128 Months From The Low

Mid-Week Report

October 30, 2019

VIX has spent the past 6 months in a huge consolidation, unable to rise above the Lip of the inverted Cup with Handle formation.  This may be called a Slingshot Move, where investors crowd into short positions that appears to be a sure thing as it broke beneath its prior low.  However, the Volatility shorts may provide the fuel for the next move in the opposite direction.

 

The NYSE Hi-Lo Index extended its Master Cycle high to October 28.  It has has closed above the trendline for the past two weeks.  This has negated any sell signal for a time.  However, a close beneath the 50-day Moving Average at 72.10 may reinstate the sell.

(TheEconomicCollapseBlog)  There should no longer be any doubt that the U.S. economy is slowing down, but most Americans still don’t realize what is happening because the major news networks are completely focused on the endless impeachment drama that is currently playing out in Washington.  And without a doubt that is important, because it threatens to literally rip our entire nation in two.  But meanwhile, economic activity has taken a very ominous turn.  Hiring is slowing, consumer confidence is plunging, defaults on auto loans are rapidly escalating, the “transportation recession” continues to get deeper and it appears that the housing bubble is popping.  Everywhere we turn, there are signs of economic trouble, and many are deeply concerned about what this will mean for us as we head into a pivotal election year in 2020.

Not since the last recession have we seen numbers this bad.  The “mini-boom” that we witnessed for several years has now turned into a “bust”, and very tough times are ahead.

 

— SPX rallied toward the top trendline of the Diamond formation and the CycleTop resistance at 3063.52. The triggering event in a Diamond formation would be the second crossing of the lower trendline at 3000.00.  Critical support lies beneath the trendline with Intermediate-term support at 2980.15.  There are three chart formations that give similar targets.  Caution is advised.

(Bloomberg) U.S. stocks advanced to an all-time high after the Federal Reserve cut interest rates as expected and signaled it was unlikely to move in either direction any time soon as inflation remains muted. Treasuries extended gains and the dollar erased an advance.

The S&P 500 turned higher when Chairman Jerome Powell said rate hikes won’t occur as long as inflation remains persistently cool. That fueled a rally in Treasuries and sent the dollar lower. Prior to the comment, risk assets were under pressure after hawks saw a change in the policy statement’s language — removing “act as appropriate” — as signaling officials will not make any further cuts this year.

 

— NDX rose toward the Diamond formation upper trendline and Cycle Top at 8163.84 in what appears to be a final test of the highs. As mentioned two weeks ago, the NDX is on a buy signal. However, a decline beneath Short-term support at 7837.43 reactivates the sell signal. The Diamond formation appears to agree with the target for Point 6 of the Orthodox Broadening Top. A potential decline may be rather sharp and fast.

(ZeroHedge) A new report from the Wells Fargo Investment Institute (WFII) examins the 126-month-old economic expansion, the longest in U.S. history, along with one of the longest bull markets in the S&P500, gaining 350% in about a decade. The length of the economic expansion and the total return in the stock market have recently caused fear among investors, signaling the good times are about to end.

The report, titled “How Bull Markets End: Investment Strategies to Prepare for the Next Downturn,” examines the relationship between equity bear markets and economic recessions, while carefully studying warning signs that could mean it’s time for investors to start positioning for the next downturn.

 

The High Yield Bond Index appears to be consolidating just beneath mid-Cycle support/resistance at 208.28.   A decline from here may trigger the Cup with Handle formation very soon.

(MarketWatch)  Risks of a U.S. corporate bond selloff often run high into the final months of the year when liquidity can get pinched and credit spreads widen.

But this year could be particularly painful for investors who took up corporate bonds at today’s relatively low spreads, which are the level of compensation a buyer demands over a risk-free benchmark, while shrugging off several potential warning signs in the market.

“We think this fourth-quarter could look at lot more like last year,” said Clayton Triick, a senior portfolio manager at Angel Oak Capital. “The latest ISM manufacturing data came in at its lowest point since June 2009, and that’s one of the primary leading indicators of the economy.”

