The Usual Suspects Are At It Again.

__________________________________________________________This may be a particularly good time to observe the markets through the eyes of a technician.

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Is this Deja Vu all over again?  ZeroHedge comments, “The stock market is at record highs and people with FICO scores as low as 500 are once again happily obtaining mortgages. Not only that, but these mortgages are once again being securitized and are in demand by yield chasers.

All of the elements that are necessary for the 2008 subprime crisis to repeat itself are starting to fall back into place. Aside from the fact that we have inflated bubbles across basically all asset classes for the most part, not the least of which is evident in the stock market, the Financial Times reported today that not only are subprime mortgage backed securities becoming prominent again, but that the chase for yield was what fueling demand.”

VIX pulled back from a test of its March 2 high at 26.22 a week ago, closing above Short-term support at 18.83. The next probe higher may exceed the prior high in the next 1-2 weeks.

(Bloomberg) The prime suspects in last month’s global rout may be at it again.

Inverse exchange-traded funds — which use leverage to bet against stocks and volatility indexes — have seen trading activity skyrocket to ominous levels as markets have whipsawed in the past few days. In fact, turnover has only been higher two other times since the financial crisis: in 2016 during a correction and in February when a surging Cboe Volatility Index forced short funds to unwind.


SPX bounces off Long-term support.

SPX bounced off Long-term support at 2587.71 but was stopped at the 2-year trendline near 2675.00. The corrective bounce appears to be over and a decline beneath Long-term support my open the door to a much deeper decline.  The broken trendline suggests that the entire two-year rally may be retraced in a very short time.

(CNBC) U.S. stocks rallied on Thursday, the last trading day of the month and the quarter, as the technology sector curbed steep declines seen in recent sessions.

The Dow Jones industrial average rose 254.69 points to close at 24,103.11, with Intel rising 5 percent. The S&P 500 gained 1.4 percent to 2,640.87, with tech rising 2.2 percent. The Nasdaq composite advanced 1.6 percent 7,063.44.

Transports also climbed 2 percent, but were still deep in correction territory.


NDX bounces at trendline, Long-term support.

The NDX challenged its Short-term resistance at 6762.40 before declining to its Long-term support and 2-year Diagonal trendline at 6388.08.  It is on a confirmed sell signal.  Breaking through the Long-term support makes it possible to decline to the Cycle Bottom at 3783.88 in short order.

(Reuters) – Fund managers have begun to ditch so-called FANG stocks that powered the U.S. stock market to record highs in January and are slowly rotating into commodity-related shares and other value stocks which typically outperform in late-cycle recoveries.

Portfolio managers holding shares of Facebook Inc (FB.O), Inc (AMZN.O), Netflix Inc (NFLX.O), and Google-parent Alphabet Inc (GOOGL.O) say they are increasingly concerned that the data scandal that has sent shares of Facebook down nearly 15 percent year-to-date will spill over into all of the FANG stocks, imperiling the broad market’s momentum at a time when there are no clear companies or sectors to take their place.


High Yield Bond Index bounces at February low.

The High Yield Bond Index bounced near the February low, then rallied back to challenge the long-term trendline. A broken Diagonal trendline infers a complete retracement to its origin. This may happen in a very short period of time.

(Reuters) – The junk bond rally may be over, but investors should not expect a sharp unraveling.

Low supply in new high-yield bond offerings has kept prices afloat despite persistent investor outflows. High-yield bond funds have had net outflows in 10 of 13 weekly periods this year, totaling roughly $18 billion, according to Lipper data, as fears of rising interest rates have driven investors to other markets.

After a decade of declining yields and worsening covenants, outflows in the junk market have returned some power to buyers.


UST rises toward Intermediate-term resistance.

The 10-year Treasury Note Index made a solid rally above Short-term support at 120.47 toward Intermediate-term resistance. A breakout above resistance may help the bullish case for UST.   However, there is some indication that the rally may be short-lived.

(Bloomberg) The yield on the 10-year U.S. government bond continues to defy conventional market views. Instead of marching up to 3 percent, if not higher, as many expected, it fell this week to below 2.80 percent, its lowest level in almost two months. The reasons matter for a wide range of markets, as well as for policy thinking.

Increased risk aversion is the most-cited immediate explanation. According to this interpretation, the recent pickup in market volatility, together with two notable air pockets for stocks this year, is pushing investors out of stocks and to safe assets. Treasuries are the greatest beneficiaries of this flight to quality, which is a particularly important warning indicator for high-risk market segments that lack a sufficient depth of investor support.


The Euro is still inside its Triangle formation.

