Category: Market News

Authored by Pater Tenebrarum via Acting-Man.com

Intra-Market Divergences Galore

US big cap stocks have rallied to new highs in recent months, but just as in the rally from the low of the February 2018 mini-panic to the September/October 2018 peak, sizable divergences between different indexes have emerged in the process. New highs in the big cap indexes (DJIA, SPX, NDX) are once again not confirmed by small caps (RUT), the broad market (NYA) and a number of sub-sectors (such as the DJTA which is included in the chart below; according to Dow Theory, the DJTA must confirm moves in the DJIA to validate its trend).

From the top: weekly charts of DJIA, SPX, NDX, RUT, NYA and DJTA. The recent new highs in the three large cap indexes have not been confirmed by small caps and the broad market. Note also the sizable RSI/price divergence in the DJIA (which is mirrored by SPX and NDX) – this is a sign of faltering momentum that is often seen ahead of trend changes.

We last discussed a “lengthy non-confirmation” in mid-September 2018 (see “US Equities – Approaching an Inflection Point”). Everything we said about the phenomenon at the time applies to the current case as well. In fact, it could well be argued that the current spate of non-confirmations is even more ominous as they are stretching over a time period of approximately 18 months by now (the broad market represented by the NYSE Index has yet to overcome its January 2018 peak).

US big caps are diverging from European and Japanese stocks as well, which have failed to reach new highs in the recent rally. It is also noteworthy that stocks and junk bonds have studiously ignored weakening macro-economic data in recent months – the rationale is apparently that an impending easing of monetary policy by Fed and ECB is more important than the economy’s poor performance and the prospect of lackluster earnings. The idea seems to be that a resumption of monetary pumping will immediately arrest and reverse recent economic trends, which is quite a leap of faith.

Government bonds and gold have rallied strongly as well this year, and while these markets also reflect rate cut expectations, they normally don’t move in the same direction as stocks for very long. It is a good bet that something will eventually give. Considering the recent yield curve inversion, investors buying stocks and corporate bonds are probably too sanguine about what lies ahead.

The Roaring 20s vs. Today

In April we briefly discussed parallels between the current time period and the late 1920s (see “A Trip Down Memory Lane”). What prompted us to look into this was the fact that the sharp correction in the (normally) seasonally strong October-December period last year was actually a spitting image of the late 1928 correction. As it turned out, this was far from the only similarity between the two eras.

Incidentally, market participants ignored a weakening real economy in the final stretch of the 1920s bull market as well: economic data deteriorated noticeably in the course of 1929, but that did nothing to curb the stock market’s advance – at least initially.

Below is a long term chart comparison as a supplement to the charts we showed in April. Interestingly, there is quite a strong resemblance between the stock market patterns of the 1914-1930 and 1997-2019 periods. The cyclical bull and bear markets of the two eras differ slightly in terms of extent and duration, but the basic patterns look remarkably similar.

It should be noted to this that chart pattern similarities are not unusual per se –   all liquid markets exhibit self-similar fractal patterning – both across different time frames and over different historical periods. At some point, these patterns will always diverge – particularly self-similarity between historical periods is usually quite limited.

It is fairly easy to find close correlations over time periods of one year or less, and more often than not they have no predictive value. Nevertheless, we find these long term pattern similarities quite interesting:

Conclusion

The divergences between the different indexes at the very least represent a heads-up that another correction is likely to begin fairly soon. In view of the increase in market volatility since the January 2018 peak, the next downturn will probably be quite a doozy again.

Courtesy of Yahoo Finance by Julia La Roche Reporter

Prominent bond investor Jeffrey Gundlach, the CEO of $130 billion DoubleLine Capital, sees the increasing likelihood of a recession within the next six to twelve months.

A couple of years ago, Gundlach began highlighting key recession indicators on his webcasts, to see if there was potentially one on the horizon.

“For the first year and a half or so, it was always, ‘No. No indication of any coming recession.’ But, now, there are several indicators that suggest a recession could occur within the next year,” Gundlach said on a webcast on Thursday.

While not yet a certainty, the billionaire bond investor noted that the probabilities of the economy moving into the red had moved up. He calculated those chances at around 40 to 45% within the next six months — and 65% in the next year.

Most economists believe the U.S. economy is slowing, but few expect a recession, technically defined as two consecutive quarters of negative growth.

The U.S. Conference Board’s Leading Economic Indicator, a key gauge followed by market watchers, is not forecasting one at present.

Still, Wall Street has been rooting for the Federal Reserve to cut interest rates by sending bond yields plunging, in part to ward off a deep downturn.

