Weekend Update April 28, 2017

VIX broke down to make a new 3-month low. In doing so, it elevated its status from a Minor degree to and Intermediate one. A potential Head 7 Shoulders formation suggests that the Cycle Top at 23.97 may be a viable target. An actual change in long-term trend may occur above the top trendline of the 15-month long Ending Diagonal formation at 18.00.

For more insights, pleas read the Financial Times article entitled, “Wall Street’s Vix index falls to its lowest since January

SPX gaps above resistance, but no new high.

SPXSPX rallied to within 3 points of its all-time high. Not being able to achieve new all-time highs in the last week of April raises questions about its strength. There certainly were enough reasons to propel it higher. The first quarter US GDP may have been the show stopper..

(CNBC) U .S. equities closed lower on Friday as investors digested economic data and key corporate earnings, but ended April with strong monthly gains.

The Dow Jones industrial average slipped about 40 points, with Intel and Goldman Sachs contributing the most losses. The S&P 500 fell 0.2 percent, with financials and telecommunications leading decliners. The Nasdaq composite hit a fresh record high before closing marginally lower.

That said, the three major indexes posted a monthly advance of about 1 percent. The S&P and the Dow posted their fifth positive month in six, while the Nasdaq recorded its sixth straight monthly gain.

NDX gaps to a new all-time high.

NDXNDX posted another new all-time high this week. It is clearly on an extension with earnings playing a big part of the ebullience. Wave relationships suggest the target of 5333.00 has been exceeded. A decline beneath Short-term support and the Orthodox Broadening Top trendline at 5418.43 may suggest a correction is in order.

(ZeroHedge) It was a little over a year ago when the market first started noticing that the private startup market had gotten just a little ahead of itself, with various dotcom 2.0 darlings such as Dropbox, Square and others slashing their private valuations by substantial amounts. Well, overnight investors at peak private valuations got another harsh reminder of just how much they may have overpaid when  Cloudera, once one of the most highly valued private tech companies, priced its IPO at less than half the company’s valuation from its last private financing round back in 2014.

As the FT notes, the share sale marked a new low for so-called unicorns, or private tech companies once valued at more than $1bn. Companies such as Cloudera have turned to Wall Street as the once red-hot private investment market has cooled, forcing some to take big discounts on their former valuations to raise more money.

High Yield Bond Index bounces to Short-term resistance.

MUTThe High Yield Bond Index bounced from Long-term support at 162.96, to Short-term resistance at 167.00. it remains on a sell signal Should MUT not be able to overcome resistance, the Cycles Model suggests further weakness ahead that may last the entire month of May.

(Bloomberg) Call it the seven-year itch.

The torrid romance that doubled the global junk-bond market to $2 trillion since 2010 is losing the spark for a handful of investors, just like the supposed tendency to infidelity after years of marriage. High-yield bond funds suffered $10.5 billion of outflows last month, the most since December 2015, according to consultancy EPFR Global.

“This is an asset class we have loved for a number of years,” said Percival Stanion, head of multi-asset funds at Pictet Asset Management in London. “Now you have to believe in a very benign outcome for government yields, default rates and recoveries. That is a foolish way to invest.”

USB testing support.

USBThe Long Bond may be pulling back to test Short-and Intermediate-term support at 150.79 as 30-year Treasury yields jumped to nearly 3%. Once the consolidation is accomplished, USB may extended period of strength may extend through mid-May. The mid-Cycle resistance and long-term resistance at 158.38 still appear to be the target, but it may go higher.

(Barrons) The U.S. Treasury is apparently giving serious consideration to launching an ultra-long bond — let’s say 40, 50 , or even 100 years to maturity (Barron’s tackled the subject last November, advocating for the U.S. to debut a 100-year Treasury bond).

Treasury Sectretary Steven Mnuchin included a question about such long bonds in his latest survey of bond dealers.

