Markets Are Stalled. Where Next?

April 24, 2020

VIX Makes a 4th Wave Retracement.

VIX has retraced 67.6% of Wave [3], with a probable completion of an extended Master Cycle low.  The extension has gone to its natural limit, giving a strong likelihood that the decline may be over.  However, there may be a final show of weakness early next week, challenging Intermediate-term support at 32.49.

(Bloomberg) U.S. stocks are likely to see new lows if VIX patterns from yesteryear hold sway, according to Bank of America Corp.

The current bear-market rally most closely resembles what occurred in 2008, and suggests there’s limited further upside before a turn that drags the S&P 500 to fresh lows, strategists led by Benjamin Bowler wrote in a note Tuesday. They drew that conclusion by measuring from the peak of volatility in the three most recent major sell-offs and comparing those with the present one.


SPX Stalls.

SPX challenged the Head & Shoulders neckline at 2855.04 and mid-Cycle resistance at 2861.53 before pulling back.  It closed the week at a loss, despite a strong comeback on Friday.  This dual resistance may prove to be its undoing, as last week’s Master Cycle high still remains.

(MarketWatch) U.S stock indexes closed higher on Friday but logged weekly losses as investors digested economic data, mixed corporate results, and the latest economic aid package from Congress to combat the COVID-19 pandemic.

How did benchmarks perform?

The Dow Jones Industrial Average DJIA, +1.10% ended up 260.01 points, or 1.1%, to 23,775.27. The S&P 500 index SPX, +1.39% added 38.94 points, or 1.4%, to close at 2,836.74, while the Nasdaq Composite Index COMP, +1.64% gained 139.77 points, or 1.7%, to finish at 8,634.52.

For the week, the Dow fell 1.9%, the S&P 500 declined 1.3% and the Nasdaq retreated 0.2%. The declines were the first losing week for the benchmarks of the past three weeks.

Meanwhile, the embattled small-cap Russell 2000 indexRUT, +1.56% finished 1.6% higher on the session and booked a 0.3% weekly gain.


Trendline Resistance Holds The NDX Down.

NDX attempted again to test the Christmas 2018 trendline at 8850.00 with no success, resulting in a minor loss for the week.  Thus far, the rally retraced 71% of the March decline.  Should a reversal occur, the NDX may retest the March 23 low at 6771.91.  A decline beneath it may be catastrophic.

(YahooFinance)  Wall Street observers hoped last week’s gains signaled the arrival of blue skies, but the COVID-19 storm is thundering on. Stocks started the week on the back foot as U.S. crude futures landed in the red for the first time in history. The lockdowns across the world have done away with the demand for crude, causing oil supply to surge.

Against this backdrop, investment firm Goldman Sachs is taking stock of the names in its coverage universe, noting that COVID-19-induced social distancing measures have taken a “severe” toll on some of its companies’ end markets. Additionally, the firm argues that the impact on profits could last longer than previously expected.

High Yield Bonds May Have Reversed.

High yield bonds made a lower low and a lower high, closing beneath last Week’s final tick.  In addition this week’s close is beneath the Cycle Bottom resistance at 171.84, changing the outlook from positive to negative.

(BloombergNetflix Inc. pulled in record subscribers after people hunkered down at home amid the virus pandemic. It’s also pulled in record-low yields for its bonds.

Investors clamored for Netflix’s latest $1 billion offering of dollar-denominated and euro bonds, after the streaming service emerged as a beneficiary of the unprecedented health crisis keeping people at home.

Demand was so strong, with orders at about ten times the offering size, that Netflix was able to reduce yields on both portions on Thursday from earlier discussions, according to people familiar with the matter. It sold $500 million of bonds at a 3.625% yield, among the lowest ever seen in the U.S. high-yield bond market and in line with prices typically offered on investment-grade bonds. The 470 million euro ($507 million) portion priced at 3%.


Treasuries Make A Lower High.

The 10-year Treasury Note made a lower high at 139.18 on April 18, which also coincided with its Master Cycle high.    The previous high at 19.33 is the all-time record and has not been exceeded.  This appears to be the end of the line for Treasury bonds.

(Morningstar)  Would you exchange $100,000 for a promise to receive $143,371 in April 2050? The question is rhetorical: Your answer is “No.” No matter how reputable the counterparty, 30 years is a very long time to wait, and a 43% cumulative gain is a meager return for your very large expenditure of patience.

Such is the deal presented by 30-year Treasury bonds, which yielded 1.18% at the time of writing. If one were required to hold such bonds until their maturity dates, the Treasury Department’s offer would be firmly rejected. Few, if any, would accept a nominal return of slightly more than 1% in exchange for accepting the risk that inflation would not be entirely dormant throughout the next 30 years.

