Countdown To Armageddon

November 8, 2019

VIX’s Slingshot Move Is Fully Extended.

VIX touched its consolidation trendline at 12.00 on Friday.  The consolidation may be over by November 13, options expiration day for VIX and a potential Master Cycle low.  This may cause a very powerful Slingshot Move that could carry the VIX back to its January 2018 high or beyond.  The fuel for this move is the very crowded short volatility trade which has hit an historic record.  The market objective is to prove the most investors wrong and the worst possible time.

SPX Is in Throw-over Mode.

SPX is now in blow-off mode.  Most investors look at this as a breakout, but if this is the final probe of Wave (5) of [5] of c, it may be a fake-out of the worst kind.  As we go into options week, Wall Street has trained its clients to buy calls and sell puts which work wonderfully until something breaks.  Good luck calling the top.

(NorthmanTrader)  New highs every day or so now. Investors are chasing the new highs, the president celebrates on twitter almost every day. Things are great. Melt-up talk is the rage.

Hate to be the seemingly lone voice of caution here, but something smells. Look, I get narratives are changing all the time to suit the price action of the day, but I distinctly remember how no weakening data has mattered this year as people kept citing how strong the consumer remains despite all the trade war uncertainties and the manufacturing recession.

And even just during the recent rate cut meeting in October Jerome Powell insisted that the U.S. consumer continues to stay strong and that the economy is in a good place. Seems a bit optimistic with a mere 0.73% Q4 GDP growth downward projecting coming out today by the New York Fed Nowcast. But hey.

NDX Surges Over Its Cycle Top.

NDX surged above its Cycle Top at 8203.95.  For those who think its a good thing, think again.

(ZeroHedgeA notable convergence emerged in recent months: as 10Y yields – which had declined for much of the past year – spiked in early September as the market’s recessionary thesis was first challenged, so did “value” and “most shorted” stocks, while former institutional favorites, growth and momentum stocks, tumbled alongside bond prices.

As a reminder, the first such notable reversal higher in 10Y Yields in 2019, which took place at the start of September, was also the main catalyst behind the infamous quant crash, which saw market-neutral momentum and defensive factors tumble the most since the infamous August 2007 quant unwind, while value, cyclical and “most shorted” stocks soared as CTAs and other position-based investors suffered a violent reversal.


High Yield Bonds Making Lower Highs.

High Yield Bonds appear to be in a rally targeting the Cycle Top at 217.75.  However, time may be running out for a final blow-off.

(CIO) Looking for impending trouble in the economy? There’s a new worry: Junk bonds, which suffer the most in a recession, are looking at a surge in credit-rating downgrades vs. upgrades.

According to Moody’s Analytics, the ratio of high-yield downgrades to upgrades has doubled—to 2.38:1 for January-September 2019, from 1.09:1 for calendar 2018. A revenue fall is to blame.

“A pronounced slowing by business sales, both with and excluding energy products, helps to the explain the marked excess of high-yield downgrades over upgrades after omitting primarily event-driven rating changes,” wrote John Lonski, the organization’s chief economist.

10-Year Treasuries On A Sell Signal?

UST has declined beneath all underpinnings but Long-term support at 126.63.  Note that UST has declined beneath its September 13 low.  While not recognized by the media, Treasury notes and bonds may be on a sell signal.  The completed formation may be a Slingshot Move with an ultimate target near 100.00.

(CNBC) The bond market has officially switched off its recession alarm and is pointing to the potential for stronger growth.

Since the summer, when fear of a global economic meltdown gripped the bond market, conditions in the Treasury market and economy have changed. So has the outlook for U.S.-China trade talks, and as a result bond yields, which move opposite price, are rising.

The Euro Resumes Its Tumble To The Trendline.

The Euro tumbled after tangling with Long-term resistance at 111.97.   Weakness may continue through mid-December, according to the Cycles Model.  The Head & Shoulders target may be in view.