 

The 10-Year Treasury Note appears to have made its Master Cycle low on Monday.  This may allow up to a three week bounce, according to the Cycles Model.  However, the 50-day Moving Average at 130.58 may put a cap on any bounce.  A further decline into the year-end may be in store.

(ZeroHedge) While the assumption is that Fed officials (having passed on the opportunity to lean against dovish market expectations) would not shock the market and vote to keep rates unchanged (96% odds and Fed has never surprised at that level), that’s precisely what happened when the Fed announced it would cut rates by another 25bps, the 3rd rate cut in the past 4 months, and now the big question is whether this will be the last rate cut for the foreseeable future.

Key takeaways (via Bloomberg) from the FOMC decision:

  • Fed cuts federal-funds rate target range by a quarter point to 1.5%-1.75% — as investors and most economists expected — in the third straight reduction aimed at protecting the record-long U.S. expansion from threats posed by tariff wars and weak global growth, amid “muted inflation pressures”
  • But FOMC signals it could pause, as the statement omits the familiar pledge from recent months to “act as appropriate to sustain the expansion”; Fed instead says it will monitor incoming information as it “assesses the appropriate path” of rates

 

The U.S. Dollar appears to have halted its bounce and is testing mid-Cycle support at 97.26. The USD is clearly on a sell signal. The Cycles Model suggests a master Cycle low may be expected by the end of October.

(CNBC) The U.S. dollar has been the world’s major reserve currency for decades, but that status could come under threat as “very powerful countries” seek to undermine its importance, warned Anne Korin, from the Institute for the Analysis of Global Security.

“Major movers” such as ChinaRussia, the European Union have a strong and stated “motivation to de-dollarize,” said Korin, co-director at the energy and security think tank, on Wednesday.

“We don’t know what’s going to come next but what we do know is that the current situation is unsustainable,” Korin said. “You have a growing club of countries, very powerful countries.”

 

–The Yen has made a three-month long counter-trend move to create another potential bullish Slingshot Move. This gives the potential for a new buy signal as the Yen re-crosses Intermediate-term resistance at 92.54. The Cycles Model inverted here to attract a crowd of short-sellers who may provide the fuel for the upcoming rally.

(DailyFX) YEN MAY RISE IF FED GUIDANCE FALLS SHORT OF DOVISH MARKET HOPES

This helps explain how currency markets may respond to the upcoming Fed monetary policy announcement. The US central bank is widely expected to issue another interest rate cut. Indeed, markets price in the probability of one at over 96 percent. That means the move itself is unlikely to generate much in the way of volatility: if the outcome is priced in already, there is no need for assets to readjust to it.

That puts the spotlight on the statement accompanying the rate decision as well as the subsequent press conference with Fed Chair Jerome Powell. Thus far, markets seem to be unimpressed with officials’ easing efforts. If the guidance on offer falls short of the accommodative stance that traders would prefer – a tall order considering the already ultra-dovish tilt in priced-in expectations – sentiment might sour.

 

The Nikkei Index may have completed an exhaustion high yesterday that forms both a Master Cycle high and a Slingshot Move that may take the Nikkei Index below 14000.00. The Cycles Model suggests that a simple decline beneath the Cycle Top support at 22528.65 may produce a sell signal that may take it to the Cycle Bottom support at 20262.34 in about a month.

(Reuters) – Japan’s benchmark Nikkei index pulled back from the highest in more than a year on Wednesday as conflicting signals from the U.S. government dampened optimism for a preliminary trade agreement with China.

At 0147 GMT the Nikkei index was up 0.33% at 22,898.42, on course for its biggest decline in three weeks.

It was the first downturn for Japanese stocks in eight trading sessions, after a U.S. administration official told Reuters on Tuesday that an interim U.S.-China trade agreement might not be completed in time for signing at an Asia-Pacific Economic Cooperation summit in Chile on Nov. 16-17.

 

The Euro continued its retracement with a potential target at or near the mid-Cycle resistance at 111.89 in the next couple of days. This also sets up another bearish Slingshot Move that aims for the Head & Shoulders target at 100.65 or possibly lower.

