Weekend Update February 17, 2017

VIX tested weekly Intermediate-term resistance at 12.91 before closing beneath weekly Short-term support at 11.56. A buy signal may be forthcoming should the VIX rally above its Intermediate-term resistance. The breakout above Long-term resistance at 13.83 implies higher targets to come.

(TumblrWhile the S&P 500 closed at another new high, the VIX also spiked, an unusual occurrence that may have negative implications in the intermediate-term. 

Among the themes in the stock market of late are the inexorable drift higher in the major averages and the rock-bottom levels to which the VIX has dropped, and stayed. On Wednesday, the former persisted but, in a stunning fashion, the latter did an about-face. Specifically, while the S&P 500 rose a half of one percent to another all-time high, the VIX, a.k.a., the S&P 500 Volatility Index, actually jumped by more than 11%. If you think that sounds odd, you’re actually underestimating the situation.

SPX “throws over” the Broadening Top, week 2.

SPXSPX continued its throw over above the upper trendline of its Orthodox Broadening Top, making a new high. A reversal of a throw-over may be a strong indication of a change in trend. A decline beneath the Cycle Top support and Short-term support, both near 2285.00, gives the SPX a sell signal. A break of those supports may send the SPX to its cycle Bottom at 1899.10, or possibly lower.

(ZeroHedge) Finally some good news for active managers. After one year of consecutive outflows, last week saw the first inflows into long-only equity mutual funds going back to last February, as according to BofA there finally was a $0.5 billion cash inflow, “a sign of rising investor confidence & broadening participation in equity rally.” However, to put this number in context, at the same time inflows to ETFs amounted to $17.2 billion, some 35 time more.

 The NDX in a Parabolic Top.

NDXNDX extended its throw-over sbove the upper trendline of its Orthodox Broadening Top, making a new high. Wave 5 is very near the length of Wave 1, achieving Wave equality and probable completion. A breakdown beneath the upper trendline of the Broadening Top may imply a sell signal.

(TumblrThe Nasdaq 100 rally is arguably extended now, based on the utilization of this charting analysis.

We have mentioned, on occasion, our view that the concept of rotation in the equity market is a bit overplayed.  Sure, there are always some things going up on others going down, but that’s the nature of the markets. It doesn’t mean it is part of some coordinated rotation whereby various segments of the market take turns carrying the leadership mantle. In fact, it is estimated that some 70%-80% of the movement of a stock can be explained by the direction of the overall market.  With that being said, in the last eight months or so, the stock market has probably exhibited more “rotational” characteristics than any other period in recent memory.

High Yield Bond Index challenges Short-term support.

MUTThe High Yield Bond Index bounced at its Ending Diagonal trendline, ramping toward its Cycle Top resistance at 169.20. A break beneath the Diagonal trendline implies a complete retracement of the rally may occur, once the rally is complete.

(ValueWalk) These are uncertain times in markets, and that creates a dilemma for investors who need high levels of income but can’t stomach a high level of risk. We have a solution. Actually, we have two.

Investors who need income know it’s impossible to avoid risk altogether. And with global growth gaining traction and the Trump administration pushing deregulation, tax cuts and infrastructure spending, maintaining exposure to high-yielding “risk” assets makes sense.

Even so, there are plenty of things that could upend the current growth trajectory and provoke market turbulence. Antiestablishment parties could win upcoming French and German elections. Or President Trump could double-down on his immigration and trade policies—or simply spook markets with his rhetoric.

USB pulls back to Short-term support.

USBThe Long Bond pulled back to Short-term support at 150.31, closing above it. The Cycles Model now suggests that a period of strength may develop through mid-March. The mid-Cycle resistance at 158.80 still appears to be the target.

(ZeroHedge) Over half a year after we first reported last Augusthat foreign official institutions – central banks, sovereign wealth funds and reserve managers – are liquidating US Trasuries in record amounts, a process that only accelerated into last month when official entities sold a record $405 billion in US paper in the LTM period, Bloomberg decided to catch up to the topic with “America’s Biggest Creditors Dump Treasuries in Warning to Trump.”

Well, not so fast, because as we also warned last month, based on more concurrent data from the Fed, showing Treasuries held in custody, the selloff most likely peaked in November, as December was a month in which foreigners were actively buying, not selling Treasuries.

The Euro sits on the Lip.

XEUThe Euro challenged the Lip of the cup with Handle formation before closing above it. A bounce to Long-term resistance at 109.59 may be the next outcome. There may be some Cyclical strength in the next few weeks .