(YahooFinanceThe Euro has broken down rather significantly during the week, forming a “four high with lower close” pattern. This is an extraordinarily bearish pattern, and therefore it looks as if the Euro has further to fall. The 1.10 level underneath will cause a certain amount of support obviously, as it is a large, round, psychologically significant figure. However, it’s very unlikely that it holds for a significant amount of time. The easiest way to trade this market is to probably look for short-term rallies that you can sell. That being said, if you simply want to trade the longer-term charts a “sullen hold” situation continues.

EuroStoxx Continue To Rally.

European Stocks continue to rally on a wash of new global liquidity which may peak in the next week or so.  While European stocks have outperformed US stocks this year, the Broadening Formation suggest this may end badly.  Normally we may expect to see European Stocks to rise to the Cycle Top line at 41.31.  However, caution is advised.

(BloombergAfter sending European stocks surging to multi-year highs on trade optimism, investors may hit the brakes on the rally, according to Morgan Stanley.

Optimism about a U.S.-China trade deal and receding risks of no-deal Brexit have boosted shares in recent weeks, with the Stoxx Europe 600 Index now less than 2% away from a record high reached in 2015.

Yen Weakness Continues.

The Yen continues to show weakness that may last for another week or so.  The target of this weakness appears to be mid-Cycle support at 90.86.

(DailyFXAfter years of extraordinary monetary stimulus is the Bank of Japan tacitly admitting that the game is up?

Governor Haruhiko Kuroda said Tuesday that the ultra-low interest environment makes any fiscal stimulus in which Tokyo might intend to indulge far more powerful and that a mix of the fiscal and the monetary might be far more powerful than just one or the other.

Taken alone this is an innocuous and perhaps even obvious remark.

But then we come to the context. All 576 trillion Yen’s worth of it (US$5.3 trillion). For that is the staggering, GDP-topping amount to which the BoJ has expanded its balance sheet in its attempt to stimulate domestic pricing power.

The Nikkei Index rally may be close to completion.

The Nikkei Index appears to be on course to hit its Cycle Top resistance at 23816.03 in the next week.  Weekly Cycle Tops are where most Primary Trends appear to end.

(Bloomberg) The yen has been the worst-performing major currency in the past month as optimism over U.S.-China trade talks and Brexit sapped demand for havens. Another reason it is declining is more curious: increased trading of Japanese stocks by overseas investors.

The dynamics work like this: foreign funds have boosted trading of Japanese shares but they are unwilling to take on currency risk at the same time. For that reason they choose to hedge purchases for foreign-exchange movements, which typically involve selling yen via forward contracts that roll over periodically. As stock prices rise, they have to increase hedging, putting additional pressures on the currency.

Is Gold Having A Wipeout?

The surge of liquidity in the markets appear to be favoring stocks and not gold.  This may be an early sign that liquidity is getting harder to find and gold may be an early indicator of its disappearance.  On the other hand, a Triangle Formation ma be an indication of a final move higher, possibly to 1600.00.  Should gold continue its decline, the Triangle will appear bearish.

(Bloomberg)  As investors fretted for most of the year that the trade war and slowing growth would end in a global recession, assets like gold and sovereign bonds provided protection. That ended spectacularly Thursday.

Gold lost as much as $30 an ounce, Treasuries tumbled the most since summer and defensive equities sank. While continued signs of a detente in the U.S.-China trade war sparked the day moves, such a beat-down has been months in the making as peak pessimism on global and U.S. growth has ebbed.

Crude Oil Challenges Long-term Resistance.

West Texas Crude rallied to challenge Long-term resistance at 57.09 on Thursday, which may have been a late Master Cycle high.   Should that assessment be correct, we may see the trendline of the Broadening Wedge broken for the final time.  The consequences may be the target may be reached in the next 30 days.

(OilPrice) OPEC’s crude oil production jumped by 1.26 million barrels per day from a decade-low in September to 29.71 million bpd in October, as Saudi Arabia restored its production to levels before the attacks on its oil facilities in mid-September, the monthly S&P Global Platts survey showed on Friday.

