It’s Not Over Until It’s Over


April 3, 2020

VIX closed at its weekly low on Friday, but has not completed an inverted Cycle Wave c of Super Cycle Wave (IV).  It may exceed the October 2008 intra-day high of 89.53 before this Cycle is over.  What’s left of the short volatility trade may be annihilated in this next move.  At the same time, the final probe higher may be so fast as to trap late-coming longs to the VIX trade.

(Bloomberg) Investors are using the stock rally to reset hedges rather than chase upside, signaling little conviction in the rebound, according to Credit Suisse Group AG.

The S&P 500 Index is up 17% from its March 23 close, after gaining in four of the last five days. But it’s been a turbulent time for stocks — and indeed, all asset classes — as market gurus and economists struggle to assess the impact of the global coronavirus pandemic. The Cboe Volatility Index, or VIX, ended at 57.08 on Monday and hasn’t closed below 40 since March 5. Compare that with its lifetime average of about 19.2.

But it’s skew, a measure of how expensive bearish options are compared with bullish ones, that has the attention of Credit Suisse equity-derivatives strategist Mandy Xu.

SPX Closes Beneath the 8.5-year trendline

SPX made a second attempt at closing above the 8.5-year trendline at 2600.00, but failed, leaving a loss of over 2% for the week.  Having surpassed its “Point 6” target and Head & Shoulders target, it is likely also to surpass the Orthodox Broadening Top target as well.  The Cycles Model suggests Cycle Wave III may be very fast and deep.  Meanwhile, the media is hopeful the worst is over.

(Bloomberg) The best day for at least one U.S. stock gauge since the Great Depression has strategists mulling the chance of further gains.

American shares haven’t enjoyed a two-day rally since Feb. 12, and the last three surges of more than 5% in the S&P 500 Index were immediately followed by equivalent losses. But with a record surge of stocks trading on an uptick at Tuesday’s open and activity heavily skewed toward winners, Sundial Capital Research Inc. is hopeful this time could be different.

NDX Still Holds Above Trendline Support

NDX bounced off its 8.5-year trendline at 6750.00 and closed above weekly mid-Cycle Support at 7506.56.  The technical indicators are more supportive of the NDX than the blue chips.  However, should these supports be broken, the decline may  be much worse than the SPX.  The Orthodox Broadening Top remains intact.

(Bloomberg) Randall Dishmon knew the bear case: that so much money had flowed to megacap tech during the Nasdaq’s mammoth run that when the rout came, those stocks would be at the epicenter. He ignored it, a decision that has been working for his Invesco Advisers clients.

“I’ve heard ‘bubble’ used to describe it — that’s laughably incorrect. I’ve heard ‘popular momentum trade’ — laughably incorrect,” says Dishmon, who oversees two portfolios, including the Invesco Oppenheimer Global Focus fund. “People look at tech and they see what they think are high valuations, but they don’t fully understand what’s going on structurally.”

The High Yield Index completes a bounce.

Having exceeded both Point 6 and the Orthodox Broadening Top target, the Dow Jones High Yield Index has completed a 2-week bounce.  Unfortunately, another decline of similar proportions awaits the Index.  A 50% decline from here would not be out of the question.

(Bloomberg) The worst is likely yet to come for high-yield bonds as more defaults loom, according to Goldman Sachs Group Inc.

Such debt faces numerous headwinds, analyst Lotfi Karoui wrote in a note dated April 1. That’s even as the Federal Reserve’s unprecedented steps to pump liquidity into a financial system reeling from the coronavirus pandemic mean investment-grade bond spreads have likely already peaked, according to Karoui.

“Despite the strength of the policy support, the cyclical challenges for corporate borrowers remain substantial,” he said. “As has been the case in past downturns, financial distress will continue to increase, leading to higher defaults and downgrades.”

Treasuries May See A Top Soon (If Not Already).

Treasuries spent the past two weeks rallying off the Cycle Top support.  It is likely that the rally may continue this week to a new all-time high that may be due in the next week.  A likely target appears to be near 142.00, where Wave [C] is equal to Wave [A].

(CNBC) Long-maturity Treasury yields fell slightly on Friday after March jobs report showed a surge in layoffs, giving a hint at the economic damage caused by the coronavirus crisis.

The yield on the benchmark 10-year Treasury note fell 3 basis points to 0.59% while the yield on the 30-year Treasury bond was also lower at 1.23%. Bond yields move inversely to prices. The 10-year yield has fallen 12 basis points this week.

The Labor Department said Friday U.S. payrolls fell by 701,000 in March, marking the first decline in jobs since September 2010. Economists surveyed by Dow Jones had been looking for a payroll decline of 10,000.

USD Rallies Beneath The Cycle Top Resistance.

USD bounced off its cluster of supports at 98.10 and rallied to its weekly Cycle Top at 101.08, closing beneath it.  The Cycles Model suggests a further decline beneath the Head & Shoulders neckline at 94.61 in the next few weeks.

