In this newsletter I put the observation that in bank stocks, “the rally may be worth more being sold than bought.” We now have another reason to suspect bank stocks and market liquidity in general. So why would Treasury Secretary Steven Mnuchin call six CEOs of the largest U.S. banks? His explanation noted that banks have plenty of liquidity “available for lending,” adding that the bank CEOs also confirmed that markets are not suffering from “any clearance or margin issues.” Does it reassure us that he even made the call?
ZeroHedge observes, “Any other week the ongoing collapse in Deutsche Bank stock, which dropped to a fresh all time low, sliding below €7.00 per share and closing at €6.97 on Friday, dragging its market cap to just under $16.5 billion or below that of Expedia, would have been the primary topic of conversation. However, in light of the numerous market “distractions” of the past week, it is understandable that the latest DB stock collapse would pass largely under the radar. And yet, for the bank with the €48 trillion in gross notional derivatives, when the market is signaling that something is wrong – which it clearly is with DB’s stock which has tumbled 56% in 2018 – it is worth paying attention.”
So what can make multiple assets decline in unison as the Cycles Model suggests? The answer may be a liquidity crisis. Take care and Happy New Year.
VIX rallied to a new high on Monday, then pulled back to challenge the inverted Head & Shoulders neckline. The Cycles Model suggests that, while it may take a brief rest, strength may recover in the VIX through the end of January.
(MarketWatch) It shouldn’t come as a surprise to anyone paying attention that stock-market volatility is on the rise. But here’s a statistic that underlines the phenomenon. The Cboe Volatility Index VIX, -5.41% commonly known as the VIX and often, if not sometimes derisively, referred to as Wall Street’s fear gauge, was on track Thursday to close above 30 for the fourth day in a row. The index, an options-based measure of expected volatility over the coming 30-day period, traded at 32.92 in recent action, up 2.51 points.
SPX bounces from the 7-year trendline.
SPX bounced from the 7-year trendline, avoiding the Bear Market for now. A Bear Market is defined as having a 20% or larger loss. By that definition, the Bear Market begins at 2352.73. More importantly, the 7-year uptrend from the October 2011 low may also be broken at 2350.00, changing the long-term trend as well. It appears that pension rebalancing and others may have saved the day for now.
(ZeroHedge) Update: and there it is – at precisely 2:39pm, a TICK print of 1775 was registered, signifying the biggest buy program of all time. Now, the only question – is this the real “pension buying” deal… or someone trying to fake out the algos into buying and trapped shorts into covering. The one problem with today’s buying fury: a burst of record buy orders only managed to push the Dow Jones 200 points higher, far less than yesterday’s 800+ point frenzy, which means that there are far more sellers into this ramp than yesterday.
NDX also bounces from its 7-year trendline.
NDX bounced off its 7-year Trendline and out of bear market territory which it closed in last week. The bounce took it back to retest the Head & Shoulders neckline at 6442.36. It appears for now that the Long-term trendline is stronger than a Head & Shoulders formation. There will certainly be a retest of the Long-term trendline very soon.
(Reuters) – U.S. stocks rose on Friday, with gains in defensive sectors including consumer staples and real estate helping extend a two-day rally, although weakness in technology companies capped gains. The final week of 2018 has seen wild swings in equities, starting off with Wall Street’s worst-ever Christmas Eve drop, followed by Dow Jones Industrial Average’s record 1,000-plus point surge on Wednesday and a stunning rally late on Thursday. The defensive consumer staples and real estate stocks rose 0.81 percent and 0.65 percent, respectively, to lead the gainers among 11 major S&P sectors. Technology stocks, which had powered the rally earlier this year and were at the center of the recent pullback, were flat. Energy stocks dipped 0.38 percent, suggesting caution.
High Yield Bond Index bounces at the 7-year Trendline.