The upshot: Today’s investors are buying long bonds with the thought of trading them later. They are not planning on a specific date; on the contrary, they probably intend to hold those bonds indefinitely, as a proportion of their strategic asset allocation. But the possibility of exit is in the back of their minds. Otherwise, they wouldn’t have agreed to the transaction.


The Nikkei Weakens.

The Nikkei made its retracement high at 19922.07 on April 17.  This week didn’t fare as well although it closed above its Cycle Bottom at 19150.69.  Should it decline further, the Nikkei would be on a sell signal.  The next Master Cycle low is targeted for early June.

(InvestingCubeThe Nikkei 225 index declined by more than 0.80% as investors reacted to news that remdesivir had failed in clinical trials. The drug, developed by Gilead Sciences was hailed last week for its ability to cure the coronavirus. Investors also reacted to news that Donald Trump was thinking of extending the social-distancing measures. Other Asian indices like China A50 and Hong Kong’s Hang Seng declined by more than 50 basis points.


The Yen Consolidates.

The Yen consolidated in place this week, having kept above critical support.

(SeekingAlpha)   Summary

The Japanese yen has been quiet in the current market turmoil, especially compared to the other safe-haven assets like US treasury bonds.

However, JPY has solid and consistent track records during the previous crises, and historical study strongly argues for a 20% upside potential for JPY in the coming months.

With JPY vol rising from depressed levels, it is a hard-to-find and inexpensive portfolio hedge to go long JPY call, which costs only 2.2% with a potential payoff of 21%.


European Stocks Weaken.

The EuroStoxx SPDR rallied to the Cycle Bottom resistance at 30.76, but could not overcome it, making a lower high.  A decline beneath this week’s low creates a probable sell signal.

(CNBC)  European stocks closed lower on Friday as traders monitored fresh economic data and digested a report that raised doubts over a possible coronavirus treatment.

The pan-European Stoxx 600 provisionally closed down more than 1%, with most sectors and major bourses in negative territory. Travel and leisure shares were the worst performers, down over 3%.


The Euro Consolidates Above The Neckline.

The Euro consolidated between the neckline and overhead resistance this week as it tests the three-year Head & Shoulders neckline.  A further decline beneath it may cause a panic collapse of confidence in the Euro.

(Bloomberg)  The European Central Bank will accept some junk-rated debt as collateral for its loans to banks in a move that aims to shield the euro area’s most vulnerable economies as they face the risk of credit downgrades in the coronavirus pandemic.

The ECB will accept bonds as long as they had at least the lowest investment grade on April 7, it said after policy makers held a call on Wednesday evening. The decision to ignore future cuts comes two days before a possible reduction for Italy by S&P Global Ratings.


The Shanghai Index Is Deflected At Short-term Resistance.

The Shanghai Composite Index was deflected at Short-term resistance at 2836.41, making a lower high.  A further decline beneath last week’s low at 2774.00 creates a potential sell signal.

(EconomicTimes)  Chinese stocks ended weaker on Thursday, as mounting economic uncertainty sparked by the coronavirus pandemic kept share prices under pressure, stopping investors from chasing the rebound from the previous session.

The Shanghai Composite index closed 0.2 per cent lower at 2,838.50.

The blue-chip CSI300 index ended down 0.3 per cent, with its financial sector sub-index down 0.3 per cent, the consumer staples sector up 0.3 per cent, the real estate index and healthcare shares flat.

Gold Consolidates Beneath Its Cycle High.

Gold consolidated, not making a new high.  The Cycles Model suggests a decline may develop over the next 4 weeks.  A sell signal may be given with a decline beneath the Cycle Top at 1656.05.

(KitcoNews)  Gold prices are set for a correction in the coming months due to the re-emergence of risk-on sentiment, this according to Florian Grummes of Midas Consulting.

In a recent article published on Seeking Alpha, Grummes said that gold’s recent uptrend could see a trend reversal soon.

“In the coming weeks…a rudimentary normalization after ‘Corona’ is expected. The easing rally in the stock market in the so-called ‘risk on’ mode could initially continue,” he said. “During such phases, gold is not needed and will most likely come under considerable pressure.”

Grummes noted that this would still only be a temporary correction for gold on its way to all-time highs.


Crude Bounces From The Abyss.

Crude Oil bounced back from the Monday Master Cycle low at 6.50.  This chart shows the June contract.  The May contract expired on April 17 with delivery on Tuesday.  No one wanted it due to lack of storage space.

(RealInvestmentAdviceThe oil price crash was inevitable. 

To understand why we have to review a bit of history.

In 2013, I began warning of the risk to oil prices due to the ongoing imbalances between global supply and demand. Those warnings fell on deaf ears.

