The Last Time We Saw This In The Market Was In 2007

Dear Readers,

Bank of America now claims, “The Last Time We Saw This In The Market Was 2007.”  This follows Morgan Stanley’s comment,  “is the late stage credit cycle about to crack?” 

ZeroHedge summarizes by observing, “And with just under $1 trillion in anticipated stock buybacks in 2018  – which would be almost entirely funded through new debt issuance – whether or not credit remains a viable, and cheap, funding pathway has become the single most important question in the financial world.”

That question may have been answered last week as 10-year treasury bond broke down.  There are more details in the Weekend Update (below).

VIX declined to a late Master Cycle low on April 17, then proceeded to rally above Intermediate-term support at 16.81. VIX is now on a buy signal.

(ZeroHedge) When Morgan Stanley’s chief equity strategist Michael Wilson released his 2018 equity outlook earlier this year, one particular observation struck us: a curious correlation between volatility and the shape of the yield curve we had not seen anywhere previously.

In his discussion in late November 2017, Wilson explains why he expected bigger volatility in the coming year, and why he thought “things will change in 2018”  he shows the following chart which illustrates an interesting relationship between equity volatility and the economic cycle.

SPX repelled at Intermediate-term resistance.

SPX extended the rally through Wednesday, rising above the 2-year trendline in a throw-over to Intermediate-term resistance at 2713.96. It appears to have made an island reversal on the daily charts at Thursday’s open.  The two-year trendline was broken on Friday morning, giving it a sell signal.  A break beneath Long-term support at 2602.31 confirms the new outlook.

(Reuters) – U.S. stocks fell on Friday, as Apple led a decline in technology stocks on concerns about weak iPhone demand and investors worried about the impact of a rise in U.S. bond yields.

Apple fell 3.8 percent and was the biggest drag on the major indexes after Morgan Stanley estimated weak demand for its latest iPhones, adding to fears raised by Taiwan Semiconductor of softer smartphone sales.

Microsoft, Intel and Cisco were the other big decliners, leading to a 1.6 percent drop on the S&P technology index, its third straight day of decline.

NDX “throws over” the trendline, reverses.

The NDX also threw over its two-year trendline before making a key reversal on Thursday.  It has declined through the trendline and Intermediate-term support at 6720.97, putting it on a sell signal.  Declining through Long-term support at 6455.27 confirms the sell signal.

(DailyReckoning)  Liquidity is the ultimate paradox in finance. It’s always there when you don’t need it and never there when you need it most. The reason is crowd behavior, or what mathematicians call hypersynchronicity (a fancy word for everyone doing the same thing at the same time).

When markets are calm, no one wants liquidity because investors are happy to hold stocks, bonds, currencies, commodities and other assets in their portfolios. As a result, there’s plenty of liquidity on offer from bank lenders and very few takers.

The opposite is true.

In a financial crisis, everyone wants his money back at once. Stocks are crashing, bonds are crashing, margin calls are streaming in and everyone is trying to sell everything at once to avoid losses, meet margin calls and preserve wealth.

In those circumstances, there’s not enough liquidity to go around. Banks, and ultimately regulators, decide who lives and who dies (financially speaking) by offering liquidity or cutting it off.

High Yield Bond Index repelled at Intermediate-term resistance.

The High Yield Bond Index continued to rally above its trendline, reaching Intermediate-term resistance at 192.18 before making a reversal, closing above the trendline. The trendline may not hold.  A broken Diagonal trendline infers a complete retracement to its origin. This may happen in a very short period of time.

(ZeroHedge) After rising for 10 of the previous 11 days, ever-hopeful that we can get back to ‘abnormal’, it appears a realization of just how levered US corporates are, as well as testing and losing a key technical level, prompted the biggest fund outflow from HY bond ETF since the 2016 election…

With HY Yields at their lowest decile on record…

UST resumes its decline.

The 10-year Treasury Note Index resumed its decline beneath Short-term support at 120.41 this week. Last week I mentioned, “… a breakdown may have dramatic consequences.” The Head & Shoulders target may be next on the agenda.

(CNBC) The yield on the 10-year Treasury note hit 2.96 percent Friday, hitting its highest level since Jan. 10, 2014.

The two-year yield hit 2.461 percent, meanwhile, its highest level since Sept. 8, 2008, when the two-year yielded as high as 2.542 percent. Friday’s moves cap a week of rising rates accredited to geopolitical and trade tensions, rising commodity prices and an uptick in German bund yields.

As of the latest reading, the yield on the benchmark 10-year Treasury note was higher at around 2.96 percent at 3:52 p.m. ET, up roughly 10 basis points for the week. The yield on the 30-year Treasury bond was up at 3.146 percent, approximately 8 basis points higher since Monday. Bond yields move inversely to prices.

The Euro coils tighter…

The Euro appears to have completed the final probe of the Triangle formation but is still caught in a tight consolidation.  It has the capability of a parabolic rally to or above 127.00 over the next two weeks.  Triangles are often known as signals of an impending trend change after the target is met.