(DailyFXUS Dollar price action has been animated by a single theme in recent weeks. A rapid contraction in global economic growth amid nearly worldwide lockdown to contain the Covid-19 outbreak has echoed in a rush for cash as capital flees comparatively riskier cyclical assets in search of safety and liquidity.

The indisputably dominant reserve currency has understandably thrived against this backdrop, paying no mind to exuberant Fed monetary stimulus that might have otherwise sent it reeling. The week is likely to remain consumed with the same narrative as the pandemic continues to burn hot.


The tone for what’s to come may well depend on whether the Fed’s new FIMA repo facility is well-received when it opens for business Monday. It allows foreign central banks to temporarily flip their holdings of US Treasuries into cash, creating a vast stop-gap liquidity supply to keep credit markets lubricated.

Nikkei Deflected By Cycle Bottom Resistance.

The Nikkei rally was stopped at the Weekly Cycle Bottom resistance at 19309.95, completing “Point 7” of the Orthodox Broadening Top formation.  A decline beneath the lower Broadening trendline triggers the final move to “Point 8,” the formation target.  This may happen in the next 2-3 weeks, according to the Cycles Model.

(MarketWatch)  TOKYO — Asian shares were mixed on Wednesday, on continuing worries about the economic fallout from the pandemic as reports of coronavirus cases keep surging in various regions.

Japan’s benchmark Nikkei 225 NIK, +0.00% fell 4.%. Australia’s S&P/ASX 200 XJO, -1.68% added 3.4%, while South Korea’s Kospi 180721, +0.03% fell 3.4%. Hong Kong’s Hang Seng HSI, -0.18% lost 2.2%, while the Shanghai Composite SHCOMP, -0.59% slipped 0.1%. Singapore’s STI, -2.59% benchmark index fell, while stocks were up in Taiwan Y9999, -0.45% and Indonesia JAKIDX, +2.02% .

Adding to the damage was the Bank of Japan’s quarterly survey of business sentiment called “tankan,” which highlighted the gloom over a likely recession. The world’s third largest economy had already been lagging for months when the outbreak began taking its toll earlier this year.

The Yen Rallies Above Mid-Cycle Support.

The Yen rallied above mid-Cycle support at 91.33 on its way to making a new high.  The Cycles Model allows another 2-3 weeks of strength, with a likely new high above 100.00.  Its intended target may be the upper trendline of an Orthodox Broadening Top formation.

(TheConversation) Fear is contagious – not least in financial markets. When it turns to panic, it spreads fast in today’s interconnected and technologically advanced trading world. Assets that are associated with some kind of risk fall in value – witness the plunges of 25% that we have seen in global stock markets since coronavirus fears took hold.

When panic moves across the world like this, there are only a few places to take shelter. These are referred to as “safe havens”. Because traders and investors know to seek refuge in these places, they can quickly become very crowded. The increased demand therefore often sends their values soaring.

The list of safe-haven assets is short and tends to include precious metals, bonds issued by countries seen as least likely to default, and the currencies in which those bonds are denominated.

EuroStoxx Completes A Bounce.

The EuroStoxx Spider ETF appears to have complete its corrective bounce.  The Cycles Model calls for another probe lower in a possible panic decline to finish Cycle Wave c.  This may be accomplished in the next three weeks.

(Reuters) – European shares ended down on Friday, closing the week lower as dismal business activity data heralded a deep economic and earnings recession due to the novel coronavirus outbreak.

The pan-European STOXX 600 index closed 1% in the red, with insurers .SXIP dragging the most after a European Union regulator asked them to suspend dividends and share buybacks to shore up liquidity.

The index fell about 0.6% for the week. Still, it appeared to have gained a measure of stability after sharp daily movements over the past month.

The Euro resumes its decline.

Normally a country’s currency rises when its stocks decline.  However, the Euro is in decline along with its stock indices.  That is primarily due to investors migrating out of stocks to the US Dollar and now the Japanese Yen.  There is a distrust of the European Union becoming more socialist with the risk of nationalizing large blocks of the economy.  The lurch toward the digital Euro is causing investors to flee the Eurozone.

(Forbes) Earlier this week, the Banque de France launched an experimental program to test the integration of digital euro in settlement procedures—designed to measure both the potential of decentralized technologies and broader uses of central bank digital currencies.

“A host of market infrastructure projects are underway, especially in Europe, aimed at helping financial markets to function more effectively and more smoothly,” the Banque de France wrote in a statement laying out its digital euro testing plans late last month and inviting qualified institutions within the European Union to sign up by a mid-May deadline with a proposal that covers one of the use cases it outlined.

The Shanghai Index Completes Its Bounce.

The Shanghai Index appears to be resisted by the daily Cycle Bottom near 2800.00.  A decline beneath the weekly Cycle Bottom near 2500.00 may cause a panic decline.  The Cycles Model calls for another 2-3 week decline.

(CNBC) Stocks in Asia Pacific were mixed on Thursday as global markets continue their rocky start to the second quarter.