In Gundlach’s graphics, the red shaded vertical areas represent recession periods, while the dark blue line is the year-over-year conference board leading economic indicator.

Thus far, the conditions for negative growth have not been met, he said.

“You’ve never got a recession without the leading indicator touching 0 and going through it. That hasn’t happened yet,” Gundlach said.

“In fact, we are not even that close to 0 yet,” he said, adding that “2.7 is the year-over-year reading except our analysis suggests that it’s possible that the year-over-year leading indicator does go negative before year end.”

He emphasized that DoubleLine is not forecasting that move exactly, but recognizes that it’s a “possibility. So, we’re going to be watching this month by month.”

Race to the bottom in US, Europe

Gundlach proceeded to show the economic data change in the U.S., Europe, and globally, all of which he notes have been “declining pretty steadily.”

DoubleLine’s indicator compares data as it comes out day-by-day for each dataset to its 12-month moving average. It gives a gauge of the momentum of the economy.

According to the picture painted by DoubleLine’s data, the global economy has been performing “below trend consistently for over a year, and so that is clearly not showing signs of robust health,” Gundlach said.

Courtesy of Bloomberg By Luke Kawa

June 11, 2019 — 7.17am

Remain vigilant. That’s the apparent message the Cboe Volatility Index is flashing, even as cash equities race toward records.

The VIX Index – often referred to as the market’s “fear gauge” – is up over the past three sessions, as of 1:40 pm. in New York. At north of 16, it’s implying that US stocks will tend to move more than 1 per cent per day over the next month. In recent years, it hasn’t lingered above this level unless equities were weakening.

The higher reading belied the brisk advance of more than 2 per cent for the S&P 500 Index over the same three-day stretch. It’s the first time implied volatility has failed to decline amid stock gains of this magnitude since 2009, when the bull market was in its infancy. The two variables tend to move in opposite directions.

During Friday’s 1.1 per cent advance in the S&P 500, the VIX – which measures the 30-day implied volatility of the S&P 500 based on out-of-the-money options prices – also moved higher. That’s despite the weekend effect that typically sees the gauge move lower on Fridays, and the passage of a market-moving event – the May non-farm payrolls report.

This marked just the 11th time since 2004 that the VIX advanced while the stock benchmark rose at least 1 per cent, according to Macro Risk Advisors derivatives strategist Vinay Viswanathan.

“The options market is unwilling to lower its pricing of risk further despite impressive market strength,” he wrote. “The stocks up/vol up move could be a sign from the option market that while equities were performing well, there is still plenty of risk worth protecting against (especially with China trade talks/G-20 lingering on the horizon).”

The event premium built into options that encompass the month-end G-20 summit – at which US President Donald Trump and his Chinese counterpart Xi Jinping are slated to talk trade – is off its recent highs, Viswanathan notes. He recommends July put options on the S&P 500 as an opportunity for investors nervous about the outcome to purchase relatively cheap protection.

Pravit Chintawongvanich, Wells Fargo’s equity derivatives strategist, said in a note that the fierceness of market rallies is contributing to firmness in the volatility index. For the most part, US stocks have taken the staircase down from a record close on April 30, and rebounded via the elevator.

“Up moves count as vol too, and have been pushing realised vol higher,” he wrote. “VIX actually looks low relative to realised vol.”

On Monday, the signal sent by a relatively muted retreat in the VIX appears to be a mirage linked to the demand for upside. The most heavily traded options are S&P 500 calls that expire on June 21 with strike prices of 2,900, 3,000 and 3,100. It’s an indication that fund managers who missed most of the 2019 might be looking for a way to get exposure to further gains without worrying about losses should equities reverse lower.

Bloomberg

Courtesy of End of the American Dream Blog May 7, 2019 by Michael Snyder

This is the closest that the U.S. has been to a war with Iran in decades, and yet most Americans are either clueless or they don’t seem to believe that it could actually happen.  And I certainly don’t think that President Trump wants a war, but he is surrounded by war hawks that have been pushing an extremely aggressive “get tough” policy with Iran.  The Trump administration just canceled the waivers that were allowing other nations to continue purchasing Iranian oil, and the goal of that move is to reduce Iranian exports to zero.  But oil exports are 40 percent of the Iranian economy, and the Iranians understand that this move could absolutely cripple their economy.  The Iranians have threatened to close the straight of Hormuz in retaliation, and that would almost certainly provoke a U.S. military response.  In addition, it is being reported that on Wednesday the Iranians will announce that they are taking steps to restart their nuclear program…

On Wednesday, Iranian President Hassan Rouhani is expected to announce small steps to resume his country’s nuclear program. According to the New York Times, that will include conducting research on centrifuges that can make nuclear fuel, and curbing nuclear inspections from observers.