(Bloomberg) French presidential candidate Marine Le Pen unsettled investors with her pledge to pull France out of the euro and re-denominate all French debt in newly minted francs. Polls suggest Le Pen won’t get the chance; she is expected to lose a second-round runoff. Even if polls are correct this time, that doesn’t mean the euro is safe.

In fact, political support for the single currency has been waning — especially in Germany’s two largest euro-zone trading partners.

EuroStoxx rallies above Short-term support.

STOXX50The EuroStoxx 50 Index rallied above Short-term support/resistance at 3292.48, extending its retracement. The Cycles Model suggests that the period of strength may be over. Starting next week, Euro Stoxx may begin a period of weakness lasting through mid-March.

(Bloomberg) European stocks ended the session little changed as a jump in Unilever shares offset declines in banks and commodity producers.

The Stoxx Europe 600 Index added less than 0.1 percent at the close. The benchmark erased a drop of as much as 0.6 percent, boosted by a 13 percent surge in Unilever after Kraft Heinz Co. said the consumer-goods peer rejected its merger approach. Miners and energy shares tracked declines in metal and oil prices.

The Yen pulls back from Intermediate-term resistance.

XJYThe Yen retreated back to its Short-term support at 87.00 on Wednesday before bouncing back to a small gain for the week. It challenged Intermediate-term resistance at 88.71 before closing beneath it. A breakout above that resistance would be a strong buy signal for the Yen..

(Reuters) The yen rose against major currencies on Friday as concerns about the upcoming French elections and the lack of movement in fiscal changes in the United States kindled safe-haven demand for the Japanese currency.

The dollar improved versus most peers with the exception of the yen, chalking up a second week of gains following a mildly hawkish view from Federal Reserve Chair Janet Yellen and surprising strong U.S. data on retail sales and consumer prices.

The Nikkei repelled by Short-term resistance.

NikkeiThe Nikkei challenged Short-term resistance at 19268.97 early this week only to be turned down at the close. A breakdown beneath this consolidation zone and Intermediate-term support at 18724.68 confirms the sell signal. A loss of the next supports suggests a potential decline to the Cycle Bottom at 15107.89 or lower.

(Bloomberg) Investors in Japanese equities brushed aside a seven-day rally in U.S. stocks to record highs, begging the question of whether the latest gains are sustainable amid uncertainty over U.S. President Donald Trump’s policies.

The Topix index slid after the VIX Index, a key measure of future volatility in U.S. markets, jumped 11 percent for its biggest gain in two and a half weeks. Automakers and telecommunications companies weighed most in the broader market, while the yen rose for a second day against the dollar. Insurers and banks outperformed, buoyed by expectations for a steeper yield curve after data showed a U.S. consumer-price index rose more than economists forecast.

U.S. Dollar tests the Broadening Top, then retreats.

US DollarUSD tested its Long-term resistance at 101.44 and the upper trendline of its Broadening Top on Wednesday before retreating back to Intermediate-term support at 100.83. A sell signal is activated beneath Intermediate-term support.  The ensuing decline may continue to be described in superlatives.

(Bloomberg) The dollar relinquished all of its gains for the week, following Treasury yields lower as the greenback extended Wednesday retreats from key levels.

The Bloomberg dollar index was down 0.3 percent on the day, though declines stretched to a full 1 percent from the Wednesday peak that was the highest this month, adding an air of drama to the move. Dollar-yen dropped to near 113.00 after rising to within four pips of 115.00 in the prior session, a reflection of sensitivity to fluctuations in Treasury yields.

Gold closes near its high, but no breakout.

GoldGold made a Trading Cycle low on Wednesday, but the subsequent rally did not produce a breakout. The Orthodox Broadening Top pattern does not support a higher retracement, nor is it not allowed. A breakout above 1246.60 or breakdown beneath 1217.50 will satisfy this dilemma.

(Reuters) Gold rose on Thursday as the dollar weakened after a 10-day winning streak and investors took the opportunity to buy bullion as a hedge against political uncertainty in the United States and Europe.

Spot gold rose 0.7 percent to $1,240.86 an ounce by 2:37 p.m. EST (1937 GMT), and is up about 10 percent from a mid-December low. U.S. gold futures settled up 0.7 percent at $1,241.60.

Concern over U.S. President Donald Trump’s policies, as well as elections in the Netherlands, France and Germany this year, have fueled gold’s rise to a peak of $1,244.67 on Feb. 8.