(Bloomberg) For European Central Bank President Mario Draghi, the battle to save the euro may be over, but for investors the risk of a continued slump in the currency persists.

The euro has fallen more than 3% so far this year and the top forecaster in Bloomberg surveys predicts it will slide as much again to $1.07 by the end of 2019. State Street Global Advisors, Millennium Global Investments and Henderson Rowe are among funds seeing little on the radar to make it worth buying, given the region’s struggling economy and global trade tensions.

“The euro is a big short position for us,” said James Binny, who oversees $129 billion as head of currencies at State Street Global Advisors. “The trade war really impacts Europe quite badly, with Germany very dependent on China. And though the mood music is a little bit better now, this is a story that is probably a multi-year or even multi-decade story.”

 

The EuroStoxx 50 SPDR appears to have completed a Master Cycle Inversion about a week beyond the normal period. The lengthy consolidation may have formed a potential Slingshot Move here as well. The Broadening Wedge target may only be the halfway point of the decline.

(MarketWatch) Downbeat results from HSBC Holdings couldn’t prevent European stocks from reaching a new multi-month high, as earnings season on both sides of the ocean has been greeted warmly.

After trading in negative territory through much of the day, the Stoxx Europe 600 SXXP, +0.08% ended with a gain of 0.33% to 399.34, the best level since Jan. 29, 2018.

Machinery stocks including ASML Holding ASML, -0.86%  and Sandvik SAND, -0.20%  rose.

The German DAX DAX, -0.23%  rose 0.49% to 12957.26, the French CAC 40 PX1, +0.45%  increased 0.28% to 5738.40 and the U.K. FTSE 100 UKX, +0.34%  rose 0.19% to 7338.15.

 

— Gold remains on a technical sell signal despite the consolidation around 1500.00.  Trading has broken down beneath the 50-day Moving Average at 1511.12 and round number support at 1500.00.  Investor sentiment is still bullish, but the Cycles Model suggests only a week is left to finish this Master Cycle.  Best guess is a quick ramp to the Cycle Top at 1583.23 in that period.

(MarketWatch) Gold futures settled higher on Wednesday, after posting back-to-back declines, then headed lower after the Federal Reserve cut its benchmark interest rate but said it would monitor the economic outlook as it assesses its next decision on rates.

The Federal Reserve cut its benchmark interest rate for the third straight meeting, by a quarter percentage point to between 1.5%-1.75%. The central bank signaled it may pause to see whether these easing steps are enough to sustain the economic expansion.

Following the statement, “I think a December cut is now unlikely and gold should sell off,” said Jeff Wright, executive vice president of GoldMining Inc. The statement was “more hawkish than I anticipated.”

 

West Texas Intermediate appears to be coming off a Master Cycle inversion on Monday.  The Cycles Model now suggests that the period of strength may be over.  This gives a potential  decline that may last up to a month as the trandline may finally be broken.

(OilPrice) The Energy Information Administration reported a crude oil inventory build of 5.7 million barrels for the week to October 25, pressuring oil prices a day after the American Petroleum Institute reported an estimated fourth consecutive inventory build, of 592,000 barrels.

Analysts expected a build of 729,000 barrels for last week after a 1.7-million-barrel draw interrupted a string of five weekly inventory builds, which added more than 19 million barrels to U.S. commercial crude oil inventories.

The EIA also reported gasoline inventories had shed 3.0 million barrels in the week to October 25, with production averaging XX million barrels daily. This compared with a 3.1-million-barrel decline in gasoline stockpiles a week earlier and production of 10.1 million bpd.

 

Domestic Food (Ag) Index continued to advance this week while on a buy signal. Cyclical strength may wane by the end of this week and a brief pullback is due through the first week of November. Pullbacks may provide a buying opportunity as prices may resume its uptrend through mid-December.

