and TIPS, where the demand for inflation protection is now the highest since the great China reflation scare of 2011 (it proved quite transitory).

High Yield Bond Index bounces off its trendline.

MUTThe High Yield Bond Index bounced off its Ending Diagonal trendline to complete an exact 78.6% Fibonacci retracement. High Yield Bonds are on a sell signal beneath its Short-term support at 163.62. The Cycles model suggests a probable 1 week decline ahead. A broken Diagonal trendline near 165.00 implies a complete retracement of the rally may occur. Is this the canary in the coalmine?

(SeeItMarket) The bulls are celebrating what they believe is another key breakout to new highs. The Dow Jones Industrial Average is over 20,000 and tech stocks are rocking again.

So does this rally have legs?

As stocks were meandering sideways and beginning to “feel” heavy, the 10 year treasury note was also pulling back. It looked like another leg lower was imminent. But then we burst higher once more.  So what gives?

USB finds support. Going higher?

USBThe Long Bond challenged weekly Short-term support at 149.90, closing beneath it. But it may be capable of a sharp rally from that support, having made a Master Cycle low at 148.84 on Wednesday. The Cycles Model allows another attempt at mid-Cycle resistance at 158.77 over the next seven weeks. The larger pattern may not resume until mid-March.

(ZeroHedge) After 2 poor, tailing auctions earlier this week, moments ago it was a bit of a relief for Treasury bulls to see that today’s $28 billion issue of 7Y paper finally stopped through the 2.338% When Issued, printing at 2.335%. The strong headline result took place even though, as reported earlier in the week, there has been no scarcity of collateral in repo, and thus no pervasive overhang of shorts who get squeezed into the auction.

The internals in today’s auction were also better than in the 2 and 5 Years, because while the Bid to Cover declined modestly to 2.454 from 2.545 in December, and in line with the 2.42 6MMA, it was the surge in Indirect bidders, which took down a record 72.8% of today’s auction that shows that foreign bidders are finally back in the game, especially for longer-maturity paper. And with Directs taking down 6.6%, it meant Dealers were stuck with 20.65%, or the lowest since December 2014.

The Euro rally fizzles.

XEUThe Euro made a nominal new retracement high on Tuesday at 107.75 before giving up its weekly gains by the end of the week. It may be slip beneath the inverted Cup with Handle formation to challenge its Cycle Bottom at 104.13. It now faces a possible 2-week decline as it ventures toward parity or below.

(MishTalk) Professor Ted Malloch, Trump’s expected ambassador to the EU says “The one thing I would do in 2017 is short the euro.

“I am not certain there will be a European Union in which to have negotiations… The one thing I would do in 2017 is short the euro. I think it is a currency that is not only in demise, but has a real problem and could in fact collapse in the coming year or year and a half.”

It nothing else, Trump is sure to provide fodder for media discussion for four full years.

That aside, it is refreshing to hear such discussions. The breakup of the Eurozone or EU is a very distinct possibility.

Is Greece on the verge of collapse?

EuroStoxx begins its descent.

STOXX50The EuroStoxx 50 Index made a new retracement high on Thursday before giving up most of the gains. It is now due for a decline that may last a week or longer. A decline beneath this week’s low at 3262.61 may provide a sell signal.

(Bloomberg) European stocks fell, trimming their fourth weekly gain in five, as lenders and carmakers led losses.

The Stoxx Europe 600 Index fell 0.3 percent at the close, after capping its biggest three-day advance since early December. Lenders in the gauge halted a three-day rally, falling from their highest level in almost 13 months, with UBS down 4.5 percent amid disappointing wealth management flows. Carmakers declined as the euro strengthened, hurting prospects for exporters’ earnings.

The Yen makes a wide ranging consolidation.

XJYThe Yen made a second new high above the weekly mid-Cycle resistance at 87.30 before closing beneath it. The Yen may finish consolidating near the low early next week to make a Master cycle low before resuming its rally. It may target Short-term support at 86.36 before ending the consolidation.

(Bloomberg) Amundi SA, which oversees more than $1.1 trillion, is buying the Japanese yen and selling Canada’s currency as U.S. President Donald Trump’s push toward trade protectionism threatens to overshadow his promise of fiscal stimulus.

“Since Trump’s victory in November, the market has been focusing too much on the fiscal policy and bought the dollar,” James Kwok, the London-based head of currency management at Amundi, said in an interview. “Now it’s time to see the correction back to reality on the trade policy.”

The Nikkei makes a sharp retracement.

NikkeiThe Nikkei rallied, retracing 86% of its decline by the end of the week. The sell signal resumes beneath Short-term support at 19190.29.

(SeekingAlpha) In 2016, the yen underwent significant strengthening which resulted in the Nikkei 225 falling significantly to a low of below 15500 in July of last year.

Since the second half of last year, we have subsequently seen the index strengthen while the yen has undergone a significant downward correction against the US dollar:

However, with Japan’s currency now edging up against the greenback, is there a possibility that we could see the Nikkei 225 inversely take another dip?

U.S. Dollar challenges Intermediate-term support.

US DollarUSD continues to challenge Intermediate-term support at 100.34, leaving it on a sell signal, although closing above it. There appears to be a double Primary Cycle turn due at the end of next week. Should the decline resume, it may be described in superlatives.