But Goldman Sachs economist David Mericle doesn’t think it’s likely since there may not be enough demand, the huge infrastructure package it would theoretically fund is getting less likely and the details of such an issue are confounding.

The Euro gaps above Long-term support.

XEUThe Euro gapped above Long-term resistance at 108.38 after the French election. The Cycles Model suggests that the decline may resume beneath the trendline near 105.50.

(Bloomberg) What a difference a week can make. Perceived as the riskiest currency on the planet until Sunday’s French election, the euro is suddenly everyone’s favorite.

Goldman Sachs Group Inc. expects the euro to gain almost 4 percent after the first round of the vote delivered all that investors hoped for. Pacific Investment Management Co. has a “more constructive” view on the currency and Nomura Holdings Inc. has recommended buying it. BlackRock Inc. and JPMorgan Asset Management favor European shares amid reduced political risk, while BlueBay Asset Management has already added to holdings.

Investors are more bullish on European assets as risks of a victory for anti-euro presidential candidate Marine Le Pen recede, reducing the odds of a political upset similar to Brexit and Donald Trump’s victory. French polls, which got the first-round results right, now see centrist Emmanuel Macron becoming president. The rising optimism contrasts with option prices before the April 23 vote, which were the most bearish for the euro than any other currency.

EuroStoxx challenge its Flag trendline.

STOXX50The EuroStoxx 50 Index leaped from Short-term support to the upper trendline of its Broadening Flag or Wedge formation. The Cycles Model suggests that the strength shown last week may be short-lived. A breach of Short-term support puts Stoxx on an aggressive sell signal. The signal may be confirmed as EuroStoxx declines beneath Intermediate-term support at 3386.01.

(Barrons) Old-World markets rebounded last week as fears of a European Union breakup eased, and investors focused instead on the region’s generally improved economic outlook.

Optimism returned after pro-EU centrist Emmanuel Macron took the most votes in the first round of France’s hotly contested presidential election—one of several key votes in Europe this year. Far-right National Front candidate Marine Le Pen, who until recently had a solid lead and is running on an anti-EU, anti-immigration platform, came in second, with a smaller-than-expected share of the ballots.

Le Pen’s plan to pull France out of the EU and the euro had unsettled investors, encouraging many to move into haven assets, such as gold and German Bunds. This “Frexit” would be particularly troublesome for European banks. While the National Front says it would ward off currency turmoil by pulling out of the euro after a period of preparation, investors still believe the impact would be severe.

The Yen falls hard to Short-term support.

XJYThe Yen fell hard to test Short-term support at 89.56, as anticipated. The Yen may consolidate at support for a few days. However, Cyclical strength may persist beyond any short-term consolidations.

(Forbes) Many Japanese institutional investors tend to de-risk due to geopolitical crises, with the Yen strengthening on actual or the perceived likelihood of capital repatriation to Japan. The current situation seems no exception, so far. Some investors are even saying that if a missile hits Japan, then Japanese insurers would be forced to sell overseas bonds to pay claims, thus strengthening the Yen. However, any major crisis in the Northeast Asian region, especially one involving a crisis within Japan’s borders, is likely to be handled very aggressively by the Bank of Japan (BOJ), with it bending the rule-book as much as the Fed did during the Global Financial Crisis or as the ECB has done in the past five years.

The Nikkei challenges Intermediate-term resistance.

NikkeiThe Nikkei challenged Intermediate-term resistance at 19166.96 this week. The retracement target has been reached. The period of strength is due to wane over the weekend. A decline beneath Short-term support at 19075.12 puts the Nikkei back on a sell signal.

(BusinessInsider) Japan’s Nikkei share average slipped on Thursday, giving back some of this week’s gains as sentiment soured on Wall Street losses and wary investors awaited the Bank of Japan’s policy decision.

The Nikkei was down 0.2 percent at 19,243.76 at midday, pulling away from the previous session’s one-month highs. It was still on track to gain 3.3 for the week, and 1.8 for the month.