But the prospect of a higher dollar and U.S. Treasury yields after U.S. Federal Reserve Chair Janet Yellen said that U.S. interest rates may need to be raised in March pushed gold to

$1,216.41 on Wednesday, its lowest since Feb. 3.

Crude continues its narrow consolidation.

WTICCrude continued its narrow consolidation, seemingly supported by Short-term resistance at 53.44. A decline beneath Intermediate-term support at 50.92 produces a sell signal for crude.  The Cycles Model suggests a potential turn date on Monday.  The Cycles are compressed here, making sudden, dramatic moves highly probable.

(OilPrice) The number of active oil and gas rigs in the United States increased again on Friday by 10. Both benchmarks were trading down earlier on Friday under heavy pressure from record-high crude oil inventories (518.1 million barrels), and record-high gasoline inventories (259 million barrels).

The total number of active oil and gas rigs in the United States is now 751, according to oilfield services provider Baker Hughes, which is 237 rigs above the rig count a year ago.

The number of oil rigs increased by 6, up from 591 last week to 597 this week. The number of active oil rigs in the United States is now the highest since October 09, 2015.

Shanghai Index retracement extends.

Shanghai IndexThe Shanghai Index continued to extend its bounce, retracing more than 72.5% of its decline which started on November 29. The fractal Model suggests the Shanghai is due for another 1,000 point drop. The index restores its sell signal beneath Intermediate-term support at 3163.66.

(ZeroHedgeSince 2000, China has been the nearly singular force for growth in global energy consumption and economic activity.  However, this article will make it plain and simple why China is exiting the spotlight and unfortunately, for global economic growth, there is no one else to take center stage.  To put things into perspective I’ll show this using four very inter-related variables…(1) total energy consumption, (2) core population (25-54yr/olds) size and growth, (3) GDP (flawed as it is), and (4) debt.

The Banking Index throws over the trendline.

BKX— BKX broke through flat-line resistance at 93.50 to throw-over the upper trendline of the Orthodox Broadening Top formation. There may be a brief probe higher, but once beneath the trendline the decline may be underway. BKX appears to be ready for a large decline that may extend through mid-March, according to the Cycles Model.

(Bloomberg) U.S. stocks climbed for the fourth straight week as financial companies rallied, economic data beat expectations and corporate earnings continued to show profit growth.

Banks posted their biggest-five day gain this year as the 10-year yield climbed and Federal Reserve chair Janet Yellen told Congress more interest-rate hikes would be appropriate if the economy stays on course.

(ZeroHedge) While it does not contain any new information to those who track the monthly, G.19, consumer credit releases by the Fed, the quarterly NY Fed report on Household Debt and Credit Developmentprovides a convenient one-stop summary of quarterly changes in household finances. What the latest report issued this morning revealed, is that total US household debt jumped in Q4 driven by increases in credit card debt, auto and student loans, and a Q4 surge in mortgage originations, and as of December 31, 2016, stood at $12.58 trillion, a $226 billion (1.8%) increase from the third quarter of 2016. For the full year 2016, total household debt rose by $460 billion, the biggest annual increase in a decade.

(ZeroHedge) In a scathing editorial published in the Wall Street Journal today, the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, blasted US banks, saying that they still lacked sufficient capital to withstand a major crisis.

Kashkari makes a great analogy.

When you’re applying for a mortgage or business loan, sensible banks are supposed to demand a 20% down payment from their borrowers.

If you want to buy a $500,000 home, a conservative bank will loan creditworthy borrowers $400,000. The borrower must be able to scratch together a $100,000 down payment.

But when banks make investments and buy assets, they aren’t required to do the same thing.

(Reuters) Rock-bottom interest rates hurt more big European banks in 2016 than in the previous year, but the worst could soon be over with the prospect of rising borrowing costs rippling from the United States to Europe.

Low rates, money printing and a penalty charge for hoarding cash have been at the heart of attempts to reinvigorate the 19-country euro zone economy in the wake of the 2008-09 debt crisis.

But the policy has been politically divisive, prompting fierce criticism from famously thrifty Germans as the returns on savings in Europe’s biggest economy dwindled to nothing.

It also imposed a heavy cost on still fragile banks, turning deposits into a hot potato that many would rather avoid so as not to pay charges to their central bank for storing them.

Have a great weekend!

Anthony M. Cherniawski

The Practical Investor, LLC

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