10-29-17 Market Commentary

 

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Market Breadth: With this past week’s market fractional advance, our Bull/Bear Point and Figure Ratio at 1.59 declined from 1.83 last week, yet remained within bullish territory. The total count of securities in bullish or bearish patterns increased 3% to 3212. The count of bearish stocks increased 12%, while the count of stocks in bullish patterns decreased 2%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now nine weeks in bullish territory. Paid subscribers have access to the OpenOffice Calc data from which the chart is generated.

The well known market breadth indicator, the NASDAQ McClellan Summation Index (NASI) fell 178 points for the tenth decline in twenty-seven weeks. At a positive 446.95 points, it has fallen below the April 216 top, and continues below the October 2017 top and the July 2016 top, and continues above all remaining four tops, and continues above all five bottoms in the last 30 months. 

Volume Analysis: In this week’s volume analysis, the NASDAQ Composite Index ended in Accumulation mode with average daily volume higher than the prior week. In the last two weeks the NASDAQ had three (3) Accumulation days and four (4) Distribution days. (Accumulation days are counted when the index closes up on higher volume than the prior day while Distribution days occur when the index closes down on volume higher than the prior market day.) Last week, the NASDAQ ended in neither Accumulation nor Distribution mode on lower average daily volume.

Momentum: The CCI(20) daily in a Woodie’s Up trend is now at +207.27, up from 5.01 last week. At Thursday 10/26 close, the CCI(20) daily was within the +/- 50 range for a ZLR (Zero Line Reject) Long entry signal at Friday 10/27 close. We will continue to follow this new trade simulation in next week’s commentary.
In Woodie’s CCI trading system, six consecutive bars above or below zero are required for a change of trend. The Weekly CCI(20) of the NASDAQ Composite Index began a Woodie’s up trend seventy-eight weeks ago, while the Daily CCI(20) began a Woodie’s up trend seven weeks ago.
The CCI(20) weekly at +155.79 fell slightly from +158.08  last week after forming a ZLR (Zero Line Reject) Long entry signal for Tuesday 9/5 open. Our rule is to stay in the trade until the CCI(20) drops below +100. We will continue to follow the result of this trade simulation in next week’s commentary.
Industry Rotation the last two weeks: All of the top five industries are  positive and all of the bottom five are negative. Summary: Some tech, S&P Retail, and Banking on top; Oil Services, Gold & Silver, and some tech on the bottom. Bullish: Semis PHLX and Comp Tech continue in the top five. S&P Retail and KBW Bank have entered the top five. Gold & Silver PHLX has continues in the bottom five. Oil Services continues to lead the bottom five. Brokers has left the bottom five.  Bearish: Computer Hardware has entered the bottom five.
Focus this week: From www.zerohedge.com “”Both Cannot Be Right” – The Yield Curve’s Ominous Message: Something Is Very Broken“. The following are some key points and charts.

  • Two weeks ago, Deutsche Bank’s credit analyst Aleksandar Kocic explained that with the yield curve becoming increasingly flatter, the Fed has roughly two more rate hikes left before it loses control as the curve first flattens completely and eventually inverts, a precursor to virtually every historical recession.
  • The problem – as observed here virtually every day for the past year – is that long rates have refused to sell off, and while they did move modestly higher last week in the US, other developed nations have seen even more flattening to compensate for the move in the US.
  • Currently, the 2s10s is trading at 82bps (since ’08 it has almost never been below 80bps), compared to ~90-95 bps in Jul ’17 and 130bps in Dec ’16. The further out on the curve that one goes, the greater the flattening, with the 2s30s now at 133bps vs over 200bps in Dec ’16. There were also no material change in the inflationary break-even rates or expectations.

  • Here’s why this is a big problem. As Shvets lays it out for the nth time, in a conventionally recovering economy, tightening by CBs should move the entire curve up, indicating strengthening confidence and rising expectations. However, it is clear that while the short-end is responding to growing probability of tightening, the long end is assuming that rising rates instead of stimulating growth and confidence, would increase the chances of much more disinflationary outcomes further down the road. In fact, the more the Fed has tightened, the more the curve has flattened.
  • From a practical standpoint this means that while the short end is assuming that mixture of rate rises and liquidity withdrawal would result in higher cost of capital, the intermediate and long end of the curve assume that neither supply nor demand for capital can withstand higher cost of capital. And as we, Deutsche Bank, Bank of America and many others have pounded the table previously, and now so does Macquarie, “Both cannot be right. Flattening yield curves imply less liquidity and higher probability that consumption and investment would fall and savings rise.”
  • So what does all of the above mean? Well, as Kocic warned two weeks ago, and as Shvets explained now, unless the entire curve starts shifting up, it appears that we are still in a world where CBs cannot tighten or withdraw liquidity. This in turn leads to another circular problem: the longer the Fed avoids the moment of reintroducing risks, the greater the eventual crash will be, i.e. the Fed’s “nightmare scenario.” Or, as Shvetz puts it:

    “There is of course a policy concern that persistence of low volatilities and high valuations are raising financial stability risks. While these concerns are legitimate, we can’t see how price discoveries or volatilities can be re-introduced, without a risk of significant asset value contractions that would bring forward economic volatilities that CBs are trying to avoid.” 

    In other words, for all the talk and posturing of tighter conditions and future rate hikes, Shvets believes that “central banks remain slaves of the system, and a pleasant Kondratieff autumn is likely to endure.” The alternative is the Fed losing control – something which is not allowed to happen, and is why stocks continue to hit all time highs – ushering in the very unpleasant “Kondratieff winter.”

–Donald Pirl www.s2pmarketsignal.com


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