Weekend Update May 5, 2017

VIX broke down to make a new 10-year low. This may be the Super Cycle low in volatility. A reversal is now overdue. An actual change in long-term trend may occur above the top trendline of the 16-month long Ending Diagonal formation near 17.50.

(ZeroHedge) Less than a month after the latest forecast from JPM’s Marko Kolanovic left something to be desired, when the famous quant said it is no longer prudent to buy the dip” only for the dip to be furiously bought, whether by algos or ETFs, “Gandalf” is back with another discussion of his favorite topic, and an emphasis on a issue that is near to all traders’ hearts, namely what could lead to a “volatility explosion.”

SPX makes a Friday ramp, but no new high.

SPXSPX closed within 2 points of its all-time high, but did not exceed it on an intraday basis. Not being able to achieve new all-time highs may be problematic since the Cycle appears to be overdue for a reversal. The DJIA is in a similar position. The risk parity model which has been a major driver of this rally appears to be losing its energy.

(Reuters) Major U.S. stock indexes gained on Friday, with the S&P 500 ending at a record high close, as energy stocks bounced back along with oil prices and U.S. job growth rebounded.

U.S. nonfarm payrolls surged by 211,000 jobs last month after a paltry gain of 79,000 in March, and the unemployment rate dropped to 4.4 percent, near a 10-year low.

Energy was the best performing sector, rising 1.6 percent, after falling sharply a day earlier. Oil prices rebounded following assurances by Saudi Arabia that Russia is ready to join OPEC in extending supply cuts.

NDX makes 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, suggesting a blow-off extension. A decline beneath Short-term support and the Orthodox Broadening Top trendline at 5448.72 may suggest a correction is in order.

(CNBC) Technology stocks could see a 15 percent correction in a few months, one fund manager told CNBC on Thursday, adding that he is selling shares of AppleAlphabet, and Microsoft because they are “fully priced”.

Patrick Armstrong, chief investment officer at Plurimi, said that the companies have reached their “full valuations”.

“I feel sad, but I’m selling all my big cap tech companies. For years and years, I’ve been coming on talking about Apple’s cheap, Alphabet’s cheap, Microsoft’s cheap, and they’re above market multiples now. We have been reducing them into the rally for the past few weeks and they are getting fully priced in my opinion,” Armstrong told CNBC.

High Yield Bond Index slips beneath Intermediate-term support.

MUTThe High Yield Bond Index declined beneath Intermediate-term support at 166.68, thereby losing key support. It remains on a sell signal. Should MUT decline further beneath Long-term support, the Cycles Model suggests accelerated weakness ahead that may last the entire month of May.

(BusinessInsider) he high-yield credit market may be about to relive an unsavory episode last witnessed in 2014.

Cheaper commodities are lowering the prices of high-yield bonds, indicating investors are demanding fewer of them. High-yield bonds are issued by companies with a greater risk of defaulting on their debt, so investors demand a premium to lend them money.

These rising yields are widening the gap between high-yield and comparable bonds.

USB at support.

USBThe Long Bond has pulled back to Intermediate-term support at 150.79, closing just above it. USB may extend a period of strength over the next 2-3 weeks. The mid-Cycle resistance at 158.37 and long-term resistance at 157.42 still appear to be the targets, but it may go higher.

(ZeroHedge) Having perfectly top-ticked US economic data with its March rate-hike, the subsequent collapse in ‘data’ has been shrugged off as transitory (or seasonal) and by all indications The Fed seems set on two more rate hikes this year no matter what (even as the market diverges dovishly).


The Euro challenges mid-Cycle resistance.

XEUThe Euro closed at mid-Cycle resistance at 105.95 this week in what may be described as an inverted Trading Cycle, retracing nearly 54% of its decline. The Cycles Model suggests that the decline may resume shortly.

(Bloomberg) he euro rose for a fourth consecutive week despite a hawkish-sounding Federal Reserve as the market discounted a win for centrist Emmanuel Macron at the French presidential run-off.

Dollar bulls must have been heartened to see geopolitical tensions with North Korea ebb, a U.S. government shutdown averted and House’s healthcare bill passed successfully. The market is now assigning a 75 percent probability of a rate increase in June, compared with 60 percent before the Fed met on Wednesday, based on overnight indexed swaps and the Fed funds effective rate. The employment report for April was mixed: while the expansion in U.S. payrolls beat the median estimate, the number for March was revised lower.

EuroStoxx overshoots its Flag trendline.STOXX50

The EuroStoxx 50 Index ramped above the upper trendline of its Broadening Flag or Wedge formation, making nearly an 85% retracement of its decline which started in 2015. The strength shown last week may have ended on Friday. EuroStoxx have extended and may be due for a correction.

