Should We Be Nervous About The Stock Market?

November 24, 2019

Stocks just had a down week.  Should we be concerned?

ZeroHedge remarks, “After three weeks of impressive inflows reversing what in 2019 had been the worst outflows from equity mutual funds on record, equities once again saw outflows this week to the tune of $1.5 billion ($4.1 billion out of the US), while bond funds saw $7 billion in inflows as flight to safety returned.

What happened?

More than a month after Trump’s October 11 announcement that a Phase 1 trade deal with China had been reached, and following the realization that this was obviously not the case nor was an imminent deal likely as the newsflow on a US-China trade deal became far less optimistic over the past month, there has been a clear move away from risk assets with bond yields, non-US equities and copper turning down and IG and HY spreads widening. In short, as Deutsche Bank puts it, jitters are again evident across asset classes and below the surface in the S&P 500.

And yet, as has been the case much for the past decade, US equities have been a notable exception to this increasingly bearish pattern, with the S&P 500 continuing to creep higher to reach a new high earlier in the week (largely because as SocGen explained previously, companies continue to engage in unprecedented stock buybacks in an increasingly illiquid market).”

 

VIX Is Retesting Its Low.

VIX tested Short-term resistance at 14.08, but reversed back down to the lower trendline of its 6-month trading range.  Last week’s low remains intact, while most traders remain comfortable with a low VIX.

(Bloomberg) The rally in U.S. stocks may have waned, but equities are still near record highs amid subdued volatility. For some strategists, that may be the perfect time to seek protection.

Macro Risk Advisors suggests a trade that involves selling a put option on the Cboe Volatility Index with a strike of 12, while buying a 20 call and selling a 22 call. Derivatives strategist Maxwell Grinacoff wrote in a note Tuesday that he backtested the strategy, both unconditionally and when VIX was below 13, and found it has performed relatively well since the beginning of 2018.

SPX Had Its First Decline In Seven Weeks.

While the SPX made a new high on Tuesday, it spent the rest of the week beneath that high.  While its did not make a Key Reversal as did the DJIA, the inability to end the week at or near the high is noteworthy.  A decline beneath the Cycle Top and Upper Trendline at 3060.69 may produce an aggressive sell signal.

(WAPO) The U.S. stock market hit record highs this week as a stunning surge of optimism has flooded Wall Street and fears of an imminent recession have all but disappeared.

The market “melt up” is driven by three main factors: belief that the trade war has peaked, belief that there won’t be a U.S. — or global — recession in 2020, and belief that the Federal Reserve has the market’s back. Investors are making a bet that corporate profits will be a bit better next year than this year. They see a future where American consumers keep spending and businesses start investing again as the economy stabilizes and President Trump hits pause on any more tariffs.

NDX Also Declines.

NDX also made its all-time high on Tuesday, then backed off, remaining above Cycle Top support at 8247.08 but beneath its trendline near 8300.00.  While many look upon this weeks action as a breakout, it has all the earmarks of an exhaustion rally.

(CNBC)  Wall Street’s top strategists favor financials and value stocks heading into 2020, jilting the high-flying and expensive growth names that have for months carried the market to record highs.

Of the brokerages tracked by CNBC that have published sector-by-sector forecasts for 2020, all said that they’re overweight the financial sector.

Most liked consumer discretionary stocks as well, but Bank of America, BMO and Credit Suisse all recommended clients steer clear of staples.

 

High Yield Hanging By A Thread.

High Yield Bonds tested an 11-month trendline, remaining above it and Intermediate-term support at 206.65.  A decline beneath that level puts High Yield on a sell signal with the potential consequences of a decline to “Point 6.”

(Forbes) When market conditions are as friendly as they have been for past decade, it is easy to lose sight of growing risks. One that I keep coming back to is the continued deterioration of the fabric of the global bond market. Whether it is foreign yields below zero, mounting government debt in the U.S., or a smokescreen in the high-yield bond corporate bond market, knowing the score can be a retirement-saver.

The latter issue is my latest warning to the complacent investors of the world. You see, things seem just right in the world of lower-rated bonds. They pay monster yields compared to U.S. Treasuries and higher-rated bonds. That has created chase for yield, since so much of the money in that market is run by big institutions and hedge funds. Competition in that field is high, and one of the biggest risks those managers take is to lag this long bull market.

 

Treasury Bonds Repelled At Resistance.

Treasuries rallied to Intermediate-term resistance at 130.22 on Wednesday but fell back, curbing it weekly gains.  It would be worth noting that Treasuries are on a sell signal.  This condition may last through the end of the year, according to the Cycles Model.

