More Than Meets The Eye

There’s more to the “stellar” 4.1% growth rate in Gross Domestic Product than first meets the eye.  Lance Roberts, of RealInvestmentAdvice has this to say, “Yesterday, I discussed the mathematical adjustment to the GDP calculation that added $1 trillion to economic growth. To wit:

“Where did a bulk of the change come from? A change in the calculation of “real” GDP from using 2009 dollars to 2012 dollars which boosted growth strictly from a lower rate of inflation.  As noted by the BEA:

“For 2012-2017, the average rate of change in the prices paid by U.S. residents, as measured by the gross domestic purchasers’ price index, was 1.2 percent, 0.1 percentage point lower than in the previously published estimates.”

In other words, stronger growth came from a recent mathematical adjustment rather than real GDP growth.  There are two other probable reasons for the quarterly uptick in GDP.  The first is the Trump tax cuts which were the driver for a one-off bonus to workers in March, resulting in an increase in consumer spending in the second quarter.  The second reason was a boost in trade ahead of the increased tariffs. All of these reasons may have produced a confluence of events boosting the second quarter GDP.

The question is, will it last?

VIX tested Intermediate-term resistance at 13.78 again, but declined to a new Master Cycle low at the two-year trendline. The buy signal is triggered when it closes above mid-Cycle resistance at 13.15. The Cycles Model shows probable strength for the VIX through late August.

(MarketWatch) There is reason to believe that the VIX will spike in August; in fact, there are three reasons:

  1. Commercial hedgers (considered the “smart money”) have been increasing their bullish VIX bets (see bottom graph of chart).
  2. VIX seasonality (black chart insert) is bullish from early July to October. The seasonal July low hasn’t affected the VIX yet. Yes, that could mean that seasonality may not matter right now, but it may also result in the VIX playing catch-up.

 SPX bounces, but no new high.

SPX bounced near round number support at 2800.00, making an 85% retracement of the decline.  This final bit of strength also coincides with an important Cyclical turn date.  This may be one of the longest SPX corrections in history, having rallied 166 days from bottom (February 9) to top (July 25) without making a new high.  Equities are entering their negative season, so care should be taken to protect what profits there are in 2018.

(ZeroHedge) In many perplexing ways, the market’s performance since the Global Financial Crisis has been unprecedented: starting with the deepest recession since the Great Depression, the subsequent bull market has been on an unprecedented run for the past decade, aided and abetted by trillions in central bank liquidity that have pushed global interest rates to historic lows, suppressed volatility and supported the S&P since its March 2009 lows so that there has not been a single 20% drop in the past 10 years, resulting in a 325% cumulative return and 17.7% annualized.

Last September, the S&P’s run became the second longest bull market in history.

Then, during this year’s January melt up, the S&P500 bull market became the 2nd largest of all time on Friday Jan 26th, when the index hit an all time high of 2873.

NDX rebounded at Short-term support.

NDX challenged Short-term support at 7202.46 before bouncing back to retrace 67% of last week’s decline.  The Cycles Model suggests that the next several months may bring pain to equities.  The period of weak seasonality may be about to begin.

(Reuters) – The S&P 500 and the Dow Jones Industrial Average gained ground and the Nasdaq was essentially flat on Friday as positive earnings helped investors overlook heightened trade tensions and weaker than expected July jobs growth.

For the week, the S&P 500 and the Nasdaq looked set to post gains. The Dow was on track to post a weekly loss.

China upped the ante on the trade dispute, announcing new retaliatory tariffs on 5,207 goods imported from the United States, including liquefied natural gas (LNG) and some aircraft.

High Yield Bond Index rallies to a 67% retracement level.

The High Yield Bond Index consolidated in place most of the week, until Friday, when it made a marginal new 67% retracement of the February decline. MUT normally would be on a sell signal beneath the trendline, but for the length of the retracement. The sell signal is confirmed beneath Intermediate-term support at 190.01. Sideways consolidations such as this imply a continuation of the previous trend.

(MarketWatch) Investors are showing trepidation over a potential wave of rating downgrades for the lowest tier of investment-grade debt, but fears those bonds will turn into “fallen angels” might be overblown, at least for now, according to analysts at S&P Global Ratings.

“Investors are increasingly wondering about the potential for a market fallout if a sizable number of ‘BBB’ issuers were downgraded from investment grade to speculative grade. [We believe] these concerns are somewhat overdone for a number of reasons,” they said in a Wednesday note, citing the solid growth picture and small number of firms in danger of losing their high-grade status.

UST Makes a Master Cycle low.

The 10-year Treasury Note Index reversed from a probable Master Cycle low on Wednesday. If so, we may see UST rally back toward the Head & Shoulders neckline near 123.00. The Commitment of Traders shows the Commercial traders remain heavily long while Speculators remain heavily short the 10-year Treasury futures.