The High Yield Bond Index challenged mid-Cycle support on Monday, but bounced from its 7-year Trendline on Wednesday. MUT continues to be on a sell signal. The Cycles Model suggests that whatever year-end strength it may have may have been used up by pension rebalancing. The 7-year Trendline is sure to be retested as early as January.
(Bloomberg) Pummeled by expectations of slower growth, outflows and dropping oil prices, junk bonds are poised for their worst returns in more than seven years. High-yield bonds are returning -2.64 percent in December, on track for the worst month since September 2011. The asset class has lost 2.59 percent so far this year, set for the biggest loss since returns fell 4.47 percent in 2015, according to the Bloomberg Barclays High Yield Total Return Index.
UST rallies on market uncertainty.
The 10-year Treasury Note Index rallied during the equities sell-off last week and held those gains even when stocks rallied later in the week. The Cycles Model suggests waning strength next week. Should supports be broken, we may see treasuries tumble for up to 5 weeks.
(MarketWatch) Treasury yields capped a weeklong decline on Friday after volatile trading in stocks sent investors into the perceived safety of bonds over the holiday-shortened week. This is the last full trading day of the year for the bond market. The Securities Industry and Financial Markets Association recommends that it close early on Monday, at 2 p.m. Eastern, ahead of New Year’s Day. The 2-year Treasury note yield TMUBMUSD02Y, +0.00% fell 1.4 basis points to 2.534%, its lowest since July 3. The short-dated maturity logged a weeklong decline of 10.7 basis points, its largest such move since Nov. 16.
The Euro has an “inside” week.
The Euro consolidated between last week’s high and low, making an “inside” week. It continues on a sell signal with no impulse in either direction. The Cycles Model suggests a possible attempt to go higher again next week, but technical resistance may overpower it.
(Quartz) Happy birthday, euro: two decades ago (Jan. 1, 1999, to be precise), a first wave of European countries adopted the currency and handed over monetary-policy decision making to the European Central Bank. Three years after that, euro notes and coins were introduced in the biggest changeover in history. Now, 19 countries have adopted the common currency, a success in several important respects. It is used by more than 340 million Europeans, and, as intended, has fostered deeper integration between EU-member countries, making it easier for companies to do business across the bloc and for citizens to move about. In terms of exchange rates, after 20 years and a couple of financial crises, it’s just about flat against reserve currencies like the US dollar and the Japanese yen.
The EuroStoxx bounced out of a Master Cycle low on Thursday just above round number support at 2900.00. The Cycle Bottom offers overhead resistance to the bounce, if it can make it. The Cycles Model may allow about two weeks of retracement, but lack of liquidity and investor sentiment may not permit it.
(Reuters) – European shares clawed back losses on Friday, buoyed by a bounce on Wall Street as a turbulent week drew to a close and investors licked their wounds after the region’s benchmark STOXX 600 sank to its lowest level since U.S. President Donald Trump’s election. The STOXX 600 ended the day up 1.9 percent, its biggest daily performance since last April. The pan-European benchmark had touched a low of 327.34 points on Thursday, its worst since Nov. 9, 2016.
The Yen rallies above Long-term resistance.
The Yen rallied above Long-term resistance at 90.44, closing above it. Last week’s comment, “The inverted Cycle high made this week allows the Yen to stay elevated to the end of the month.” …was spot on, but a trend change is due.
(CNBC) The Japanese yen jumped on Friday as investors sought protection against volatile stock moves, while the greenback dipped as stocks traded higher after a dramatic week capped by large price swings. The benchmark S&P 500 tested its 20-month low early in the week and was at the brink of bear market territory before the three main indexes roared back with their biggest daily surge in nearly a decade on Wednesday and a late rally on Thursday. The yen gained despite higher stocks, soft domestic data and a decline in benchmark Japanese bond yields, which fell back into negative territory for the first time in more than a year.
Nikkei makes new two-year low, then bounces.
The Nikkei has already declined beneath its 6-year trendline two weeks ago. This week it fell to its lowest level in 2018. The Master Cycle low arrived on Wednesday, followed by a rally that could not bring the Nikkei back to breakeven for the week. Usually a bounce like this may last two to three weeks. It doesn’t appear to be the case this time.