(Barrons) As good as the year has been for the stock market, it’s arguably been even better for bonds. That’s the good news for fixed-income securities investors. The bad news is that they face a risk of reversal perhaps as great, if not greater, than equities do. But history suggests that stocks should be able to ride out a backup in the bond market.

The drop in long-term yields has driven bonds’ robust performance. The benchmark 10-year Treasury note’s yield is down to 1.76% from 3.04% 12 months ago, while the 30-year bond’s has fallen to 2.23% from 3.31% over that span. For the long end of the market, that’s translated into strong price gains, as exemplified by the 24.50% total return from the iShares 20+ Year Treasury Bond exchange-traded fund (ticker: TLT) over the past 12 months…

 

The US Dollar Makes Little Progress This Week.

USD challenged Intermediate-term support at 97.94, but managed to rally back to the closing level of the week before.  A close beneath Long-term support at 97.31 confirms a sell signal in the US Dollar.

(CNBC)  The dollar was marginally down on Friday and risk appetite boosted by statements from China on the need to find a solution to the tit-for-tat tariff war with the United States, raising hopes that a “phase one” deal could be reached.

Chinese President Xi Jinping said Beijing wants to work out a deal with Washington and has been trying to avoid a trade war – but is not afraid to retaliate when necessary.

 

The Euro Loses Support Again…

The Euro challenged Intermediate-term resistance at 110.66, but could not stay above it.  The Cycles Model suggests a possible accelerated decline through mid-December.  It may be at risk of meeting the Head & Shoulders target in that time.

(DailyFX)  The Euro may undergo selling pressure in the week ahead if EU-US trade war tensions flare up against the backdrop of deteriorating negotiations between Beijing and Washington. While ECB officials anticipate a prolonged period of slower regional growth, a fallout in cross-Atlantic trade negotiations could put the financial stability of the Eurozone at risk. Key data may also weaken the Euro if it fuels ECB rate cut bets.

 

EuroStoxx Make A Weekly Reversal.

The EuroStoxx ETF appears to have made a weekly Key Reversal.  If so, we may see it decline to the weekly Short-term support at 38.79.  Beneath that is a sell signal for investors.   The Cyclical outlook appears bearish for the next two weeks.

(Bloomberg) The exit from European stock funds has resumed, just a month after the global risk-on mood led to the biggest inflows since early 2018.

European equity funds lost $0.8 billion in the week through Nov. 20, following four weeks of inflows, according to Bank of America Corp. and EPFR Global data. And they weren’t alone, as investors also pulled money from U.S. and Japanese equity funds, with a net total of $1.5 billion leaving stock funds. Bond funds continued to attract new money.

 

The Yen Consolidates Under Short-term Resistance.

While the Yen made its Master Cycle low on November 8, it continues to be hampered by Short-term resistance at 92.30.  The Cycles Model suggests a period of strength may emerge, with the potential of producing a breakout, particularly on Monday and Wednesday.

(YahooFinance) The Dollar/Yen is trading slightly lower on Friday after giving back earlier gains. The two-sided price action suggests there is still just enough uncertainty over U.S.-China trade relations ahead of the weekend to encourage some light safe-haven buying of the Japanese Yen.

We could also be looking at some light position-squaring ahead of today’s U.S. economic reports, which are not likely to have an impact on Fed policy, but will reveal something about the strength of the manufacturing sector and consumer confidence.

 

Nikkei Erodes A Second Week.

The Nikkei Index tested Short-term support at 22559.92 Thursday but bounced back.  Nevertheless, the Nikkei suffered a loss for the week.  Short-term  support may be the line of demarcation for a sell signal.  If so, the Nikkei may see declining prices for the next three weeks.

(EconomicTimesJapanese shares gained on Friday as cautious optimism about the prospect of the United States and China reaching a trade agreement lifted investors’ risk appetite.

The Nikkei index ended up 0.32 per cent at 23,112.88 points as exporters in the IT sector and the industrial equipment sector paced gains.

China wants to work out an initial trade agreement with the United States and has been trying to avoid a trade war, but it is not afraid to retaliate when necessary, President Xi Jinping said on Friday.

 

Gold Has No Energy For A Bounce.

Gold could barely eke out a bounce from its Master Cycle low on November 13.  To make matters worse, it may have another Master Cycle low due in about 2-3 weeks.

(KitcoNews)  This week’s non-action created a new resistance level for gold and it will need to breach it before rallying higher, according to analysts.

The yellow metal was unable to sustainably break the $1,475 an ounce this week, signaling a new resistance line before the $1,500 mark.

 

Crude Makes A 62% retracement.

West Texas Crude appears to have made a 62% retracement of its recent decline on Friday.  If so, this may be the final high of the year for oil.  The Cycles Model is clear that crude is in the midst of a strong phase that is just about to collapse.