(ZeroHedge) As we have showed repeatedly over the past month, the European economic imploding, and nowhere is this more obvious than the Citi Eurozone Economic Surprise Index why will soon hit its post financial crisis lows.

It appears that after weeks of dithering, someone at the ECB also figured out how to pull up this chart on their Bloomberg because moments ago, and one month after the ECB first admitted that things are not ok when the central bank cut its 2019 inflation forecast, arguably due to protectionism concerns…

… Mario Draghi finally admitted what we all know:


EuroStoxx reaches Long-term resistance.

The EuroStoxx 50 Index extended its rally to reach Long-term resistance at 3505.44 before pulling back.  While the Cycles Model suggested a bearish tilt starting early last week, Options Expiration came on Friday with its own agenda.  A break of the Head & Shoulder neckline and mid-Cycle support at 3301.38 may create a panic decline.

(ZeroHedge) The rosy “strong euro area growth” narrative is done. As a result of a lower than expected ZEW index (-8.2 points in April versus 5.1 points in March), Citi Economic Surprise Index for the Eurozone is sinking further into negative territory, reaching its lowest level since 2012. The index is currently the worst performer among G10, at minus 87.8. This collapse added downward pressure on European stocks during Q1 and the risk is high that it will happen again in Q2 or Q3 if economic indicators continue to disappoint.

The sharp drop in the ZEW index confirms that soft data are rapidly adjusting to weak hard data recently released by Markit and the European Commission. All of them send the same message: euro area growth has reached a plateau.

The Yen pulls back toward support.

The Yen continues to ease down toward Intermediate-term support at 92.48 in a in a half Trading Cycle decline from its (inverted) Master Cycle high.  The Cycles Model suggests that another Master Cycle inversion (high) may take place in mid-May.

(Bloomberg)  As Governor Haruhiko Kuroda heads into the Bank of Japan’s policy meeting next week, he has an additional factor to watch out for: politics.

Scandals have cast doubts on Prime Minister Shinzo Abe’s ability to stay as leader of the Liberal Democratic Party, raising questions over the future of Abenomics. That may fuel yen gains, which could derail the inflationary impact of the monetary easing that Kuroda has pursued since being first appointed by Abe in 2013.

Despite sliding in the last three weeks, the yen continues to be this year’s top performer against the dollar in Asia, with an almost 5% gain. It climbed on Monday, as thousands of anti-Abe protesters rallied on the weekend and a Nippon TV survey showed that approval rating for the prime minister fell to a record low of 26.7 percent.

Nikkei “throws over” its two-year trendline.

The Nikkei threw over its two-year trendline this week, challenging Intermediate-term resistance but closing beneath it. A decline beneath the trendline near 22000.00 renews the sell signal. The potential for a decline to the Cycle Bottom is high.

(JapanTimes) The 225-issue Nikkei average snapped its five-session winning streak on the Tokyo Stock Exchange on Friday, hurt by selling to lock in gains.

The Nikkei lost 28.94 points, or 0.13 percent, to end at 22,162.24. On Thursday, it rose 32.98 points.

By contrast, the Topix index of all first-section issues closed up 0.95 points, or 0.05 percent, at 1,751.13, after edging up 0.51 points the previous day.

The Tokyo market opened weaker following Wall Street’s retreat on Thursday, with the Nikkei briefly losing over 110 points in morning trading.

U.S. Dollar starts its trek to Point 7.

USD made a shallower low than what was expected, but nevertheless made a strong reversal higher.  The rally toward the Broadening Top “Point 7” target has begun.  A panic Cycle may develop in equities and bonds, boosting the flow back into the USD as a safe haven.

(Xinhua) — The U.S. dollar index increased on Friday amid rising U.S. yields.

The dollar index, which tracks the greenback against six major peers, was up 0.37 percent at 90.277 in late trading.

The yield on the 10-year Treasury note moved above 2.957 percent Friday, hitting its highest level since January 2014.

The two-year yield hit 2.457 percent, its highest level since Sept. 8, 2008 when the two-year yielded as high as 2.542 percent.

With no major data on Friday, analysts said higher U.S. yields have contributed to the rise in the dollar.


.Gold retreats from its corrective high.

Gold had a choppy week, trading inside the prior week’s range.  It closed above critical supports at 1332.00.  A further decline beneath that support level gives Gold a sell signal.  This may be the beginning of a panic Cycle decline in precious metals.

(Kitco News) – The market is paying attention to the rising U.S. dollar, which poses a big risk to gold prices going into next week, according to analysts.

Gold prices ended the week on a lower note, giving up all of Wednesday’s impressive gains. June Comex gold futures were trading at $1,338.10, down 0.79% on the day, as markets are getting ready to close on Friday. Meanwhile, the U.S. dollar index was last at 90.32, up 0.42% on the day.