The Euro probed to both sides of the diminishing Triangle formation.  It is now resting on the bottom trendline of the Triangle.  A break of the Triangle Top near 124.03 may send the Euro higher.  Triangles are often known for false breakdowns, so we will use Intermediate-term support at 121.92 as a safety support.

(Bloomberg) The European Commission proposes to bring down costs for cross-border euro payments within the EU and to make currency conversions fairer for consumers.

  • Under existing rules, cross-border payments in euros within the 19-nation euro area can’t cost more than a domestic transaction; this benefit should be extended to all 28 EU member states, commission says
  • Proposal would reduce transaction fees to a few euros or even cents, while today, bank transfers can cost as much as 24 euros in some non-euro area member states, according to the commission


EuroStoxx dips beneath the neckline.

The EuroStoxx 50 Index dipped beneath its Head & Shoulders neckline and mid-Cycle support on Monday, but rallied above it at the close of the week.  The Cycles Model suggests the period of strength may be over.

(MarketWatch) German stocks led European equities higher Thursday, but the broader market couldn’t avoid losses for March and the first quarter of 2018.

How markets moved

The Stoxx Europe 600 index SXXP, +0.44% rose 0.4% to end at 370.87, fronted by gains for the consumer goods and basic materials groups. But the utility sector fared the worst. On Wednesday, the index rose 0.5%.


The Yen seeks out support.

The Yen was repelled at the Head & Shoulders neckline but may have found support at the weekly Short-term support at 93.68.  The Cycles Model suggests that a Master Cycle low may have been made on Wednesday, which allows the rally to resume next week.

(SputnikNews)  Bank of Japan (BoJ) policymakers say a stronger yen could derail their efforts aimed at policy normalization. This takes place as tighter monetary policies typically add upward pressure on the national currency’s FX rate.

A stronger yen could hamper Japanese exports — one of the pillars of the nation’s GDP growth — and if the rally continues, the BoJ might further delay its long-anticipated interest rate hikes.


Nikkei retests Long-term resistance.

The Nikkei probed lower on Monday, then rallied to test Long-term resistance at 21322.73. It is on a sell signal that may last up to a month. The potential for a decline to the Cycle Bottom is high.

(BusinessLine) Japanese stocks finished a weak first quarter on a positive note on Friday, with index heavyweight stocks rising and technology firms such as Tokyo Electron jumping in sympathy with a rebound in their US counterparts.

The Nikkei ended 1.4 per cent higher at 21,454.30 points, its highest close in more than a week.

For the week, the index gained 4.1 per cent, though it lost 2.8 per cent for the month and tumbled 5.8 per cent on a quarterly basis, undermined by worries about higher US interest rates, a stronger yen and growing fears of a global trade war.

Volume was thin on Friday, as markets were shut for the long Easter weekend break in many of the world’s largest trading centres. Only 1.14 billion shares changed hands on the main board, the lowest level since late December. Turnover was ¥2.14 trillion, also the lowest level since then.


U.S. Dollar running out of time.

USD bounced off the Cycle Bottom support at 88.66 for a possible final time as it appears to be rising above Short-term resistance at 89.57.  This may give the Dollar a possible week to rally toward its mid-Cycle resistance at 95.78, the Broadening Top “Point 7” target.  The crisis discussed last week may be emerging, boosting the flow back into the USD as a safe haven.

(Reuters) – The dollar stalled against its peers on Friday as the recovery seen earlier this week petered out ahead of the new quarter, which could potentially bring renewed pressure on the greenback.

Against a basket of six other major currencies .DXY, the dollar was off 0.2 percent to 89.985.

The index was up nearly 0.6 percent for the week, during which it touched a one-week high of 90.178 on factors including easing of concerns over global trade protectionism and perceived progress on North Korea’s nuclear programmme.

“A key part of the dollar’s recent gains were quarter-end flows, with many investors seen to have closed out short positions on the currency to lift the dollar,” said Shin Kadota, senior strategist at Barclays in Tokyo.


.Gold rally falls short of new highs.

The Gold rally stalled at 1356.80 on Tuesday.  The high appears to be another Master Cycle inversion.  The reversal appears to have begun.  Tuesday’s move is called a breakout by some analysts but the move may be a false one.  Instead, this may be the beginning of a panic Cycle decline in precious metals.

(CNBC) Gold is on a tear, and some market watchers see further upside ahead for the precious metal.

Gold rallied to its highest level in five weeks on Monday, tracking for its best quarter since the January-March quarter of last year. Larry McDonald, publisher of the Bear Traps Report, told CNBC’s “Trading Nation” that gold is breaking out and could rally further. Here are his reasons why.

• Gold has broken out on a technical basis, due in part to a more dovish-than-anticipated Federal Reserve, trade war concerns brewing in Washington and a relatively weaker U.S. dollar.