(CNBC) All that debt piling up in the government’s coffers is going to require the Treasury Department to get more creative in figuring out how to finance it.

As a result, the department said Wednesday it needs to sell an additional $30 billion worth of bonds in the second quarter and is adding a two-month note to the offering of debt securities. That compares to a $27 billion increase for the first quarter.

In its quarterly refunding statement, the Treasury said it will be adding another $1 billion a month to each of the auctions for two-, three- and five-year notes over the next three months. On top of that, it will increase the auction size for the seven- and 10-year notes and the 30-year bond by $1 billion for the August sales.

The Euro may be headed for the neckline.

The Euro has been consolidating for five weeks above the Head & Shoulders neckline.  It has stayed beneath the Short-term resistance despite multiple challenges.  The Cycles Model suggests a possible 3 week decline that may take it to its Cycle Bottom at 102.88.

(Reuters) – Business activity in the euro zone lost some momentum at the start of the third quarter, hampered by a drop in new orders that sapped optimism in the private sector, a survey showed on Friday.

But the pace of growth remained fairly robust, supporting European Central Bank plans to end its 2.6 trillion euro stimulus programme this year, which policymakers reaffirmed last week.

IHS Markit’s Euro Zone Composite Final Purchasing Managers’ Index (PMI), seen as a good measure of economic health, fell in July to 54.3 from June’s 54.9, matching an earlier preliminary estimate. Readings above 50 indicate growth.

EuroStoxx reverses at Long-term resistance.

The EuroStoxx reversed beneath Long-term support/resistance at 3506.58 on Tuesday, dissipating what strength it may have, as suggested last week.  The Cycles Model calls for an approximate six week decline that, in all likelihood, may take EuroStoxx to the Head & Shoulders target..

(CNBC) Stocks in Europe moved higher Friday as investors digested further corporate earnings and news that Apple‘s valuation had hit $1 trillion.

The pan-European Stoxx 600 was provisionally higher by 0.67 percent with almost every sector rising supported by solid corporate results.

Tech stocks were among the gainers, benefiting from the momentum surrounding Apple. The tech giant saw its market valuation hit the $1 trillion mark on Thursday — boosting the S&Pand the Nasdaq.

The Yen capped by Short-term resistance.

The Yen appears to have been unable to overcome /Short-term resistance at 90.19.  Having been beaten back, it may consolidate further before another rally attempt.  A likely target for the bounce may be near 92.50.

(Bloomberg)  The yen is headed for smoother sailing, at least in the view of options traders. Implied volatility — expectations of price swings derived from options contracts — dropped to the lowest in nearly a month for the currency after the Bank of Japan became the latest central bank to begin issuing forward guidance. One-month implied volatility for the yen is now sitting within about 45 basis points of its lowest since 2014.

Nikkei challenges support.

The Nikkei declined to challenge Intermediate-term support at 22463.62, but closed above it. Violating that support introduces a new sell signal, while declining beneath Long-term support at 22355.17 confirms the signal.

(EconomicTimes) Japan’s Nikkei share average on Thursday pulled back from the previous day’s near two-week highs, as Chinese stocks fell sharply after an escalation in the Sino-US trade war soured sentiment.

The Nikkei ended the day down 1.03 per cent at 22,512.53.

The index’s fall gathered pace after Chinese shares tumbled, with the trade war back in focus as US President Donald Trump proposed a higher 25 per cent tariff on $200 billion worth of Chinese imports.

U.S. Dollar consolidates near the highs.

USD continues to consolidate above Short-term support at 94.27.  This gives the USD the unique possibility of making yet another high to complete point 7.  The Cycles Model allows a 1-2 week period of strength that may finally cap off this rally.

(SeekingAlpha)  Trump can try to talk down the U.S. dollar all he wants. The fact is the USD is appreciating based not only on factors largely outside of the U.S. president’s control but also because of the president’s actual policies, not tweets. As Reuters reports “actions speak louder than words” and the appreciation in the U.S. dollar is largely a product of Trump’s own making. Passing the tax bill encourages multinational corporations to move money back to the U.S., therefore, buying U.S. dollars. The larger deficit and economic improvement from tax cuts are also leading to higher treasury yields which support the USD to an extent. Exports only account for 14% of U.S. GDP, compared to around 40% for Europe, so the negative export effect from a strong currency is really overestimated for the U.S. economy by comparison.

Gold retests the neckline.

Gold appears to have retested the neckline a second time and now may be ready to decline to the Head & Shoulders target.  The Cycles Model and Head & Shoulders formation agree that there is stiff resistance at 1238.00.  The failure to break through confirms that formation and allows gold to decline much lower.

(Bloomberg) Investors are turning their backs on gold.