“The down-move in the yellow metal came as the U.S. dollar index pushed to its daily high. Some profit-taking from the shorter-term futures traders is also featured heading into the weekend,” said Kitco’s senior technical analyst Jim Wyckoff.

Crude makes a complete throw over.

Crude completely threw over its Broadening Wedge formation, but met its daily chart target at 69.65.  The new high was completed on Thursday as the period of strength winds down over the weekend.  A break beneath the Cycle Top and trendline at 64.85 may indicate a change in trend.  A further decline beneath Intermediate-term support at 63.51 confirms it.

(Reuters) – Hedge funds and money managers raised bullish wagers on U.S. crude oil in the latest week, data showed on Friday, as prices rose with the risk of global supply disruptions remaining high.

The speculator group raised its combined futures and options position in New York and London by 31,273 contracts to 472,907 in the week to April 17, the U.S. Commodity Futures Trading Commission (CFTC) said.

During the period, oil prices rose about 1.5 percent.

Oil markets have been supported by the sentiment that there are high risks of supply disruptions, including conflicts in the Middle East, renewed U.S. sanctions against Iran and falling output as a result of political and economic crisis in Venezuela.

Shanghai Index breaks beneath mid-Cycle support.

The Shanghai Index broke down this week, declining beneath mid-Cycle support at 3155.04.  The lows have been tested and broken, reinforcing the sell signal.  The Cycles Model suggests a lengthy decline, perhaps until mid-June.

(ZeroHedge) We issued the first warning notice last December, in a post whose title said it all: “Global Deflation Alert: Chinese Credit Creation Tumbles To 27 Month Low.” It showed the chart which we – and UBS – have argued is the only one that truly matters for global inflation (or deflation): China’s credit impulse.

We followed it up two months later in February with “The Deflationary Canary: China Tier-1 Home Prices Post First Decline Since May 2015” in which we said that as a result of the ongoing slide in China’s credit impulse, “expect further downside to home prices, not only in Tier 1 cities, but across the entire Chinese housing market” and added that “the last two time China’s housing contracted, the result was a deflationary wave unleashed across the globe; in fact some have speculated that the reason for the near-bear market in late 2015 and 2016 as well as the Fed’s derailed plans to hike rates in 2015 was largely due to the deflationary spark prompted by the sharp contraction in Chinese housing prices.” In short: deflation, and poor economic data was about to spread across the globe.

The Banking Index treads water beneath the trendline.

— BKX weakened early in the week but had a reprieve on Thursday, remaining beneath Ending Diagonal trendline.  It remains on a sell signal. Cycles Model suggests that the Banking Index may have a month-long decline ahead of it.

(ZeroHedge)  The latest monthly auto-loan data from the Fitch Auto ABS Index showed something very troubling: subprime delinquencies 60 days or more past due on the secondary market rose to 5.76% in February, the highest they’ve been in 22 years, or since 1996, and blowing past the highs hit during the 2008 financial crisis. At this rate, a record high print is assured in a month or two.

The data seemed confusing, almost a misprint to Hylton Heard, Senior Director at Fitch Ratings who said that “it’s interesting that [smaller deep subprime] issuers continue to drive delinquencies on the index in an unemployment environment of around 4%, low oil prices, low interest rates — even though they are rising — and a positive economic story overall.” In other words, there is no logical reason why in a economy as strong as this one, subprime delinquencies should be soaring.

(Reuters) – Big U.S. banks are racing to launch websites and mobile apps to make getting a mortgage faster and easier, investments that may have modest near-term payoffs as home lending activity slows.

Lenders have been spending on digital tools to cut costs, eliminate error-prone paperwork and appeal to younger home buyers. However, they are chasing a shrinking pool of refinancing business and new home loan volumes are still below pre-crisis levels.

(ZeroHedge) As was widely expectedWells Fargo announced today that it has agreed to pay a $1 billion fine to the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau in what is the largest fine ever levied by the CFPB in its six-year existence.

The fine was levied over Wells’ shady sales practices, including the opening of millions of fraudulent accounts in its retail bank, and abuses in its auto-lending and mortgage lending divisions.

As a result, the company will need to adjust its already unremarkable first quarter results to factor in an additional non-tax-deductible accrual of $800 million, which shaves 16 cents off its EPS to 96 cents.

(ZeroHedge) Back in the summer of 2015, Deutsche Bank mistakenly paid $6 billion to a hedge fund client in a “fat finger” trade on its foreign exchange desk. The embarrassed bank recovered the money from the US hedge fund the next day, and quickly accused a junior member of the bank’s forex sales team of being responsible for the transfer while his boss was on holiday; as the bank further explained, instead of processing a net value, the person processed a gross figure: “That meant the trade had too many zeroes” a staffer helpfully explained.

Fast forward to today when Germany’s largest bank has done it again.

Have a great weekend!

 Anthony M. Cherniawski                                                                                                                         


Disclaimer: Nothing in this newsletter 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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