(Bloomberg) European stocks rose for a second day as strength in the U.S. jobs market bolstered optimism that the global economy is improving and speculation mounted that the centrist candidate will win France’s presidential election.

The Stoxx Europe 600 Index added 0.7 percent at the close, after falling as much as 0.4 percent earlier in the day. Energy shares advanced as oil rebounded, while mining shares jumped the most in seven weeks as metal prices climbed. The Stoxx 600 is up 1.9 percent this week, boosted by robust earnings and speculation centrist Emmanuel Macron will win Sunday’s final French presidential vote.

The Yen challenges Intermediate-term support.

XJYThe Yen declined even further than anticipated, challenging Intermediate-term support at 88.90. The Yen may consolidate at support for a few days. However, Cyclical strength may resume in the next week.

(EconomicCalendar) US bond yields have remained broadly stable which has lessened the potential for yen gains, but the dollar was able to gain only very limited traction following the US jobs report.

The US House of Representatives passed legislation to repeal the Affordable Healthcare Act and the legislation will now pass to the Senate. There was no significant support for the dollar, especially with reports that not all Republican Senators will back the bill.

The sharp decline in oil prices had a significant impact in boosting the yen with markets wary over increased volatility. A sustained decline in energy prices would also tend to increase the likelihood that the Fed will decide to postpone a June rate hike.

Overall, USD/JPY dipped to lows just above the 112.00 level, although activity was inevitably subdued in Asian trading as Tokyo markets remained closed.

The Nikkei rallies above Intermediate-term resistance.

NikkeiThe Nikkei has rallied above Intermediate-term resistance at 19166.45 this week. What appears to be a Cycle inversion may lead to weakness lasting through mid-May. A decline beneath Short-term support at 19072.52 puts the Nikkei back on a sell signal.

(ZeroHedge) A year ago, we noted that The Bank of Japan (BoJ) was a Top 10 holder in 90% of Japanese stocks. In December, we showed that BoJ was the biggest buyer of Japanese stocks in 2016. And now, as The FT reports, the real “whale” of the Japanese markets is stepping up its buying (up over 70% YoY) entering the market on down days more than half the time in the last four years.

Since the end of 2010, The FT notes that the BoJ has been buying exchange traded funds (ETFs) as part of its quantitative and qualitative easing programme. The biggest action began last July, when its annual acquisition target was doubled to ¥6tn. Since then, the whale designation has seemed pretty obvious: the central bank swallows a minimum of ¥1.2bn of ETFs every single trading day (tailored to support stocks that further “Abenomics” policies), and lumbers in with buying bursts of ¥72bn roughly once every three sessions.

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

US DollarUSD declined further beneath Long-term support at 99.15, while indicating that a Master Cycle low may have been made this week. USD appears to be on a sell signal that may imply further declines ahead.

(Reuters) Net long positions on the U.S. dollar fell sharply in the latest week to their lowest level since early October, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.

The dollar was a casualty of the euro’s strength the past week after the victory of centrist candidate Emmanuel Macron in the first round of France’s presidential race bolstered expectations the country would stay in the European Union and

preserve the single currency.

The second round of France’s presidential election will be held on Sunday, and Macron extended his lead in the polls over far-right rival Marine Le Pen on Friday.

The U.S. currency had also struggled as the Trump administration unveiled a one-page plan proposing deep tax cuts, many for businesses, that would make the federal deficit balloon if enacted, far short of comprehensive reforms both parties in Washington have sought for years.

Gold falls through Intermediate-term support.

GoldGold fell through Intermediate-term support at 1237.15 on Thursday as it accelerated its decline. There may be a Master Cycle low due in about two weeks during which a lot of damage may be done. Should a panic ensue, the “buy the dip” mentality may be extinguished for some time.

(CNBC) Gold’s latest swing lower could be a screaming buying signal.

Frank Holmes, who runs an investment management firm specializing in gold, says he’s optimistic that the precious metal could rally by more than 20 percent within the next 12 months — a forecast that’s not just based on “fear” of a negative geopolitical event, rising interest rates or an economic soft patch.

“There is the ‘love’ driver, and that’s also very significant, the U.S. Global Investors CEO and CIO said Wednesday on CNBC’s “Trading Nation.”

Holmes’ “love driver” refers to the ravenous appetite for gold in China and India. He calls them major players, accounting for 40 percent of the world’s population.

Crude falls through the neckline.