On Wall Street on Wednesday, U.S. stocks slipped following two sessions of strong gains, as solid corporate earnings were offset by uncertainty over the feasibility of a proposed business tax cut. The proposal from U.S. President Donald Trump’s administration offered no specifics on how the cuts would be paid for without increasing the nation’s deficit.

U.S. Dollar slips beneath Long-term support.

US DollarUSD declined beneath Long-term support at 99.12, signaling more weakness ahead. The Cycles Model suggests a Master Cycle low may be due in the next week. USD is on a sell signal that may imply broken supports ahead.

(Reuters) Net long positions on the U.S. dollar were near flat from a week earlier, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.

The value of the dollar’s net long position totaled $15.29 billion in the week ended April 25, down slightly from $15.34 billion the previous week.

The dollar failed to gain traction over the last few days, as U.S. President Donald Trump’s tax reform plan underwhelmed investors and raised doubts about how it could get done. Over the last two weeks, the dollar index has dropped 1.5 percent and has underperformed for most of the year to date.

The greenback is expected to be in focus next week ahead of a slew of events and economic data, including the Federal Reserve Open Monetary Policy meeting and Friday’s U.S. nonfarm payrolls report.

Gold tests Long-term support.

GoldGold bounced from Long-term support at 1257.78 on Thursday as it eased down from its high. The may not be long-lived as there may be a Master Cycle low due in about two weeks.

(Forbes) Gold and silver prices are modestly up in early U.S. trading Friday, on technical rebounds, and some short covering and bargain hunting heading into the weekend. The just-released U.S. GDP report was a bit weaker than expected but did not significantly impact the markets. June Comex gold was last up $1.60 an ounce at $1,267.90. May Comex silver was last up $0.03 at $17.295 an ounce.

Arguably the most important data point of the week is Friday morning’s U.S. advance first-quarter gross domestic product report. First-quarter GDP came in at up 0.7%, which is below market expectations. Forecasts expected GDP to come in at up 1.0% from the fourth quarter of last year.

Crude tests the neckline.

WTICCrude tested the neckline of a Head & Shoulders formation before a small bounce back above Long-term support/resistance at49.12. The probe of the neckline appears to be a Master Cycle low, which allows a bit more of a bounce, possibly a week, before resuming its decline.

(CNBCOil fell by as much as 2 percent Thursday, and according to one trader who closely follows the charts, there could be even more pain to come.

“The problem is [oil has] spent a lot of time consolidating around this $52 to $55 area now,” Todd Gordon said Thursday on CNBC’s “Trading Nation.” “So we’ve been rejected [from a breakout above $55] for probably the fourth time now,” said the founder of TradingAnalysis.com

Not only that, but according to Gordon’s chart work, oil is running into some technically perilous prices, hitting “uptrend support” levels that had been in place since the middle of last year. Thursday’s drop put oil dangerously close to falling below that support level.

Shanghai Index challenges Long-term support.

Shanghai IndexThe Shanghai Index challenged its Long-term support at 3130.27 before closing above it. While there may be another day or two of relative strength, the Cycles Model suggests the decline may persist through mid-May when a Trading Cycle low is possible.

(ZeroHedge) The Chinese and U.S. stock markets are going in opposite directions, as an intensifying crackdown against leverage has slammed the recently ‘stable’ Shanghai Composite over the past week, erasing all post-Trump gains.

The relationship between the two markets is the weakest since August 2008 – just before the collapse of Lehman unleashed chaos on the global financial system.For a market relying more on liquidity than fundamentals, China’s worsening monetary conditions index suggests tough times ahead…

Bloomberg reports that given how mainland stocks have become increasingly linked to global markets, however, the divergence may prove to be a short-term phenomenon, according to Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong.

The Chinese government is squeezing speculation out of the market and while investors adjust, it will inevitably lag behind other parts of the world,” So said.

The Banking Index gaps up to resistance.

