SPX Challenges The Two-Year Trendline

VIX slipped beneath the mid-Cycle and weekly Short-term support at 13.30 to challenge the two-year trendline support at 12.15. It completed the week closing at the trendline. It appears to have had a belated Master Cycle low on Thursday.

(Bloomberg)  Time is the enemy of the volatility seller, according to Morgan Stanley.

The level of implied volatility is too low and the time it takes to generate sufficient income from volatility-selling strategies too long for investors to profit from taking a negative position on price swings, strategists at the bank including Phanikiran Naraparaju, wrote in a note to clients this week.

“We find that equity, credit, G10 FX and rates need two quarters of current carry levels to be protected from mean-reversion in implied volatilities,” the strategists said. “The cycle is far too advanced to give volatility sellers enough time to be able to withstand this.”

SPX challenges the two-year trendline…again

SPX rallied to challenge its 2-year trendline at 2775.00, closing slightly above it. This is the third inversion of the equities Master Cycles, something I haven’t seen before.  While SPX may go higher in the coming days, the rally is very stretched and may be prone to a sudden reversal.

(CNBC)  Stocks rose on Friday, adding to solid weekly gains, but their rise was kept in check amid increasing tensions between the U.S. and key trade partners as the G-7 summit kicked off.

The Dow Jones industrial average closed 75.12 points higher at 25,316.53, as UnitedHealth and Home Depot contributed the most to the gains. The S&P 500 gained 0.3 percent to 2,779.03 as consumer staples rose more than 1 percent. The Nasdaq composite closed 0.1 percent higher at 7,645.51.

For the week, the major averages all rose at least 1.2 percent.

NDX makes a new closing high

The NDX has broken out above its March 13 high and made a new closing high this week. In the process it approached its Cycle Top at 7273.49, but did not challenge it. The Cycles Model suggests that Thursday may have been the last day of strength in equities.    

(Bloomberg)  The world’s favorite stocks fought through to their seventh rally in nine weeks, though not without landing a few blows on traders.

For about 24 hours on Thursday and Friday, losses in the FAANG block looked liable to snowball, bringing back memories of a similarly out-of-the-blue lurch almost exactly a year ago today. But the nervousness abated, possibly aided by precautions traders have taken to lock in gains that are again approaching historic dimensions.

More than $300 billion has been added in six weeks to the group, comprising Facebook Inc., Amazon.com, Apple Inc., Netflix Inc. and Google parent Alphabet Inc. But along with the rally has come a jump in the price of bearish equity options on Nasdaq 100 stocks, a sign of brisk demand for contracts that act as insurance should the rally falter.

High Yield Bond Index scrambles back from Long-term support

The High Yield Bond Index rose above Long-term support at 188.75 to challenge its long-term trendline. MUT remains on a sell signal beneath the trendline. The rally has the appearance of a breakout, but must rise above 192.66 to make that a reality.  

(ZeroHedge)  Less than a month ago, Moody's warned that  "the prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality," and adds that "the record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives."

This was followed by an ominous warning from Bill Derrough, the former head of restructuring at Jefferies and the current co-head of recap and restructuring at Moelis: 

"I do think we're all feeling like where we were back in 2007," he told Business Insider: "There was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time."

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Disclaimer: Nothing in this article should be construed as a personal recommendation to buy, hold or sell short any security.  The Practical Investor, LLC (TPI) may provide a status report of ...

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