(Reuters) The dollar rose against the yen on Friday, extending a broad trend that has been in place since U.S. President Donald Trump’s election in November on expectations of more pro-growth policies to bolster an economy that has improved but sputtered at times.

The greenback has climbed for two straight days, pulling it back from seven-week lows against a basket of currencies on the view that it would gain from a rise in border tariffs, tax reform and future spending.

“Donald Trump’s ambitious fiscal plans point to stronger growth in the coming quarters,” said Fawad Razaqzada, market analyst at in London.

Gold may reverse higher.

GoldGold may be ready to reverse higher. Its pullback hasn’t yet reached the trendline and Short-term support at 1169.48. Should it complete its retracement to that level, it may be ready for a spirited rally to Long-term resistance at 1264.99 in a very short period of time.

(MarketWatch) Gold futures ended lower Friday for a fourth day in a row, losing more than 1% for the week as strength in the dollar and recent all-time highs in major U.S. stock indexes dulled demand for so-called haven investments.

Gold for February delivery GCG7, +0.10% fell $1.40, or 0.1%, to settle at $1,188.40 an ounce. Gold has posted declines each day since ending Monday at $1,215.60—its highest settlement since Nov. 17. April gold GCJ7, +0.10% which trades with higher open interest, also shed $1.40, or 0.1%, to finish at $1,191.10 an ounce. Both contracts settled roughly 1.4% lower on the week.

Crude has an “inside week.”

WTICWhile Crude challenged Short-term support at 52.85, it closed above it in an inside week. A decline beneath Intermediate-term support at 50.33 produces a sell signal for crude.  The Cycles Model suggests a potential low may be overdue.  The Cycles are compressed here, making sudden moves highly probable.

(MishTalk) Global export of goods (priced in US dollars) has collapsed in Japan, the EU, and emerging markets, since their recovery highs following the great recession.

The US is the best of the lot, but US exports of goods are down substantially as well.

What’s behind the move? Is it protectionism? Currency related? Take a guess before reading further. The answer is coming up.
I got to thinking about the above questions after following a Gavekal Capital tweet that World Trade has Increased by Less Than 1% Annually Since 7/07.

Shanghai Index sits at the Pennant trendline.

Shanghai IndexThe Shanghai Index sits above its year-long Bearish Pennant formation at 3150.00, but beneath its Short-term resistance at 3162.48 while the entire country goes on a week-long vacation. The fractal Model suggests the Shanghai is due for another 1,000 point drop. The index is now on a sell signal.

(ZeroHedge) For months/years we’ve covered the many real estate bubbles that have been inflating all over the world courtesy of Chinese billionaires looking to launder money offshore (here are just a couple of examples:  VancouverSydney and New York).  But a new set of capital controls enacted in China on January 1st, and aimed specifically at curbing foreign real estate investments, may just be the needle that finally pops all those bubbles.

As Bloomberg pointed out earlier this month, the following new restrictions on foreign currency transaction were implemented earlier this year.

  • Customers must pledge money won’t be used for overseas purchases of property, securities, life insurance or investment-type insurance. While such rules aren’t new, citizens previously didn’t have to sign such a pledge

The Banking Index makes a spirited retracement.

BKX— BKX made a spirited 87% retracement of its January 13 decline. It resumes its sell signal under Short-term support at 91.40. The period of strength ends this weekend and there may be a sharp decline lasting approximately 1 week following it.

(Bloomberg) ndian bank investors are in for a rude shock, and one that’s got little to do with the chaos unleashed by demonetization.

The fault lies in shareholders’ own expectations, which, in Morgan Stanley’s words, are driven by “institutional memory.” The top three Indian private-sector lenders by assets — ICICI Bank Ltd., HDFC Bank Ltd. and Axis Bank Ltd. — have such a stellar record of boosting their net interest margins (what they earn on assets minus what they pay for liabilities, divided by interest-earning assets) that it’s almost unthinkable the profit gear could now be in reverse.

But in reverse it might well be.

(ZeroHedge) Having discontinued its production of EUR500 banknotes, it appears Europe is charging towards the utopian dream of a cashless society. Just days after Davos’ elites discussed why the world needs to “get rid of currency,” the European Commission has introduced a proposal enforcing “restrictions on payments in cash.”

With Rogoff, Stiglitz, Summers et al. all calling for the end of cash – because only terrorists and drug-dealers need cash (nothing at all to do with totalitarian control over a nation’s wealth) – we are not surprised that this proposal from the European Commission (sanctuary of statism) would appear…

(ZeroHedgeAlthough the stock market is giddy from President Trump’s pro-growth policies, there is another constituent not quite so enamoured with recent developments. Although a few years ago Fed officials were begging for some help from fiscal policy, with employment now running at a “perceived” tight pace, FOMC participants have switched to viewing fiscal stimulus as a potential inflationary concern that needs to be offset with tighter monetary policy.

Case in point – have a look at the comments from the most dovish member of the FOMC – über dove Lael Brainard

Have a great weekend!

Anthony M. Cherniawski

The Practical Investor, LLC

P.O. Box 129, Holt, MI 48842

Office: (517) 699.1554

Fax: (517) 699.1558

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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