3-11-18 Market Commentary



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Market Breadth: With this past week’s market advance, our Bull/Bear Point and Figure Ratio at 0.89 rose from 0.57 last week, advancing, but still within bearish territory. The total count of securities in bullish or bearish patterns increased 4% to 2726. The count of bearish stocks decreased 14%, while the count of stocks in bullish patterns increased 34%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now six weeks in bearish 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) rose 206 points for the tenth advance in 21 weeks. At a positive 141.92 points, it continues below all eight tops in the last 30 months, continues above all five bottoms below -100 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 lower than the prior week. In the last two weeks the NASDAQ had four (4) Accumulation days and three (3) 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: At Monday 3/5 close, the CCI(20) daily in a Woodie’s Up trend within the +/-50 range formed a ZLR Long entry signal. At +157.68, up from +21.61 last week, it rose for the remainder of the week. We will continue to follow the results of this trade simulation in next weeks commentary, exiting when the CCI(20) daily falls below +100.
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 ninety-seven weeks ago, while the Daily CCI(20) began a Woodie’s up trend one week ago.
At Friday 2/16 close, the CCI(20) weekly presented a ZLR Long entry signal for Monday 2/19 open. At Friday 3/2 close, the CCI(20) weekly fell to 85.7 from 106.21 last week, signaling the exit of our trade simulation at Monday 3/5 open. The result of this trade simulation was a gain of 13.86 points on the Nasdaq or $0.83 per share of QQQ. The CCI(20) rose this week to +124.27, and is currently outside the +/-50 range for a new ZLR Long entry signal.
Industry Rotation the last two weeks: All of the top five industries are  positive and all of the bottom five are negative. Summary: Brokers and some tech on top; Gold & Silver, Oil, and Oil Services on the bottom. Bullish: Semis PHLX and Disk Drives continue in the top five. Brokers, Networkers, and Computer Hardware have entered the top five. Gold & Silver continues in the bottom five. Oil and Oil Services have entered the bottom five. REITs has left the bottom five. Bearish: Comp Tech and S&P Retail have left the top five.
Focus this week: From www.zerohedge.comIs A Dollar Funding Crisis Imminent: Libor-OIS Blows Out The Most Since 2012“. We recommend reading the article, but much of the first portion is reproduced below as an antroduction.

Call it the latest paradox of bizarro centrally-planned markets.

On the same day when the Nasdaq hit a new all time high, when the Dow soared and when the payrolls report reincarnated the Goldilocks narrative with one flashing red average hourly earnings headline (“surging jobs + subdued wage growth = an economy that can handle 10Y yields at or above 3.0%”), one of the most closely followed leading indicators of an imminent funding crisis and global credit crunch finally broke above its 6 year range, when the USD Libor-OIS spread jumped 2bps on Friday, rising to 44.23bps.

This was the widest this key spread has been since January 2012, when the latest European sovereign debt crisis was roiling the markets and forced the Fed to open unlimited swap lines with the rest of the world to avoid a global dollar funding crisis and, well, effectively bail out the world – which according to the BIS is synthetically short the USD to the tune of over $10 trillion – for the second time in 4 years.

The move will not come as a surprise to regular readers, as we have been covering it extensively since late 2017:

However, while the overall move wider was expected, the speed of the blow out has taken most analysts by surprise, and the result has been a scramble to explain not only the reasons behind the move, but its sharp severity.

While this is a simplification of the various catalysts behind the spike in Libor-OIS, here is a quick summary of what is going on – the expansion of Libor-OIS and basis swaps have been impacted by a complex array of factors, which include:

  1. an increase in short-term bond (T-bill) issuance
  2. rising outflow pressures on dollar deposits in the US owing to rising short-term rates
  3. repatriation to cope with US Tax Cuts and Jobs Act (TCJA) and new trade policies, and concerns on dollar liquidity outside the US
  4. risk premium for uncertainty of US monetary policy
  5. recently elevated credit spreads (CDS) of banks
  6. demand for funds in preparation for market stress

In recent posts (see above) we have taken a detailed look at each of these components, of which 1 thru 3 are the most widely accepted, while bullets at 4 through 6 are within the realm of increasingly troubling speculation, and suggest that not all is well with the market, in fact quite the contrary.

It’s not just rates: the consequences of rising dollar funding costs will eventually impact every aspect of the fixed income market, even if simply taken in isolation due to the ongoing spike in 3M Libor which still is the benchmark reference rate for hundreds of trillions in floating-rate debt.

The reality, however, is that without a specific diagnosis what is causing the sharp surge wider, and thus without a predictive context of high much higher it could rise, and how it will impact the various unsecured funding linkages of the financial system, it remains anyone’s guess how much wider the Libor-OIS spread can move before it leads to dire consequences for the financial system.

–Donald Pirl www.s2pmarketsignal.com

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