Nobody wanted to pay much attention to the fundamentals at a time when near-zero interest rates were pushing banks, hedge funds, and private equity firms, to chase the “yield” in the energy space. Naturally, with money flooding into the system, companies were forced to drill economically unproductive wells to meet investor demands, which drove supplies higher.


Food Prices Hit a New Low.

Food prices hit an all-time low on Tuesday at 6.50 in the Agriculture Fund.  The lockdown caused a major stoppage in the markets causing crops and food products to be destroyed.  This may be the final low with food prices starting to rise due to the bottlenecks caused by the lockdown.

(ZeroHedge) Alarming reports from Reuters indicate food bank networks are quickly running out of staple goods as 26 million people in five weeks are out of work, broke and hungry, as an economic depression could result in social decay.

There’s nothing complicated about our analysis, but rather common sense, as a crashed economy and high unemployment could unleash a “social bomb.” Earlier this week, the “Pennsylvania Militia” rolled up to the state capitol building in Harrisburg in a military truck, packed with men wearing bulletproof vests and wielding rifles and shotguns, demanded the state government reopen the economy after it has led to widespread unemployment.

In the last four weeks, we have reported food banks across Pennsylvania have experienced unprecedented demand as hungry families wait in mile-long traffic jams outside of these facilities for care packages. And as we’ve explained, food banks are becoming stressed across the country.

(WTVY) — It’s planting season for many crops around the nation including the Wiregrass area.

Although, many farmers have not directly been affected by COVID-19.

They are seeing the effects in their wallet.

A decrease in crop and cattle prices is resulting in a loss of thousands of dollars for a single farmer.

“Now is the time that they have to work,” Extension Agronomist William Birdsong continued. “There’s no choice. This is the season of the year, planting season, to be able to get the seeds in the ground to start the crop. There’s no choice about that it’s just now or never.”

Farmers are a little wary this planting season as cotton is at its lowest price since 2009.

Cattle prices have also seen a significant decrease.


Bank Stocks May Be On A Sell Signal.

It has been two weeks since the Banking Index made its retracement high at 76.31.  A decline beneath last week’s low at 64.04 may confirm the sell signal in BKX.  Should it go beneath the March 23 low at 55.40, it would warn of an impending government takeover (forced reorganization) of the major banks.

(TheHill)  The $349 billion Paycheck Protection Program (PPP) ran out of money in 14 days. Unfortunately, too many small businesses were shut out of the program, while bigger businesses were prioritized. A lack of clear guidance and oversight led many big banks to process and approve PPP applications that favored their bottom line. During a time when we should be helping the most vulnerable, putting profits over people is completely unacceptable.

CNN reported on lawsuits against Bank of America, Wells Fargo, JPMorgan Chase, and US Bank alleging that America’s biggest banks were reshuffling PPP applications and prioritizing those that would make them the most money in processing fees. An Associated Press investigation found that 94 publicly traded companies, some with market values of over $100 million, got $365 million in PPP loans, loans that were supposed to provide emergency relief to our small businesses. In 2008, big banks were bailed out when they needed help. Now, during our country’s unprecedented crisis, big banks are abandoning those that need the most help.

(Enterpreneur) On Tuesday, the Senate approved an additional $310B of funding for the popular Paycheck Protection Program (PPP) loans for small-business owners, and the House is expected to approve the measure as soon as today.

The original bill passed passed on March 27 and established $349 billion in funding for PPP loans, but that money evaporated in just two weeks. Consequently, many business owners were left unfunded or were unable to find a bank that would even take their application. This additional $310 billion will go much more quickly than the first round, as the pipeline is full of those who applied and missed out initially, as well as others who have since located a bank willing to take their application.

The limited funds have unfortunately created some winners and losers in the race for PPP dollars. One reality is that the smallest of small businesses have faced the biggest uphill battle. The National Small Business Association conducted a survey of 980 small-business owners between April 15-18, revealing that 52 percent of small businesses with 20 employees or more received approval for their PPP loan, while only 18 percent of those with 10 or fewer employees received approval.

(ZeroHedge) One week ago we showed that the largest US commercial bank, JPMorgan, which just hiked its provisions for loan losses in anticipation of a surge in defaults…

… appeared to be “getting out of Dodge“, because after exiting (non-government guaranteed) loans and hiking mortgage standards, JPMorgan had also stopped accepting HELOCs. It now appears that the largest US bank – and its peers – are also quietly shunning all European business as well, because as the FT reports, “US banks are pulling back from lending to European companies during the coronavirus pandemic, fuelling concerns that Wall Street may be quietly withdrawing to its home market in a repeat of the last financial crisis.”

One small correction here: Wall Street is not withdrawing to its home market – as we have described before, US banks are also quietly shunning their home market as well amid rising fears of a surge in corporate defaults, suggesting that the current crisis could be far worse than 2008/2009.


Posted in 2020, Weekend Update | Leave a comment