(RTE) Tokyo’s benchmark Nikkei index closed lower this morning, ending the year with its first annual loss since 2012, as negative factors including US-China trade tensions weighed on the market. The bellwether index lost 12.1% from a year earlier to end at 20,014.77 in roller-coaster trade. The Nikkei 225 index had surged to a 27-year high in October on a cheap yen and rallies on Wall Street but has since rolled downslope. The index lost more than 5% on Tuesday to have the worst finish since April 2017.
U.S. Dollar is still testing support and resistance.
USD gyrated between Short-term resistance at 96.60 and Intermediate-term support at 95.87 before closing above it. The USD remains on a sell signal. The Cycles Model suggests weakness for the next 5 weeks.
(Reuters) – The U.S. dollar’s share of currency reserves reported to the International Monetary Fund fell in the third quarter to a near five-year low, while the euro’s share of reserves grew to its largest in almost four years, data released on Friday showed. The Chinese yuan’s share of allocated reserves shrank for the first time in the third quarter since the IMF began reporting its share of central bank holdings in the fourth quarter of 2016. Reserves held in Japanese yen reached a 16-year peak in the third quarter, IMF data showed. Global reserves are assets of central banks held in different currencies, primarily used to support their liabilities. Central banks sometimes use reserves to help support their respective currencies.
Gold overshoots its target.
Gold overshot its target of 1275.00 and may hit is alternate target of 1288.00 by year-end. The Cycles Model calls for a final probe to the high by the end of the year. However, the right shoulder of a potential Head & Shoulders formation is complete and the reversal may be imminent. The more recent Head & Shoulders formation matches targets with the already existent Broadening Wedge formation.
(CNBC) Gold prices held near six-month highs hit on Friday, helped by a softer dollar, concerns over slowing economic growth and wild swings in equities, putting bullion on track for a second straight week of gains. Spot gold was up 0.3 percent at $1,278.99 per ounce as of 1:46 p.m ET, and up 1.7 percent so far this week. Earlier it had peaked at $1,282.09, its highest since June 19. U.S. gold futures settled $1.90 higher at $1,283.00 per ounce.
Crude makes a 20-month low.
Crude oil made a new low not seen in 20 months, then bounced in a temporary bout of strength, as suggested last week. It may probe higher, possibly as high as the Broadening Wedge trendline, before a reversal. Should it not make it through the trendline on the bounce, the decline may resume through the end of January.
(CNBC) Oil prices ticked were higher on Friday after a week of volatile trading, but shed early gains on profit-taking ahead of the New Year holiday as global crude benchmarks hovered near their lowest levels in more than a year. U.S. light crude ended Friday’s session up 72 cents, or 1.6 percent, to $45.33, after reaching $46.22 a barrel earlier. Brent crude oil futures were up 6 cents at $52.22 a barrel by 2:28 p.m. ET, having earlier risen to $53.80 a barrel. It had dropped 4.2 percent on Thursday. Both benchmarks posted their third straight week of losses, with Brent dropping about 3 percent and WTI falling roughly half a percent.
Shanghai Index bounces weakly.
The Shanghai Index continued its decline with an end-of-week bounce from possible pension rebalancing. The Cycles Model correctly anticipated further weakness through the end of the year and extending into the New Year. It may continue with a potential bottom near 2000.00-2200.00.
(Bloomberg) For China’s stock investors and forecasters, 2018 has been a gloomy year marked by unwelcoming milestones. The benchmark Shanghai Composite Index is 25 percent below where it started this year, making it the worst-performing major stock market in the world. The breakout of a trade war between the U.S. and China has wiped out $2.4 trillion this year, while a deleveraging drive has squeezed margin debt to just one-third of its peak in 2015. While foreign investors continued to pour money into onshore equities via the stock connects and state funds were said to have bought exchange-traded funds to rescue shares, they did little to arrest declines. There was no place to hide with even the safe-havens losing ground, as the weak Chinese economy hurt spending and weighed on consumer stocks, while a vaccine scandal and a gene-editing controversy sparked a sell-off in the health-care sector.
