November 1, 2019
It appears that the Federal Reserve has used up the better part of its ammunition before the war even started. On Wednesday the Federal Reserve slashed rates for a third time in a desperate attempt to revive a stalling economy. But gunning the markets only help the 1% who own stocks without affecting the vast majority of consumers. In the last six weeks the Fed has launched a massive quantitative easing program which, in reality, is an extreme measure that should only be used in desperate situations.
Meanwhile, the Fed insists that the U.S. economy is in good shape. Wall Street applauded by sending stocks to a new all-time high. Bu if we are in good shape now, what will they do when things really get bad?
Here’s the dilemma; if the economy picks up next year, the Fed governors will be heroes. But should the economic tide go out, we will find out “Who is swimming naked?”
VIX extended a mid-Cycle low until Thursday when it approached its consolidation boundary. Should this be a Slingshot Move, it may reverse powerfully in the opposite direction, using all the volatility shorts as fuel to propel it beyond the upper trendline.
(Bloomberg) The divergence between short and long-term volatility is creating an opportunity for investors, according to some market participants.
SPX Makes A New All-Time High.
SPX rose above its Cycle Top resistance at 3058.72, breaking above its prior high and challenging the upper trendline near 3065.00. Investors piled in, not wanting to miss the next big thing. Short-term support is at 2993.10, a decline beneath that may produce a sell signal.
(RealInvestmentAdvice) The SPX recorded new highs this week. Investors appear to be excited about the U.S. – China Phase 1 trade agreement, which only goes so far in ending the trade war. Plus, the Fed is cutting interest rates, injecting $100 billion in repo financing over the next month, and embarking on a new round of QE. So, is it clear sailing for corporate America? Maybe companies are not as financially viable as record SPX levels would indicate.
Let’s look at the lifeblood of a company, cash flow. Goldman Sachs analysis of corporate cash flows shows that SPX companies are actually running, in aggregate, negative cash flow at 103.8% while keeping stock buybacks and dividends flowing to shareholders. Debt is up 8% squeezing corporate cash flow to the point where aggregate cash flows are down 15% versus the prior year.
NDX Reaches Its Cycle Top And Trendline
NDX also reached its Cycle Top and Diamond Formation trendline at 8160.00. As you can see, the Diamond trendline support and resistance is forcing the trading channel into a narrowing band that must be broken, either up or down. A downward thrust beneath 7800.00 may bring a sell signal.
(Bloomberg) For some time now the conventional investment wisdom has been that the global economy may be at risk of a slowdown, posing a threat to companies dependent on international markets. The major exception, this thinking went, was big technology companies, which have so much going for them that they were immune to any minor bumps in worldwide growth.
But now there’s reason to believe both sides of that narrative have changed and that there’s cause for optimism for global growth but pessimism for Silicon Valley. If that’s right, it will mean some stock-market darlings are about to fall from favor while certain laggards suddenly outperform.
High Yield Bonds Are Underperforming.
High Yield Bonds also appear to be limited by its Diamond Formation. If so, a drop below Short-term support at 207.42 may produce a sell signal. Further confirmation may be provided by a decline beneath the lower Diamond trendline at 204.00.
(Barrons) Remember the Attack of the Killer BBBs?
It was a popular narrative in the capital markets in 2018. The swarm of corporate bonds with the lowest investment-grade rating supposedly were on the precipice of a descent into the high-yield level—the polite term for junk—as soon as the inevitable economic slowdown hit. In that event, these erstwhile members of the respectable investment-grade world would be punished with a major decline in their securities prices and a concomitant rise in their yields.
Treasuries Bounce, But May Not Last.
UST made a Master Cycle low on Monday then bounced, closing just above Intermediate-term support/resistance at 129.98. The bounce may be short-lived, as the decline may resume through the end of the year.
(CNBC) The U.S. may begin issuing 50-year ultra-long government bonds for the first time, the Treasury Department said Wednesday.
The department is “exploring” potential additions to the current suite of Treasury securities, including a 20-year nominal coupon bond, a 50-year nominal coupon bond and a one-year floating-rate note linked to the Secured Overnight Financing Rate, according to the Treasury’s quarterly refunding statement released Wednesday.
“Treasury is taking a proactive approach to prepare for prospective future financing needs,” the statement said. No timeline was given for the issuance.
The U.S. Dollar Resumes Its Decline.
USD resumed its decline this week, challenging Long-term support at 97.13. Having closed beneath it, the highest likelihood is a continuation of the decline for another week or so. A nearby target for the decline may be the trading channel trendline near 96.50. However, a panic decline could take it as far as the Cycle Bottom at 89.55.
“Our latest projections are that it would weaken even further — maybe to the high 80s, perhaps even as low as 85,” Mohammed Apabhai, head of Asia Pacific trading strategies group at Citi, told CNBC’s “Street Signs.” Technical analyst Daryl Guppy said last year that 85 is a “historical support level” for the dollar.
The Yen Takes Aim.
The Yen may have been launched from its Slingshot Move to test Short-term resistance at 92.69. If correct, the Yen may have a target near 100.00. We’ll know more about the strength of this move by mid-November. In this case the Slingshot Move may be powered by short sellers who have speculated against the currency in a very crowded trade. Most analysts won’t catch this move until it is too late.
(PoundSterlingLive) The Yen is the worst-performing major currency of the month, and the trend of depreciation is likely to extend after the Bank of Japan offered little by way of support to the currency at their October 31 policy meeting.
The BoJ signalled that, if anything, the next move on interest rates might be another cut, a message that chimed with a market that has been steadily raising expectations for such a move in the future.
The Nikkei Index Slingshot Move Is Primed And Ready.