(FarmLead) Grain markets are mixed as the market continues to ponder harvest 2019 crop progress and a trade war deal getting done. Soybean prices are in the green this morning but saw a big sell-off on Friday as speculators sold off positions ahead of the weekend with no confirmed news of a deal between the world’s two largest economies, as well as grain buyers hedging their anticipated weekend deliveries of freshly-harvested beans. Corn prices also fell a bit on grain elevator pre-hedging but weekly losses were moreso attributed to weaker demand fundamentals.

Data from the CFTC on Friday showed that money managers increased their net-long position in soybeans to nearly 69,000 contracts, which would be the largest bullish position in the oilseed since late May 2018. On the flipside, fund managers increased their net-short position in corn by more than 10,000 positions to a little more than 76,000 lots. For wheat, speculators increased their net-short in Kansas City HRW wheat but added to their net-long in Chicago SRW wheat to make it the largest position since early July of this year. This helps explain some of the dollar spread between Chicago and Kansas City winter wheat prices.

 

The Shanghai Composite appears to have through its mid-Cycle support and 50-day Moving Average at 2942.70 today after consolidating there for the past two weeks. The Cycles Model suggests the upcoming decline may last through mid-December.

(ZeroHedge) While the US bond market has had its share of harrowing slumps and vomit-inducing short squeezes in the past year as consensus shifted from one of “the neutral rate is far away” to “here comes NIRP”, China’s bonds have been a bastion of stability, trading in a tight range between 3% and 3.50% for the past year.

That may be about to change.

The reason: a wall of bond maturities is about to flood across China’s sovereign-bond market, which in the past three months has already been reeling from a global sell-off and rising inflation.

 

— BKX rallied above its Diamond formation trendline, nullifying that pattern.  However, it may have introduced a bearish Slingshot Move that may dwarf the former pattern.  The Master Cycle ended in in an inversion, giving the BKX the potential for a decline lasting more than 5 weeks.

(ZeroHedge) JP Morgan’s CEO Jamie Dimon has been running around Washington claiming that mid-September’s repo rumble was the result of the post-crisis regulatory environment. He now says that his bank had the spare cash and was willing to cash in on double digit repo rates but it was government rules which prevented that from happening. It’s unclear (but we can, and I will, guess) why he didn’t make the same claim and warn everyone on Friday, September 13, before the seasonal low point in liquidity that everyone knew was there.

It wasn’t until quite a while afterward during that period when a stunned financial world was still trying (and failing) to make sense of what had happened.

You probably won’t be surprised to learn that this isn’t the first time Wall Street has complained about these very same regulations. They’ve been against them from the very beginning. What’s different now is that they have a very public event about which nobody has any real answers to rally support. It all sounds pretty plausible (it always sounds plausible, yet never explains most of the facts).

(ZeroHedge) Deutsche Bank stock tumbled – again – after the bank reported its steepest drop since CEO Christian Sewing’s sweeping revamp in early July as Q3 fixed income trading results badly trailed its Wall Street rivals in the latest sign of the steep hurdles Germany’s biggest lender faces in its efforts to turn round the fortunes of its investment bank.

Revenue in the bank’s once iconic fixed income group — by far the biggest remaining unit of Deutsche’s downsized investment bank — tumbled 13% year-on-year to €1.23bn.

 

Deutsche blamed the decline in its FICC group on low market volatility in foreign exchange markets. It also pointed to “business restructuring and challenging market conditions” in its rates unit, which handles sovereign bonds and other related products, and emerging markets debt which triggered “some risk management losses”.

(Forbes) Bank of America, the second-biggest lender in the U.S., had a major outage last night that left thousands of customers around the country locked out of their accounts for over an hour without explanation.

  • Reports flooded in over social media last night, with scores of customers saying that their bank accounts and information were inaccessible.
  • The outage apparently hit across the country, with Bank of America’s Web login, mobile app, customer service lines and even ATM services all going down. Other customers said they were unable to pay bills and that their debit and credit cards were getting declined.
  • Downdetector, a website that provides information about users’ issues with different services, registered more than 9,100 problems at Bank of America last night, starting at around 10:30 p.m. EST and spanning several hours. Most reports were related to online banking (73%) and mobile banking (23%).

Until next week…

Tony

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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