Are Investors Too Relaxed About Risk?

Dear Readers,

 To most investors the sell-off ending on February 9 was a brief inconvenience or maybe an opportunity to buy more stocks as “bargain” prices.  Few look at it as a “shot across the bow,” a warning that all may not be as well as it may seem. 

Today the Federal Reserve released its Monetary Policy Report.  You may either read the report directly or go to ZeroHedge’s summary.  It is enlightening reading.



VIX expanded its retracement to 81% in the two week period since its high. While this has allowed market participants to relax about risk, the fact remains that, should it turn higher, it will be immediately back on a buy signal. The downtrend in the VIX is broken. The next Cycle Top may occur in the next 4 weeks.

(Bloomberg) China stopped updating its homegrown version of the VIX Index, taking another step to discourage speculation in equity-linked options after authorities tightened trading restrictions last week.

State-run China Securities Index Co. didn’t publish a value for the SSE 50 ETF Volatility Index on its website Thursday. An employee who answered CSI’s inquiry line said the company stopped updating the measure to work on an upgrade. The move was designed to curb activity in the options market, said people familiar with the matter, who asked not to be identified discussing private information. It’s unclear when the index will resume.


SPX closes flat for the week.

SPX began its descent early this week but retraced most of its losses on Friday.  It closed just above Short-term support/resistance at 2743.07. However, it closed beneath last week’s high at 2754.42leaving this week as an “inside week, denoting uncertainty./ The retest of the lows may still be in the cards..

(Reuters) – U.S. stocks advanced on Friday, buoyed by gains in technology stocks and a pullback in Treasury yields as the Federal Reserve eased concerns about the path of interest rate hikes this year.

The central bank, looking past the recent stock market sell-off and inflation concerns, said it expected economic growth to remain steady and saw no serious risks on the horizon that might pause its planned pace of rate hikes.

Investors largely expect the Fed to raise rates three times this year, beginning with its next meeting in March, the first under new Chair Jerome Powell. Traders currently see a 95.5 percent chance of a quarter-point hike next month, according to Thomson Reuters data.


NDX pushes through its Cycle Top.

The NDX closed above its weekly Cycle Top at 6844.05 after finding support at the Short-term support level.  A decline beneath Cycle Top resistance allow the NDX to do a retests of the lower supports.  A failure here allows the NDX to decline to mid-Cycle support and the 7-year trendline at 5280.57. A breakthrough at that point suggests a further decline to the October 2011 low.

(Reuters) – U.S. stocks rallied on Friday, lifted by gains in technology stocks and a retreat in Treasury yields as the Federal Reserve eased concerns about the path of interest rate hikes this year.

The U.S. central bank, looking past the recent stock market sell-off and inflation concerns, said it expected economic growth to remain steady and saw no serious risks on the horizon that might pause its planned pace of rate hikes.

Investors largely expect the Fed to raise rates three times this year, beginning with its next meeting in March, the first under new Chair Jerome Powell. Traders currently see a 95.5 percent chance of a quarter-percentage-point hike next month, according to Thomson Reuters data.


High Yield Bond Index has an indecisive week.

The High Yield Bond Index pulled back in an inside week that left no clue what it will do next.  The sell signal remains and the Cycles Model suggests additional weakness going forward.

(ZeroHedge) Despite rebounds in US (and less so European) equities and drops in both regions’ ‘VIX’ measures, the last few days have seen an ominous reawakening in credit markets that is far more systemically concerning than a volatility ETN…

European credit spreads are back near cycle wides…

And it’s not just HY credit, US investment grade credit spreads are starting to crack wider…d US HY spreads are pushing back towards last week’s wides…


UST may have started a bounce.

The 10-year Treasury Note Index extended its Master Cycle low to Wednesday and appears to have started a bounce. The target for this bounce may be a retest of the Head & Shoulders neckline near 122.50.   The bounce may last 2-3 weeks.

(ZeroHedge) As Bloomberg’s Michael Regan writes, “pinpointing the exact level of Treasury yields that will break the back of the bull market has become the trendiest parlor game in town.” Earlier today, Tom Lee of Fundstrat became the latest to chime in, predicting that rates – which are rising due to reflation, – should support higher P/E ratios until interest rates are above 4%.

Then, it was Jeff Gundlach’s turn.

Recall that it was Gundlach who during a DoubleLine webcast on January 9 predicted that if the 10Year goes to 2.63% – it was at 2.50% then – “stocks will be negatively impacted.” However, he also added that if the 10Y TSY passes 2.63%, it will head well higher, likely pushing toward 3%. Gundlach also was the first to note that he expects a 3.25% print on the 10Y in 2018, a target which was since adopted by both Goldman and, today, Bank of America.