The metal is near the lowest in more than a year, edging closer to a key $1,200-an-ounce level, and is heading for the longest run of weekly losses since October. Gold’s appeal has waned, even amid ongoing trade-war tensions, partly because of an upbeat outlook on the U.S. economy that’s strengthened the dollar.

While gold is traditionally viewed as a haven in times of uncertainty, U.S. tax cuts and the Federal Reserve’s guidance for more interest-rate hikes has made the dollar an attractive alternative. There are other signs of investors getting out of gold — holdings in exchange-traded funds are at a four-month low and money managers are holding their biggest bearish bet on record.

Crude consolidates at Intermediate-term support/resistance.

Crude consolidated near Intermediate-term support/resistance at 69.01, closing beneath it.  There may be an additional attempt at a bounce to test the Cycle Top and trendline before a continuation of the decline through the month of August with a possible 50% loss.

(OilPrice) U.S. West Texas Intermediate crude oil futures are in a position to close flat-to-slightly higher this week. The market was set to close lower for the week before a huge short-covering rally on Thursday reversed the market to positive for the week.

Bullish Factors

Thursday’s nearly 2 percent rise was fueled by aggressive hedge buying tied to an industry report suggesting domestic crude stockpiles would soon decline again after a surprise rise in the latest week.

Traders said prices rallied early in the session when industry information provider Genscape reported that crude inventories at the Cushing, Oklahoma delivery hub for U.S. crude, dropped 1.1 million barrels since Friday, July 27.

Shanghai Index repelled at Short-term resistance.

The Shanghai Index was repelled at Short-term resistance at 2871.91, declining beneath its Cycle Bottom as well.  There may be a short bounce at the prior bottom at 2691.02 when the “short squeeze” takes effect, but the larger trend is down.  Exhaustion of the decline may not set in until early September.

(ZeroHedge) In the clearest signal yet that the PBOC is drawing a “red line” to further currency devaluation, moments ago the PBOC announced it is raising the reserve requirement for FX forwards to 20%.

As the PBOC notes, “due to factors such as trade frictions and changes in international exchange markets, there have been some signs of procyclical fluctuations in the foreign exchange market.” As a result, the move is “aimed at preventing macro financial risks” with the central bank adding that it will “take counter cyclical measures to keep FX markets basically stable based on market conditions.” The new forward foreign FX risk reserve requirement will become effective as of Aug. 6th.

Stated much simpler, what the PBOC is doing is nuking Yuan shorts and forcing a marketwide FX short squeeze.

The Banking Index consolidates near the top of the trading range.

— BKX appears to have completed a Master Cycle high on Monday, but has been in a consolidation mode since then. While the strength has not yet ebbed, the Cycles Model calls for a reversal with a decline through the Head & Shoulders formation.

(ZeroHedge)  The Justice Department announced that embattled Wells Fargo, which has seen its name feature in virtually every prominent banking scandal in the past year, will pay a civil penalty of $2.09 billion under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on the bank’s alleged origination and sale of residential mortgage loans that it knew contained misstated income information and did not meet the quality that Wells Fargo represented.

According to the DOJ, investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in residential mortgage-backed securities (RMBS) containing loans originated by Wells Fargo.

“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” said Acting U.S. Attorney for the Northern District of California, Alex G. Tse. “Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted. Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.”

(SouthChinaMorningPost) The government financial committee led by Vice-Premier Liu He has ordered China’s banks to lend more to small business as Beijing tries to head off growing risks to jobs and growth from a trade war with Washington.

After its second meeting under Liu, the Financial Stability and Development Committee – the agency in charge of coordinating financial policies – said the system needed to “create new dynamism” for growth and that banks must improve their internal mechanisms to encourage lending to small business, according to a statement on Friday.

While small businesses are vital to employment, they are also vulnerable to external shocks. The latest purchasing managers’ survey published by Caixin magazine on Friday showed that growth in the service sector, which contributed about 60 per cent of China’s economic growth last year, slowed further in July. The outlook for the economy among Chinese managers fell to its lowest level in almost three years – even before US tariffs on Chinese exports started to bite.

(ZeroHedge)  Earlier this week, the Treasury surprised the market and sent bond yields higher, when it unexpectedly reported that in the current quarter, US funding needs would increase by $56 billion to a $329 billion, and in the second half of the year will be the most since the financial crisis a decade ago, with the Treasury expecting to issue $769 billion in net marketable debt in the second half, the most since the financial crisis.

But how would the US Treasury adjust its debt auction pattern to fund this growing debt requirement?

We got the answer this morning, when in the quarterly refunding announcementthe Treasury announced it would raise the amount of long-term debt it sells to $78 billion this quarter, up from $73 billion last quarter, while launching a new two-month bill. The department is also extending out to the five-year maturity where it’s concentrating its increases to coupon-bearing debt.

Have a great weekend!

 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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