BKX— BKX gspped up to challenge Intermediate-term resistance at 92.95, still working on the right shoulder of a Head & Shoulders formation. The ramp did not last as the sell signal remains in place with a probable new target near mid-Cycle support at 75.54.  Serious investors may be well served to sell any rally rather than buy the dip, as the decline may resume next week.

(TheConversation) A variety of indicators suggest that China has come perilously close to a banking crisis. So far, the government has managed to keep things in check. A state-led debt restructuring indicates Chinese officials have learnt some of the lessons of the bad loan crisis faced by state banks in the 1990s. Tight control over banks and their senior personnel has long given China a ready-made platform to control its financial institutions.

But controlling the effects of financial contagion is very different from the supply side policies that central planners have long relied on. Plus, unlike the 1990s when the problem mostly concerned poor lending practices, the roots of the current problems are more complex and concern both the asset and liability sides of bank balance sheets.

(NationalRealEstateInvestorFor regional banks across the U.S., the “Trump bump” hasn’t yet translated into business.

Bank stocks have climbed since Donald Trump was elected president as investors bet his pro-growth agenda and rising interest rates would help lenders generate huge profits. But this month, executives at some of the country’s largest regional banks said customers, especially corporations and small businesses, are instead waiting for details on the new administration’s proposals and results before seeking financing for expansion.

Total loans at the 15 largest U.S. regional banks declined by about $10 billion to $1.73 trillion in the first quarter, compared with the previous three-month period, the first such drop in four years, according to data compiled by Bloomberg. All but two of those banks missed analysts’ estimates for total loans, as a slump in commercial and industrial lending sapped growth.

(ZeroHedge) With Canada’s housing bubble popping amid the collapse of the country’s largest mortgage lender, it was no surprise that a bailout had been orchestrated, and now we know the source of the $1.5 billion ‘loan’ – 321,000 retired healthcare workers in Ontario.

As we noted yesterday, the stock of Home Capital Group cratered by over 60%, its biggest drop on record, after the company disclosed that it struck an emergency liquidity arrangement for a C$2 billion ($1.5 billion) credit line to counter evaporating deposits at terms that will leave the alternative mortgage lender unable to meet financial targets, and worse, may leave it insolvent in very short notice.

As part of this inevitable outcome, one which presages the company’s eventual disintegration and likely liquidation, Bloomberg reported that the non-binding rescue loan with an unnamed counterparty will be secured by a portfolio of mortgage loans originated by Home Trust, the Toronto-based firm said in a statement Wednesday. Home Capital shares dropped by 61% in Toronto to the lowest since 2003, dragging down other home lenders.

(ZeroHedge) Back in 2007/2008, Wall Street drastically pulled back on mortgage origination for their own balance sheets while ramping up their issuance of RMBS securities.  Of course, the goal was very simple: package up all the mortgage-related nuclear waste on your balance sheet into a pretty package, tie a ribbon around it with that AAA-rating from Moody’s and sell it all to unsuspecting pension funds and insurance companies around the globe. 

Now, despite all the ‘harsh penalties’ that Obama imposed on Wall Street after the mortgage crisis, like that $1.8 billion settlement where we showed that Goldman will actually make money from their ‘punishment’, it seems as though the exact same scheme is currently underway with auto loans.

(ZeroHedge) On the surface, Deutsche Bank’s results this morning came in better than expected with first quarter earnings more than doubling as Germany’s biggest bank benefited from a pick-up in market activity at the start of the year. In the three months to March, Deutsche managed to make a net profit of €575m, more than double from €236m in the same period a year earlier, when market were shaken by concerns over Deutsche’s viability, and above consensus estimates of €522m.

However, not only did revenues fall 9% to €7.3bn, largely the result of an accounting effect known as debt-valuation adjustment, or DVA, but a more careful read of the report thru explains why DB stock is down 3%, after tumbling as much as 3.9% earlier in the session – the most in 5 weeks – making it the second biggest decliner in 46-member SX7P after Popular.

Have a great weekend!

 Anthony M. Cherniawski

The Practical Investor, LLC

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