The Euro makes an inside consolidation.

The Euro is still being supported by a rising Cycle Top in an inside week of trading.  The Cycle Top isn’t broken, but a failure to make a new high suggests a reversal may be at hand.  If so, XEU may decline to is mid-Cycle support at 112.69.

(CNBC) The euro could hit $1.30 in the next 12 months as the European Central Bank (ECB) unwinds its stimulus, economic growth continues and political risks dissipate further, analysts told CNBC.

Markets forecast a gradual reduction in the ECB’s quantitative program as inflation expectations in the region increase. ECB minutes released Thursday indicated once more that inflation, the most important economic indicator at the central bank, is picking up at a faster pace. This has fueled calls that the need for a significant monetary stimulus is over.


EuroStoxx  expanded its bounce.

The EuroStoxx 50 Index expanded its bounce this week, but has not achieved the 38.2% retracement level.  The Cycles Model suggests the decline may resume early next week for a decline through late March.

(ZeroHedge) Following dismal PMIs across Europe yesterday, the region’s equity market rebound is rolling over today and has triggered the dreaded ‘death cross’, last seen in September 2015 before stocks legged notably lower.

European economic data has been dramatically disappointing recently (weakest since Sept 2016)…

The 50-day moving-average has crossed below the 200-day moving-average just as the dead-cat-bounce in European stocks rolls over…


The Yen has an inside week.

The Yen broke consolidated its gains in an inside week.  The Cycles Model suggested a possible brief consolidation, but the trend is solidly higher through early to mid-March.

(Reuters) – The dollar edged up against the yen and other currencies on Friday, trimming earlier losses, as global investors gingerly dipped their toes back into riskier assets amid rapidly shifting views on U.S. monetary policy.

The dollar edged up 0.1 percent to 106.850 yen.

It had dropped nearly 1 percent overnight as U.S. Treasury yields retreated from four-year peaks.

The greenback was given some reprieve, however, as yields leveled off.

Japan’s Nikkei rose 0.4 percent and MSCI’s broadest index of Asia-Pacific shares outside Japan adding 0.9 percent.

The market focus was on whether equities could extend their gains should U.S. yields resume rising.


Nikkei makes a higher retracement.

The Nikkei continued its retracement to attain the 38.2% retracement level, but has given back some of its gains later in the week. Cyclical strength appears to have dissipated quickly as a major low may be due in the next week or so. Supports have been violated and are due to be retested.

(Bloomberg) Japanese retail investors bought domestic stocks for a fourth consecutive week, stoking hope that foreign buyers will join them in helping the market make a full recovery from a rout that started last month.

Individual investors last week added to their record net purchases of the nation’s stocks, yet foreigners were net sellers for a sixth straight week. Overseas players — who generated 68 percent of the market’s equity trading value last month — have to start buying more if Japan’s equity benchmark is to rebound from its 10 percent correction, analysts said.


U.S. Dollar rallies above key support.

USD rallied above its Broadening Top trendline and Cycle Bottom support/resistance at 89.45.  The Cycles Model indicates a probable rally over the next 2 weeks.  There is a Broadening Top “Point 7” target near the weekly mid-Cycle resistance at 96.18.


(DailyFX) There is a popular adage that markets will do what they need to do to disappoint the most people at any one time. The recent USD outperformance has helped that adage ring true and most notably against commodity currencies like the Canadian Dollar and Australian Dollar as well as the EUR.

Institutions are known as smart money, but they often get caught crowded into popular trades that are quick to reverse. One of those is the play of selling the US Dollar. Per Bank of America Merrill Lynch, the short US Dollar trade is the second most crowded trade second to bullish US equities and the most crowded FX trade.

The short-term outlook has seen focus turned to the concerns of the US fiscal expansion late into an economic cycle and the view that other major central banks normalization anticipation will drive up their currencies, and keep global capital flows as limiting USD upside


.Gold falls beneath Short-term support.

Gold has fallen back beneath Short-term support at 1332.36 this week.  This implies a loss of prior supports and additional follow-through to the decline.  If so, the proposed target appears to be the lower trendline of the Broadening Wedge formation near 1260.00

(SeekingAlpha) Gold is faring quite well today technically, though you sure wouldn’t know it from the rampant bearish sentiment. Gold’s price is in a strong uptrend over a year old, high in both its current upleg and young bull market. Gold isn’t far from breaking out to its best levels since September 2013, a really big deal. The stock markets even finally sold off after years of unnatural calm. Yet traders are still down on gold.