(OilPrice) Refineries across the United States have reduced their total crude oil processing so far in 2019, as demand for oil products both in America and abroad has weakened, according to EIA data compiled by Reuters market analyst John Kemp.

Year to date, U.S. refiners’ crude processing has declined for the first time since the 2008-2009 crisis.

Faced with weaker demand at home and weakening demand abroad, and amid a fuel glut in Asia, refiners in the U.S. have processed lower volumes of crude oil so far this year. The cutting of rates has helped refiners avoid a fuel glut domestically, but lower processing rates have built an oversupply in crude, Kemp notes.

 

Crop Prices Pull Back.

Crop prices pulled back to Short-term support at 15.95 where it appears to have found support.  The Cycles Model suggests a brief consolidation before another burst of strength through mid-December.

(ZeroHedgeThe most delayed U.S. corn harvest on record is resulting in chaos for traditional commodity trade routes.

Corn usually is harvested in the midwest, before it is sent south to be exported, according to Bloomberg. But because farmers in the east, hurt by a spring-time deluge, are holding back on supplies in hope of higher prices, the commodity’s price has been pushed higher than the futures market in east – while it remains lower than the futures market in the west. It’s a phenomenon known as “basis arbitrage”.

The result? Corn is now starting to be shipped “over Chicago”: from the west, to supply corn processors, ethanol plants or animal-feed makers in the east. 

 

The Shanghai Composite Is Making New Lows.

The Shanghai Composite fell beneath prior week levels, confirming its sell signal.  The Cycles Model suggests another 2-3 weeks of decline in which the acceleration may get much worse.

(ZeroHedge) In the last 30 days, we’ve noted that China’s credit growth rapidly decelerated to the weakest pace since at least 2017 as a continued collapse in shadow banking, weak corporate demand for credit and seasonal effects all signaled that a massive rebound in China’s economy, nevertheless the global economy, in early 2020 is questionable.

Though investors around the world have bought stocks in preparation for a massive 2016-style rebound in the global economy. We’ve discussed that because of China’s credit impulse has rolled over, the probabilities of a massive rebound in China’s economy or even the rest of the world remains low — though it’s possible the global economy could stabilize, it’s just the idea that a huge rebound is unlikely.

 

The Banking Index Consolidates.

BKX spent the week in consolidation after its Master Cycle high on November 7 and overshooting its Broadening formation trendline.    While most analysts view this action as bullish, the Banking Index is due for a potential Master Cycle low in 2-3 weeks.  Time to exercise due care.

(ZeroHedgeYield-starved banks expanded lending to “relatively high-risk businesses” and to the property sector, as the Bundesbank considers house prices in many cities overvalued by 15% to 30%.

The “risks to financial stability have continued to build up in Germany,” the Bundesbank warns in its Financial Stability Report, published this week. One major risk highlighted by the central bank is that Germany’s current economic slowdown — the result largely of “unfavourable external economic developments” — could turn into an “unexpected economic downturn”.

The country’s export-led economy has barely grown in the last five quarters as global trade has slowed. If the situation gets much worse, it could trigger a “deterioration in the debt sustainability of enterprises and households,” which in turn could lead to cascading loan defaults and credit write-downs.

(ZeroHedge) There’s been talk that the Federal Reserve will slam interest rates to zero or even negative when the next recession strikes. President Trump’s support for negative interest rates has quickly increased in the last several months as the latest tracking estimates for Q4 GDP have tumbled to sub 0.4%.

It seems that policy rates in the US are too high — and will likely conform to the rest of the world, which is near zero to negative territory. This has undoubtedly alarmed UBS CEO Sergio Ermotti, who said banks have “no choice” but to pass on the negative rate pain to customers.

Ermotti said UBS “will not pass negative rates to smaller clients, the personal banking clients,” that’s because if UBS and other EU banks actually passed along negative rates to poor and middle-class families — that would quickly spark unwanted social unrest that could crash the entire system.

“Right now, the threshold is very high still,” Ermotti said. “It’s difficult to make a prediction right now, but we are quite convinced it’s not going to go down to smaller investors.”

(MarketWatch) The liquidity problems in U.S. money markets that pushed up short term interest rates in September may recur at the end of this year, despite the Federal Reserve’s move to begin regular auctions to inject cash into the banking system, according to J.P. Morgan.

The liquidity coverage requirements imposed on “too big to fail” banks, introduced by the Basle III banking rules after the 2008 financial crisis, and managed by the Federal Reserve and other banking regulators in the U.S., are likely to force lenders to curb how much they are willing to lend to cash-starved market participants in short-term funding markets, according to J.P. Morgan analyst Joshua Younger in a Friday note to clients.

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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