Of course the truth is that the Iranians never fully abandoned their nuclear program in the first place, but that is supposed to be a big secret.

In any event, tensions between the U.S. and Iran have now reached frightening levels.

On Sunday, White House National Security Adviser John Bolton announced that the USS Abraham Lincoln and four B-52 bombers are being sent to the Middle East as a message to Iran…

Four B-52 Stratofortress bombers are being sent to the Mideast to support the aircraft carrier Abraham Lincoln in moves aimed at countering threats from Iran, U.S. Central Command said Tuesday.

The B-52s, from Barksdale Air Force Base, Louisiana, are deploying to Al Udeid Air Base in Qatar, a hub for U.S. air operations in the region, CBS News reported.

Apparently there was some intelligence which indicated that Iran was planning a possible attack on U.S. forces in the region, and Bolton said that these deployments would make it very clear that any assault would be “met with unrelenting force”…

The deployments would “send a clear and unmistakable message to the Iranian regime that any attack on United States’ interests, or on those of our allies, will be met with unrelenting force,” he said in a statement. “The United States is not seeking war with the Iranian regime, but we are fully prepared to respond to any attack, whether by proxy, the Islamic Revolutionary Guard Corps, or regular Iranian forces.”

In response, the Iranians accused the U.S. of engaging in a form of “psychological warfare”.

In addition to everything else, CNN is reporting that it appears that the Iranians have been “moving short-range ballistic missiles aboard boats in the Persian Gulf”, and this has deeply alarmed U.S. officials…

Intelligence showing that Iran is likely moving short-range ballistic missiles aboard boats in the Persian Gulf was one of the critical reasons the US decided to move an aircraft carrier strike group and B-52 bombers into the region, according to several US officials with direct knowledge of the situation.

The concerns over the movement of the missiles was one of multiple threads of intelligence from various sources that led the US to believe Iran had a capability and intention to launch strikes against US targets.

If both sides rattle their sabers for a while but nothing ever comes of it, we will be fine.

But if someone goes a little bit too far and the missiles start flying, we could be soon engaged in a conflict that could literally spark World War 3.

While they are certainly no match for the U.S., the truth is that the Iranian military is quite strong, and they possess weapons of immense destructive power.  And in the event of a military conflict with the U.S., the Iranians have already said that they will hit Israel too.

And if Israel gets hit, they will certainly strike back at Iran extremely hard.

The Iranians absolutely hate both the United States and Israel, and recent moves by the Trump administration have pushed the Iranians into a corner.  The following comes from Pat Buchanan…

Did President Donald Trump approve of this? For he appears to be going along. He has pulled out of the Iran nuclear deal and re-imposed sanctions. Last week, he canceled waivers he had given eight nations to let them continue buying Iranian oil.

Purpose: Reduce Iran’s oil exports, 40% of GDP, to zero, to deepen an economic crisis that is already expected to cut Iran’s GDP this year by 6%.

Trump has also designated Iran a terrorist state and the Republican Guard a terrorist organization, the first time we have done that with the armed forces of a foreign nation. We don’t even do that with North Korea.

A cornered animal is extremely dangerous, and at this point the Iranians may feel as if the only option they have left is to lash out.

As a first step, they could potentially close the Strait of Hormuz, and that would instantly create a global oil crisis.  Here is more from Buchanan…

Iran has also warned that if we choke off its oil exports that exit the Persian Gulf through the Strait of Hormuz, the Strait could be closed to other nations. As 30% of the world’s oil shipments transit the Strait, closing it could cause a global crash.

In 1973, when President Nixon rescued Israel in the Yom Kippur War, the OPEC Arabs imposed an oil embargo. Gas prices spiked so high Nixon considered taking a train to Florida for Christmas vacation.

Of course a potential war with Iran is not even on the radar for most Americans these days.  Most of us are preoccupied with other things, but if the missiles start flying this will instantly become the top news story on the entire planet.

Wars never start in a vacuum.  In every major war throughout history, there has always been a series of steps that has ultimately resulted in the outbreak of war.

Without a doubt, the U.S. and Iran are moving toward war.  That doesn’t mean that one will happen, and we better hope that it doesn’t, because it would have all sorts of apocalyptic consequences.

So let us hope that cooler heads prevail.

Unfortunately, there doesn’t appear to be any “cooler heads” among Iranian leadership, and Trump has surrounded himself with war hawks like John Bolton and Mike Pompeo.

In the end, Trump himself will make the final call on any conflict with Iran, and let us hope that he makes the right one.