Crude makes a double top.

The rally in Crude anticipated a challenge the January 26 high, but fell short by a few ticks.  The reversal began on Tuesday as indicated last week.  A break beneath support at 60.00 may propel crude beneath its Broadening Wedge formation.

(Reuters) – China’s new crude oil futures contract, which began trading this week, has a good chance of confounding the doubters and becoming a regional benchmark where other contracts have failed.

The history of futures and options trading is littered with new contracts launched amid great fanfare but which subsequently failed to develop sufficient liquidity and have been discontinued or faded into irrelevance.

But the new crude futures contract launched on the Shanghai International Energy Exchange comes after years of meticulous preparation and has many of the ingredients needed to be successful.


Shanghai Index challenges mid-Cycle support.

The Shanghai Index challenged mid-Cycle support at 3146.62 but did not exceed the February 9 low.  There may have been an early Master Cycle low put in on Monday, but indications are that there may be a deeper test of the low in the next week or so.

(Reuters) – China’s major stock indexes ended slightly higher on Friday, but posted their worst quarterly losses in two years, as the country’s fund managers slashed equity exposure amid China-U.S. trade tensions. ** At the close, the Shanghai Composite index was up 0.3 percent at 3,168.90, while the blue-chip CSI300 index CSI300 index inched up 0.1 percent to 3,898.50. ** The smaller Shenzhen index ended up 1.29 percent and the start-up board ChiNext Composite index was higher by 3.16 percent. ** For the week, SSEC gained 0.5 percent, while CSI300 slipped 0.2 percent. ** For the quarter, SSEC and CSI300 slumped 4.2 percent and 3.3 percent, respectively, their worst quarterly falls since March 2016. ** Worrying that the China-U.S. trade spat could bring uncertainties to the world’s second largest economy and its capital markets, Chinese fund managers slashed their suggested equity exposure for the next three months to an 18-month low.


The Banking Index retests the Diagonal trendline.

— BKX declined further than the February 9 low beneath the Diagonal trendline, bouncing back to challenge the trendline.  This is known as the “final kiss” of the trendline. Cycles Model suggests that the Banking Index may have a week-long decline ahead of it.  It is on a confirmed sell signal.

(Barrons)  Financial firms in the S&P 500 have been on a big buying spree lately, and it isn’t about mergers and acquisitions.

It’s all about their stock. These firms repurchased $124.5 billion of their shares last year, up nearly 20% from $104.4 billion in 2016, according to S&P Dow Jones Indices.

Financials led all of the 11 S&P 500 sectors in buybacks in 2017, followed by technology ($119 billion), consumer discretionary ($83.6 billion), health care (nearly $65 billion), and industrials ($53.6 billion).

(Forbes) The five largest U.S. investment banks made the most of the increased demand for debt origination services globally in 2017 to pocket more than $15.2 billion in fees from debt capital market activities (including loan syndication). This is the most these five banks have made in a single year in history, and is well above the average figure of $13 billion for the prior five-year period. As a bulk of debt origination activity over the year was from U.S. companies looking to issue debt securities before the Fed’s rate hike process boosts interest rates, these banks also witnessed an increase in their global market share from ~34% over recent years to just over 35% in 2017.

(Mises) Every 10 years or so there is a banking crisis. We are due. However, the furthest thing from most people’s minds with the Trump boom is a banking/financial crisis, except for a few folks at the Brookings Institution, who just released a paper entitled “Liquidity Crisis in the Mortgage Market.”

You Suk Kim, of the Federal Reserve Board; Steven M. Laufer, who also labors on the Federal Reserve Board along with Karen Pence, plus, Richard Stanton of the University of California, Berkeley, and Nancy Wallace, also of University of California, Berkeley, to give away the punchline from their paper’s abstract, write, “We describe in this paper how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario.”

(ZeroHedge) Over the past month as Libor continued its relentless upward creep and is now higher for 37 consecutive sessions, the longest streak of advances since November 2005, and rising to 2.3118% while blowing out the Libor-OIS spread to a crisis-like 59bps, a cottage industry has developed to explain what is behind the dramatic move in Libor, and which – as we noted 2 weeks ago – can be roughly summarized as follows:

  • an increase in short-term bond (T-bill) issuance
  • rising outflow pressures on dollar deposits in the US owing to rising short-term rates
  • repatriation to cope with US Tax Cuts and Jobs Act (TCJA) and new trade policies, and concerns on dollar liquidity outside the US
  • risk premium for uncertainty of US monetary policy
  • recently elevated credit spreads (CDS) of banks
  • demand for funds in preparation for market stress

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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