SPX Continues Rally But Not Out Of The Woods

VIX pulled back, challenging the weekly Cycle Top at 22.62 and closing beneath it. However, the uptrend isn’t broken. The Cycles Model suggests that, while it may take a brief rest, strength may recover in the VIX through the end of January.

(Bloomberg)  Going strictly by the VIX, the U.S. stock market just saw its biggest weekly drop in volatility since March. Go by traders’ nerves and you’d have a hard time framing the past few days as anything but another trial for markets that have known little but upheaval for three months.

Exhausted by December convulsions? You’re getting no respite in January, as Thursday’s 2.5 percent S&P 500 plunge gave way to a 3.4 percent rally, the third biggest since 2012. Investor sentiment that was throttled by Apple’s revenue warning was revived by the best employmentreport in 10 months and calming words from Federal Reserve Chairman Jerome Powell.

SPX continues rally, but not out of the woods

SPX continued its rally after a bounce from its 7-year trendline last week. However, it is likely to retest the uptrend from the October 2011 low at 2350.00 again. The media is upbeat, but the SPX is not out of the woods.

(Bloomberg)  Stocks surged, the dollar weakened and Treasuries tumbled with gold as a risk-on tone gripped financial markets after investors got good news on the economy, Federal Reserve policy and trade tensions.

The S&P 500 rallied 3.4 percent, the Dow Jones Industrial Average roared higher by almost 750 points and the Nasdaq 100’s surge topped 4 percent. All of the blue-chip index’s 30 members advanced. The rally didn’t surpass the post-Christmas breakout, but it ranked among the steepest of the bull market.


NDX also bounces back to the neckline

NDX continued its bounce to retest the Head & Shoulders neckline at 6442.36 again. This constitutes a 45% retracement of the December decline. The Cycles Model calls for a resumption of the decline.   

(ZeroHedge)  Previously we noted that while a variety of hedge funds, ETFs and central banks are getting slammed by today's 9% drop in AAPL shares, few have been as badly hit (even if they can more than afford it) as Warren Buffett, whose Berkshire Hathaway is looking to lose more than $3.8 billion on its AAPL position thanks to his holdings of 258 million shares of Apple stock which make him the third biggest shareholder after passive investors Vanguard and BlackRock.

Today's drop brings Berkshire's holdings to about $36 billion, and a $3.8 billion loss, and has also hammered Berkshire Hathaway's Class A stock which is down more than $15K today, or 4.93%, its biggest one day drop since the February 5 VIXtermination event. Ignoring that one-time drop which quickly reversed, one would have to go back to August 2011 when the US was downgraded, to find an even bigger drop.

High Yield Bond Index tests Long-term resistance

The High Yield Bond Index continued its rally to retest Long-term resistance at 194.12. MUT continues to be on a sell signal. The Cycles Model suggests that whatever year-end strength it may have may have been used up by pension rebalancing. The 7-year Trendline is likely to be retested by the end of January.

Treasury bonds challenge the neckline

The 10-year Treasury Note Index challenged the Head & Shoulders neckline at 123.00, closing beneath it and completing its retracement rally. The Cycles Model suggests a loss of strength over the next three weeks or more.

(Bloomberg)  Federal Reserve Chairman Jerome Powell finally decided that the stock market’s tantrum over the past month was too noisy to ignore. 

Traders bemoaned the fact that Powell considered the central bank’s balance-sheet runoff to be on “automatic pilot.” So he softened his tone on Friday during a panel at an American Economic Association meeting in Atlanta, saying policy makers “wouldn’t hesitate to make a change” if necessary. Investors were unhappy that Powell shrugged off swings in the stock market as “a little bit of volatility” that shouldn’t do much harm to the economy. So he assured them that the Fed is listening carefully to the market’s concerns about downside risks. He and his predecessor, Janet Yellen, both reminded listeners about 2016, when the median projection among officials was for four rate increases, yet they only went through with one.

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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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