Across all markets price action drives psychology. When something’s price is rising, traders get excited and bullish on it. So, they increasingly buy to ride that upside momentum, amplifying it. Of course, the opposite is true when a price is falling, which breeds bearishness and capital flight. Given gold’s great technical picture today, investors and speculators alike should be growing enthusiastic about its upside potential.


Crude surges to its Cycle Top resistance.

Crude surged this week to its Broadening Wedge trendline and Cycle Top resistance at 63.67 in a 66% retracement of its decline from the January high.  The Cycles Model suggests that the current strength is about to run out over the next week.  A break of the Intermediate-term support at 60.29 gives crude a sell signal..

(Reuters) – Oil prices rose to two-week highs on Thursday, boosted by data showing a surprise draw in U.S. crude inventories and also by a drop in the dollar.

West Texas Intermediate (WTI) crude CLc1 futures rose $1.09, or about 1.8 percent, to settle at $62.77 a barrel. U.S. crude traded between $60.75 and $63.09, its highest since Feb. 7.

Brent crude LCOc1 futures rose 97 cents to settle up about 1.5 percent at $66.39 a barrel. It hit a two-week peak at $66.56.


Shanghai Index rises above Long-term support/resistance.

The Shanghai Index rallied to close above Long-term resistance at 3284.21.  50% retracement level is near 3361.55 which may be the next target if it can sustain the rally another day or two.  However, the bounce may be over already with significant new lows anticipated in early March.  The immediate target may be beneath the Cycle Bottom at 2801.23.

(ZeroHedge) Last June, when looking at the most unstable of China’s mega conglomerates Anbang Insurance (the others are HNA, China Evergrande and Dalian Wanda), we said that “Anbang’s troubles could soon become systemic.”  Half a year later, that’s exactly what happened when in a “surprising” twist, the $315 billion insurer was bailed out by Beijing, just days after we pointed out the tremendous surge in the yield on its bonds.

And while the market has so far blissfully ignored the potential consequences of this admission by China that all is not well with its biggest corporations, that may soon change.


The Banking Index challenges the Cycle Top.

— BKX continues reaching for the Cycle Top at 116.93, but closing beneath it.  A reversal beneath the trendline at 111.77 may give a sell signal while a further decline beneath the lower trendline of the Ending Diagonal confirms it.  A break of the trendline implies a target near the February 2016 low.

(Reuters) – An easing of financial rules will soon unleash pent-up mergers and acquisitions among mid-sized U.S. banks, according to deal bankers, analysts and bank executives.

Deal activity in the sector has languished since the 2007-2009 financial crisis thanks to stricter rules on lenders with more than $50 billion in assets and aggressive enforcement of rules barring banks with compliance issues from expanding.

Lawmakers, spurred on by the leadership of Republican President Donald Trump, are set to raise the threshold for systemically important banks, making lenders that had capped growth to avoid the added compliance and capital costs more inclined to combine.

(MarketWatch) Companies may be starting to rethink their ties to the National Rifle Association in the wake of last week’s massacre at a Florida high school, with a major bank, insurer and car-rental giant announcing they were dropping partnership programs with the NRA.

First National Bank of Omaha, the nation’s largest privately owned bank, said Thursday it will not renew its contract with the NRA for a branded Visa card.

(AmericanBanker) About a third of companies have knowingly sacrificed security for expediency or business performance, according to a study released this week, and researchers said that bankers’ responses were consistent with the group as a whole, which included health care and other sectors.

An example of this is rushing a new app or product out before conducting thorough security tests.

“If you don’t have a detailed appreciation for the security risks, you’re more liable to make a trade-off that affects security,” said Justin Blair, executive director of business wireless services for Verizon, which sponsored the research.

(ZeroHedge) Earlier this week we noted that as trader attentions have been focused on more conventional indicators of market risk, the USD Libor-OIS spread – historical a sign of credit concerns – has been blowing up, widening the most since last Feb as Libor has continued to creep higher, while commercial paper rates for financials are also rising as more issuers have been selling longer-dated obligations, and moving closer on the curve.

Well, earlier today the USD Libor-OIS spread widened again, pushing to 35bp, from 34bp the prior session as three-month Libor rose for the 13th straight session.

Have a great weekend!

 Anthony M. Cherniawski

The Practical Investor, LLC

2205 Hopkins Avenue

Lansing, MI 48912

Office: (517) 331-5200


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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