Mainland Chinese stocks recovered from earlier losses to jump on the day, with the Shanghai composite up 1.69% to about 2,780.64 while the Shenzhen composite advanced 2.258% to around 1,697.55. Hong Kong’s Hang Seng index was 0.69% higher, as of its final hour of trading, though shares of HSBC were down 2.25%.

Gold Is Unable To Reach New Highs.

Despite wide daily swings, gold has not been able to rally above its March 9 high at 1704.30.  This may cause a serious problem since this rally may count as a correction against a 19% decline.  Should the decline resume, a Head & Shoulders formation awaits with a targeted outcome.

(Bloomberg) Jeffrey Gundlach has a warning for investors piling into gold-backed ETFs: Don’t think you’ll get the physical metal back.

State Street Corp.’s $50 billion SPDR Gold Shares ETF, ticker GLD, attracted $2.9 billion of inflows last week, its biggest haul since 2009, as haven demand amid escalating coronavirus fears boosted the metal. Meanwhile, assets in gold ETFs climbed to a record on Tuesday, according to data compiled by Bloomberg.

The demand for such ETFs is flashing a warning sign for DoubleLine Capital’s chief investment officer, who cautioned against the products during a webcast Tuesday. While ETFs such as GLD are backed by physical gold, the process for an individual investor to acquire the actual bullion isn’t as simple as selling shares of the ETF. “Paper gold” ETFs are little more than speculative vehicles, Gundlach said, and buyers should be aware that holding shares doesn’t amount to having gold bars.

Crude Oil Has A Terrific Bounce.

West Texas Crude Oil made a terrific bounce last week, based on a scheduled meeting for Monday that was postponed over the weekend.  Although the meeting was rescheduled for April 9, irreconcilable differences  have arisen that may push any meeting further into the future.  Meanwhile lack of storage space may force producers to shutter their operations.

(Bloomberg) The survivors of oil’s last crash were the lowest-cost producers. But the crisis engulfing the industry now is so fast, the same rules don’t apply.

From the shale patch of Texas and the oil sands of Canada to the plains of Siberia, production of at least one in every 10 barrels around the world is likely to be shuttered as demand is shredded by the coronavirus pandemic. Cost won’t be the ultimate arbiter for producers this time, because as the International Energy Agency says, “there could soon be no place for their oil to go.”

Every imaginable space — from tanks and pipelines to rail cars — is filling to the brim. It’s a key reason that pressure is building for an output cut by OPEC and other producers at their meeting next week, though even the 10 million barrels a day of curbs that’s been touted may not be enough. Only those who can find a place to shelter their unwanted crude are likely to remain standing.

Crop Prices Are Going Lower.

Invesco’s Agriculture DB Fund closed on a new low last week.  The Cycles Model suggests another possible two weeks of decline.  A possible Fibonacci target of 12.50 awaits at the bottom.

(AgWeb) Whether you produce corn, cows, wheat or hogs, you are facing dropping markets. Here’s a rundown of the weekly price movement for the week ending April 3:

  • July corn was down 15¢
  • July beans down 26¢
  • Kansas City wheat down 14.5¢
  • Minneapolis wheat down nearly 13¢
  • Chicago wheat down nearly 22¢
  • April Feeder Cattle: $13 a hundred weight
  • April Hogs are down $18 a hundred weight

The only thing positive market this week was energy. Crude oil was up $6 a barrel and unleaded gas was up slightly. Check the latest market prices in AgWeb’s Commodity Markets Center.

“There are big challenges out there,” says Jerry Gulke, president of the Gulke Group. “When there’s too much of everything or the demand isn’t sufficient, the market will take prices to market-clearing levels, where you find a home for the excess supply or you don’t produce any more.”

The Fed’s Money Isn’t Helping.

The Banking Index made a lower retracement high this week and ended the week with nearly an 11% loss, despite the Fed’s pumping the economy with liquidity in the form of new loans.  Most individuals and corporations are saturated with loan obligations and cannot take on any more.  The only entities that are blissfully ignorant of this are the US government and many state governments.

Individuals, banks and corporations are hoarding cash, driving the Velocity of Money into the tank.  Banks don’t even trust one another to lend, much less their customers.  Now foreign central banks are coming to the Fed for relief.

(Bloomberg) Foreign official holdings of Treasuries stashed at the Federal Reserve fell $109 billion in March, the largest monthly drop on record, as international governments and central banks struggled with the economic fallout from the new coronavirus.

The decline showed up in the Fed’s weekly custody data, with the latest figure released Thursday showing a $24 billion drop in the week to April 1.

The sales amid the past month’s pandemic-fueled turmoil are a further signal of the global rush to raise U.S. dollars as the Fed’s recently expanded dollar swap lines are accessible to only 14 central banks. Countries reliant on oil exports and smaller Asian economies have been selling U.S. debt, according to traders and market makers familiar with the transactions, and central banks have been primarily offloading older, less-liquid Treasuries.


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