The Nikkei Index appears to have completed an extended Master Cycle high. It made a new high on Tuesday at 23008.43, then pulled back, creating a potentially bearish Slingshot Move. Cyclical strength has waned with six weeks of potential decline. The rally has attracted a lot of new money so be wary of this crowded trade.
The Euro Consolidates At The High.
The Euro has consolidated for three weeks under Long-term resistance at 112.05. It has made a Master Cycle high at 111.82 on Friday as its period of strength runs out. The Cycles Model suggests a possible 6 weeks of decline ahead.
(YahooFinance) The Euro rally during the week, trying to reach the 1.12 level but has failed to break out above there. That being the case, the market had a good week, but is still very much in a downtrend overall, and a bit of a larger channel, at least in the spirit of the way the market has been trading since March 2018. That being said, not a lot has changed, and even though the last couple of weeks have shown a proclivity on daily charts to strengthen, this is something that we have seen happen several times in the past.
European Stocks Rally Higher.
The EuroStoxx SPDR continued its rally this week to a probable Master Cycle high on Friday. That suggests a reversal in the making. The Cycles Model indicates a probable month-long decline ahead.
(MarketWatch) For one week at least, more stock-market investors have turned to stodgy Europe than the U.S.
An analysis by Jefferies of fund flow data showed that European stocks, in the week ending Oct. 30, saw more inflows than U.S. ones.
The beat, to be fair, wasn’t substantial — $1.7 billion to $1.6 billion. But the fact European stocks came out on top is notable given that European stocks only ended 40 weeks of outflows the week before.
The case for Europe, to be clear, doesn’t rest on its economy. Eurostat reported this week that the eurozone economy grew 1.1% in the third quarter compared to the same period of 2018. The U.S. economy, on a year-over-year basis, grew 2% in the third quarter. Inflation in the eurozone was just 0.7% in the 12 months ending October, not remotely near the European Central Bank’s target of just under 2%.
The Shanghai Composite Trades in Narrowing Range
The Shanghai Composite appears to be bouncing at Long-term support at 2907.79, but halting at mid-Cycle resistance at 3001.71. This narrowing range may soon be resolved as it has recently made a Master Cycle high in mid-October and has a potential 6-week decline ahead.
(ZeroHedge) It’s almost like the market is treating a Bloomberg report claiming senior Chinese officials harbor serious doubts about the feasibility of a trade deal as if the report wasn’t credible – something we suggested yesterday when we speculated that the report could be a plant to push the Fed toward more rate cuts.
Gold Completes A Possible Triangle Formation
Gold closed above Short-term support/resistance at 1505.43, completing a two month long Triangle formation. Triangles signify the end of a trend is near as they launch a final probe equal to the widest part of the Triangle. In this case, the target appears to be 1585.00, but the final probe may extend to 1600.00.
(Kitco News) Gold is keeping its head above the key $1,500 an ounce level despite the Federal Reserve’s signal to pause its rate cuts, backed by stronger U.S. economic data. For gold, this could mean the metal is ready for the next spark, according to analysts.
The precious metal’s price action has been somewhat surprising this week with gold managing to trade well above $1,500 an ounce as Fed proceeded with its widely expected “hawkish cut.”
Crude May Be At The End Of A Bounce.
West Texas Crude ran out of sort-term strength on Monday, but remained elevated for the remainder of the week. It could not overcome Long-term resistance at 56.95 and runs the risk of declining beneath Short-term support at 55.47 where a sell signal may be activated. Once accomplished, crude oil has a potential to decline over the next month.
(OilPrice) The US oil and gas rig count fell again this week, according to Baker Hughes, continuing the downward trend with a drop of 8 rigs for the week, according to Baker Hughes. This week marks ten decreases out of the last eleven weeks.
Food Prices Rise.
Agricultural prices resumed their climb this week, but may be due for a short-term pullback this week. Cyclical strength appears to be waning while a Trading Cycle may be due at the end of the week.
(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.
Banking Index Hits Trendline Resistance.
The Banking Index hit the upper trendline of an Orthodox Broadening Top formation on Tuesday while simultaneously fulfilling a Master Cycle high. A reversal from here has the potential of a 5-6 week decline ahead of it. Normally we go into a positive seasonal surge as we approach Thanksgiving. However, the Fed may have sown the seeds for a negative season by ramping up QE and the repo market since mid-September.
The glitch threatened to restrict some customers from accessing their latest paychecks. The credit card issuer said on Twitter that the technical issue affected “customer money movement, including direct deposits, and the ability for some customers to access accounts.”
Later Friday afternoon, the company tweeted that the issue was fixed, adding that “if you continue to experience any difficulties, please reach out to us. We sincerely apologize for the inconvenience.”
Capital One, which also experienced an unexpected outage Sunday on its website and app, told USA Today in a statement that customers “will not be responsible for any fees associated with this issue.”
(ZeroHedge) First it was Baoshang Bank , then it was Bank of Jinzhou, then, two months ago, China’s Heng Feng Bank with 1.4 trillion yuan in assets, quietly failed and was just as quietly nationalized. Today, a fourth prominent Chinese bank was on the verge of collapse under the weight of its bad loans, only this time the failure was far less quiet, as depositors of the rural lender swarmed the bank’s retail outlets, demanding their money in an angry demonstration of what Beijing is terrified of the most: a bank run.
Local business leaders, political cadres and banking executives rallied Thursday at the main branch of Henan Yichuan Rural Commercial Bank, just outside the central Chinese city of Luoyang, where they stood one by one before a microphone to pledge their backing for the bank, as smiling employees brandished wads of cash before television cameras to demonstrate just how much cash, literally, the bank had.
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.