The Banking Index bounces from the 7-year Trendline.
— BKX bounced from its 7-year Trendline on Wednesday, closing above the Cycle Bottom. The Liquidity Model does not indicate any more strength in the bounce, although it may extend a few more days. In other words, the rally may be worth more being sold than bought. The Cycles Model suggests the decline may still meet the implied Head & Shoulders target by mid-February.
(BusinessInsider) Bank stocks are flashing what some on Wall Street see as a huge economic warning sign. Take Goldman Sachs, trading below the value of its assets at a level not seen in six years. Its plunging price-to-book ratio mirrors some of its big bank peers. While the bank has its own issues — it’s embroiled in a scandal that may command billions in fines — some see a bigger, gloomier picture. “Fear of an economic slowdown in the US are being reflected in the P/B of financials,” said Sam Rines, a chief economist at Avalon Advisors, a Houston, Texas-based investment firm. “In my opinion, it is one of the more obvious ways the market participants are signaling their opinion about the timing of a recession. And they are telling us it is coming soon.” Goldman Sachs is trading at a price-to-book ratio of 0.81, near its lowest level in six years. Citigroup, meanwhile, is trading at a ratio of 0.70, UBS at 0.84, Barclays at 0.49, and Credit Suisse at 0.63. The price-to-book ratio offers investors a look at a stock’s valuation by comparing its current price to the value of the company’s assets.
(YahooFinance) Investors were left scratching their heads over the Treasury Department’s statement earlier this week reassuring the public that banks have “ample liquidity.” But what kind of liquidity was the Treasury talking about? On Monday, markets sold off after the U.S. Treasury issued a surprise weekend statement noting that Secretary Steven Mnuchin had called six CEOs at the largest banks. The statement noted that banks have plenty of liquidity “available for lending,” adding that the bank CEOs also confirmed that markets are not suffering from “any clearance or margin issues.” The Treasury Department was referring to two different types of liquidity; access to credit speaks to bank liquidity while clearance relates to market liquidity. Analysts say there is no fire to put out in either sense of the word “liquidity.” “This surprised the market as many didn’t think of this as a concern,” Bank of America wrote in a note Dec. 26. “And in our opinion, it isn’t.” Bank analysts say banks are plenty liquid — mostly due to post-crisis regulations. They also say markets are liquid, but decreasingly so — also due to post-crisis regulations.
(ZeroHedge) For those equity traders who think they’ve been plunged into the darkest circle of hell with all the recent violent moves in the S&P, we dare you to take one look at the chart below and say which is worse. (see article) Ominously, the slide in leveraged loan prices – which have collapsed in the past 6 weeks as a result of the events we described recently in “Wheels Come Off The Leveraged Loan Market: Banks Unable To Offload Loans Amid Record Outflows” – has trekked steadily downward in the past month even when stocks and high-yield bonds rebounded as they did on December 26 and 27. The liquidation has been so furious, that the S&P/LSTA Leveraged Loan Price Index has not had a gain in any trading session since Nov. 1.
(ZeroHedge) Just over a week after Wells Fargo agreed to pay $480 million to settle a class-action lawsuit brought on by the many dishonest (and in some cases outright fraudulent) customer abuses that have come to light in the wake of the now-infamous cross selling scandal, Wells has agreed to shell out another $575 million to settle charge charges brought by attorneys general from all 50 states (and Washington DC) over its cross-selling scandal, what appears to be a final chapter in a saga that has already cost the bank hundreds of millions of dollars in fines. For those who need a reminder, the bank was exposed in 2016 after regional branch managers opened millions of fraudulent credit-card and checking accounts for customers to help meet strict sales quota.
Happy New Year!
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