WTICCrude fell through the neckline of its Head & Shoulders formation to make a new 5-month low before a bounce back to test mid-Cycle resistance at 46.89. This action suggests the decline may not be finished. The Head & Shoulders formation indicates the probable next target.

(CNBC) Crude just had its worst day in five months, and one technically minded trader who has had a hot hand calling crude’s next move sees even more trouble.

With crude hitting below $46 on Thursday for the first time since Nov. 30, Todd Gordon of TradingAnalysis.com said the commodity may retest old lows from 2016. “That opens the door to not only lower $40s, but possibly into the $30s,” he said Thursday on CNBC’s “Trading Nation.”

Shanghai Index slips beneath Long-term support.

Shanghai IndexThe Shanghai Index slipped beneath its Long-term support at 3134.24, losing its final critical support. The Cycles Model suggests a week of solid declines before the next probable bounce.

(ZeroHedge) Coming a time when traders and analysts are looking with growing concerns toward Beijing, riddled by deja vu memories of the China-induced near-bear market of 2016 when in a similar episode China’s credit impulse tumbled – something which even Pimco highlighted earlier this week, when it reposted a chart first shown here in February

… worries that not all may be well in China – for the second time in two years – grew this morning after the country’s Finance Minister, Xiao Jie, unexpectedly skipped a summit conference with his Japanese and South Korean peers on Friday to attend an “emergency domestic meeting”, a senior Japanese finance ministry official said quoted by Reuters. The official told reporters during a ministry press briefing that Xiao’s absence was not related to any diplomatic matters, adding that Xiao was expected to attend the Japan-China finance dialogue in Japan scheduled for Saturday.   He did not elaborate on the nature of the minister’s emergency meeting.

The Banking Index may be completing a right shoulder.

BKX— BKX retested Intermediate-term resistance at 92.94, continuing to linger at the right shoulder of a Head & Shoulders formation. The sell signal remains in place with a probable new target near mid-Cycle support at 75.72.  Serious investors may be well served to sell any rally rather than buy the dip, as the decline may resume imminently.

(IBD) President Trump’s hint this month of a breakup of big Wall Street banks such as JPMorgan Chase (JPM), Bank of America (BAC), Goldman Sachs (GS) and Wells Fargo (WFC) hit their stocks hard — for maybe 30 minutes. Then the stocks recovered and finished higher for the day.

Little wonder. Financial deregulation looks like it’s one of the few Trumponomics planks that investors can count on. Despite all the headlines, chaining off commercial banks from investment banking is probably a nonstarter now in Congress. But Trump has the will — and the political wherewithal — to bust up heavy regulations clamped on banks after the financial crisis.

(Fox6Now) A federal agency has shut down every single Guaranty Bank including all 48 in Wisconsin. Ten brick and mortar banks will reopen during business hours on Saturday, May 6th as a First-Citizens Bank.

The Federal Deposit Insurance Corporation (FDIC) says First-Citizens Bank will take over the Guaranty Banks, and all Guaranty customers’ accounts will automatically move over.

Despite this abrupt closure, customers of Guaranty Bank should be able to use their existing checks, ATM and/or debit cards.

(ZeroHedge) That didn’t last long.

Just one week after Canada’s largest alt-mortgage lender Home Capital Group sent shockwaves across the Canadian financial system, when it confirmed that long-running allegations about its liar-loan business were true, and suffered a spectacular bank run necessitating emergency loans which yield a stunning 22.5%, the company is now “actively seeking expanded sources of funding” having drawn half of its C$2b rescue loan, according to an email sent to mortgage brokers seen by Bloomberg News.

“This is a fluid situation, and we are optimistic our challenges are temporary,” Pino Decina, executive vice president of residential mortgage lending, said in the email.

He further said that despite what’s “written in media” the company continues to experience demand for financing from brokers. He did not deny, however, the rest of what is written in the media, namely that as the company’s GICS’s mature, it risks running out of liquidity in the coming weeks even with the full C$2bn facility fully drawn, especially since by now it is almost certain that its retail deposits have all been redeemed.

(SovereignMan) By late 2014 I’d finally had enough.

After so many run-ins with the bitter incompetence and bureaucratic indignity of the banking system, I decided once and for all that I would start my own bank.

I probably should have had my head examined, but instead I called one of my attorneys to talk through the options.

Had I known then what I know now, I think I still would have made the same decision… but in total honesty I was completely unprepared for the torrential shit storm I was about to enter.

The deeper I went, the more overwhelming my discoveries of how shockingly inept, obsolete, and out of touch the industry is.

Have a great weekend!

Anthony M. Cherniawski

The Practical Investor, LLC

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