11-19-17 Market Commentary

 

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Market Breadth: With this past week’s market fractional decline, our Bull/Bear Point and Figure Ratio at 1.18 declined from 1.21 last week, yet remains within bullish territory. The total count of securities in bullish or bearish patterns decreased 2% to 3116. The count of bearish stocks decreased fractionally, while the count of stocks in bullish patterns decreased 3%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now twelve 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 107 points for the thirteenth decline in thirty weeks. At a positive 33.50 points, it has continues all seven tops in the last 30 months, 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 Distribution mode with average daily volume lower than the prior week. In the last two weeks the NASDAQ had one (1) Accumulation day 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 higher average daily volume.

Momentum: The CCI(20) daily in a Woodie’s Up trend is now at 94.21, up from 70.98 last week. At Wednesday 11/15 close, the CCI(20) daily was within the +/- 50 range for a ZLR (Zero Line Reject) Long entry signal at Thursday 11/16 close. We will stay in the trade until the CCI(20) daily rises above then falls below +100 or falls below the ZLR pivot of +13.83.
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 eighty-one weeks ago, while the Daily CCI(20) began a Woodie’s up trend ten weeks ago.
The CCI(20) weekly at +135.87, fell from +152.73 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 on top; Oil, Oil Services, and KBW Bank on the bottom. Bullish: Computer Hardware, Disk drives, and Networkers have entered the top five. Oil, and Oil Services has left the top five.  Bearish: KBW Bank continues in the bottom five. REITs has left the top five. Gold & Silver PHLX has left the bottom five.
Focus this week: From www.CaymanFinancialReview.comThe stage has been set for the next global financial crisis“. The following are some key points.

  • Japan’s status as the world’s most indebted advanced economy is not a deterrent to the foreign investors, banking primarily on the expectation that continued strengthening of the yen against the U.S. dollar, the U.K. pound sterling and, to a lesser extent, the euro, will stay on track into the foreseeable future.
  • In a way, the bet on Japanese bonds is the bet that the massive tsunami of monetary easing that hit the global economy since 2008 is not going to recede anytime soon, no matter what the central bankers say in their dovishly-hawkish or hawkishly-dovish public statements.
  • Worldwide, current stock of government debt trading at negative yields is at or above the US$9 trillion mark, with more than two-thirds of this the debt of the highly leveraged advanced economies.
  • We are in a multidimensional and fully internationalized carry trade game, folks, which means there is a very serious and tangible risk pool sitting just below the surface across world’s largest insurance companies, pensions funds and banks, the so-called “mandated” undertakings. This pool is the deep uncertainty about the quality of their investment allocations. Regulatory requirements mandate that these financial intermediaries hold a large proportion of their investments in “safe” or “high quality” instruments, a class of assets that draws heavily on higher rated sovereign debt, primarily that of the advanced economies.
  • …half of all the large insurance companies trading in the U.S. markets are currently carrying greater risks on their balance sheets than prior to 2007.
  • At the end of 2Q 2017, U.S. insurance companies’ holdings of private equity stood at the highest levels in history, and their exposures to direct real estate assets were almost at the levels comparable to 2007. Ditto for the pension funds. And, appetite for both of these high risk asset classes is still there.
  • If the Fed simply stops replacing maturing debt – the most likely scenario for unwinding its QE legacy – there will be little market support for prices of assets that dominate capital base of large financial institutions. Prices will fall, values of assets will decline, marking these to markets will trigger the need for new capital.
  • All in, 18 EU member states have negative yields on their two-year paper. All, save Greece, have negative real yields.
  • The problem is monetary in nature. Just as the entire set of quantitative easing (QE) policies aimed to do, the long period of extremely low interest rates and aggressive asset purchasing programs have created an indirect tax on savers, including the net savings institutions, such as pensions funds and insurers. However, contrary to the QE architects’ other objectives, the policies failed to drive up general inflation, pushing costs (and values) of only financial assets and real estate. This delayed and extended the QE beyond anyone’s expectations and drove unprecedented bubbles in financial capital.
  • …the world’s largest Central Banks continue buying some US$200 billion worth of sovereign and corporate debt per month.
  • Much of this debt buying produced no meaningfully productive investment in infrastructure or public services, having gone primarily to cover systemic inefficiencies already evident in the state programs. The result, in addition to unprecedented bubbles in property and financial markets, is low productivity growth and anemic private investment. (See chart 2.)
  • The only two ways in which these financial and monetary excesses can be unwound involves pain. The first path – currently favored by the status quo policy elites – is through another transfer of funds from the general population to the financial institutions that are holding the assets caught in the QE net.
  • The alternative is also painful, but offers at least a ray of hope in the end: put a stop to debt accumulation through fiscal and tax reforms, reducing both government spending across the board (and, yes, in the U.S. case this involves cutting back on the coercive institutions and military, among other things) and flattening out personal income tax rates (to achieve tax savings in middle and upper-middle class cohorts, and to increase effective tax rates – via closure of loopholes – for highest earners).
  • …going forward…the real economy has consistently been charged with paying for utopian, unrealistic and state-subsidizing pricing of risks by the Central Banks. In the future, this pattern of the rounds upon rounds of financial repression policies must be broken.
  • Whether we like it or not, since the beginning of the Clinton economic bubble in the mid-1990s, the West has lived in a series of carry trade games that transferred real economic resources from the economy to the state. Today, we are broke. If we do not change our course, the next financial crisis will take out our insurers and pensions providers, and with them, the last remaining lifeline to future financial security.

–Donald Pirl www.s2pmarketsignal.com


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