Saudi Arabia’s oil production jumped by 1.35 million bpd to 9.8 million bpd in October, as it appears to have fully recovered output after the September 14 attacks on vital oil infrastructure that took 5.7 million bpd—or 5 percent of global daily supply—offline.

Despite the production recovery, the Saudis continue to overcomply with the OPEC+ deal by more than 500,000 bpd, according to Platts estimates.

Crop Prices Consolidate Under Long-term Resistance.

Crop prices stabilized a bit under Long-term resistance at 16.23.  The Cycles Model suggests that strength may resume later this week and run strong through the rest of November.

(Agriculture) With a return to normal weather, farmers will expand vastly their corn and soybean plantings next year — enough to produce their largest corn crop ever and the fourth-largest soybean crop, according to USDA’s agricultural projections. Bumper crops will drive down market prices in the near term and create huge stockpiles that will take years to whittle down.

Meanwhile, economic growth will slow in the U.S. to less than 2% annually, constraining domestic demand for food and fiber, said the projections released on Friday. Growth would slow as well in Japan, rise in Canada, Mexico, and South Korea and hold steady in the EU. Canada, Mexico, the EU, Japan, and South Korea, in that order, are the top customers for U.S. farm exports.

Shanghai Composite Repelled Again at Mid-Cycle Resistance.

The Shanghai Composite declined after being repelled at mid-Cycle resistance at 2998.99 and closed beneath Short-term support at 2973.17.  The space between the mid-Cycle resistance and Long-term support is narrowing and may be due for a breakdown with a new low by mid-December.

(ZeroHedge) The bizarre disconnect at the heart of China’s market pricing engine is getting bigger with every passing month.

Whereas in the 2009-2015 period, China’s consumer and producer (or wholesale) prices tended to track each other largely tick for tick, sometime in the beginning of 2016, roughly when global leaders decided at the Shanghai Accord to reflate the global economy by unleashing a massive Chinese credit impulse…

… China’s PPI soared higher, which in turn allowed China to rapidly export inflation across the globe, prompting central banks to confuse China’s latest credit reflation blast with a coordinated global recovery and tighten financial conditions, something which at the end of 2018 they promptly realized was a mistake after global markets tumbled, resulting in the latest global wave of coordinated central bank easing.

The Banking Index “Throws Over” Its Broadening Formation.

The Banking Index threw over its Broadening Formation trendline either as a continuation of the rally to the Cycle Top at 115.88 or a brief fakeout to pull the unwary into its “breakout.”  Broadening Formations are emotional wrecks as they shake out the bulls with new lows only to crush the bears with new, expanding highs.  They are highly unpredictable until they turn deadly when the bottom finally falls out.

(ZeroHedge) The equity-ification of the bond market has been closely followed by Bloomberg News and other financial journalists. Unfortunately for the big banks, it’s a trend that has largely been led by fintech firms like TradeWeb and Bloomberg. Many corporate bonds from investment grade to deep in speculative territory can be found trading on-the-run on both platforms.

This trend virtually guarantees that, even as trading volume increases (thanks to the growing prevalence of HFT “market makers”) banks’ trading revenue will likely continue to decline, though in its early years in the pre-crisis days some believed the pullback in bank trading revenue might be temporary.

Trading revenue has been sliding since the financial crisis. According to BBG data, trading revenues at the largest banks have fallen for six out of the past seven quarters to their lowest levels in decades, with 2019 expected to set a new low.

(ZeroHedge) A record number of CEOs left their positions in October, a corporate outplacement firm reported Wednesday, the most in one month since the 2008 recession.

The news from Challenger, Gray & Christmas raised eyebrows—and concerns over a possible incoming recession—Wednesday evening at progressive news co-op The District Sentinel‘s radio show.

“Maybe this means nothing, maybe this is a coincidence,”said show co-host Sam Sacks.

“Or maybe rich people can see the writing on the wall and are cashing out right now.”

All the best!

Tony Cherniawski

 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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