SPX Internals Reveal Massive Rotation

 

VIX made an extended Master Cycle low on Thursday, then rallied above weekly mid-Cycle support/resistance at 14.97, creating a new buy signal. Once a Master Cycle low is made, there are usually two-three weeks of rallying.

SPX reverses

  

SPX reversed out of its Thursday morning high without breaking above the July 26 high. Market internals revealed a massive rotation underway but not a lot of new money. 

(MarketWatch) U.S. stocks closed lower Friday, for the first weekly decline in a month, as investors looked beyond a litany of central-bank decisions of the past week and focused on the state of China-U.S. trade talks.

U.S. stocks turned lower in afternoon trade, dragged lower by the technology sector XLK, -1.17% and consumer discretionary shares XLY, -1.15% after a report that a Chinese delegation had canceled plans to visit farms in Montana as a part of its negotiations with the U.S. delegation.

Traders were also on the watch for any effects of “quadruple witching day” on Wall Street, the simultaneous quarterly expiration of stock-index futures contracts, single-stock futures, and options on stock-index futures and individual stocks, which often spurs higher volumes.

 NDX loses traction

 

NDX was unable to gain any traction to overcome its September 12 high this week. NDX was on scheduled for its Master Cycle high while SPX delayed a week due to rotation from momentum stocks to value stocks.  

(Bloomberg) How can U.S. stock indexes be right back up at their record highs when there are strikes on oil installations in the Middle East, the money markets are in revolt, negative bond yields show despair at the prospect of growth anywhere in the world, and any number of decent indicators are signaling on-coming recession? It’s a good question. And the answer, according to one investment strategist I spoke to this week, is clear: “It’s because everyone is in the Larry Summers trade.”

Summers is one of the most prominent economists of this era, of course, but my friend used his name as shorthand for his concept of “secular stagnation.” Markets are positioned for Summers’ negative theory to come true in full force. That leaves central banks with little choice but to work on the Summers assumption.

High Yield Bond Index rises above its support/resistance cluster

 

The High Yield Bond Index made its weekly high on Monday and drifted lower since then. The sell signal is temporarily suspended until it declines beneath support again. The Cycles Model warns the next step down may be a large one.   

(SeekingAlpha) With interest rates at extreme lows, investors continue to frantically search for investments that generate an acceptable yield. Interest rates want to go higher. As witnessed by the ongoing repo market fires, the world is running out of cash and the free market is beginning to demand higher rates.

If rates go higher, people will put more money into their savings accounts and the repo market shortage would end due to an increase in excess reserves (which would stabilize IOER). Despite this, the Fed lowered rates again, which only serves to further decrease cash and push investors into increasingly risky investments.

Treasuries bounce off Intermediate-term support 

The 10-year Treasury Note Index bounced from Intermediate-term support at 128.98 to test the Cycle Top resistance at 129.94.Should overhead resistance hold, there may be a resumption of the decline. This week the markets were kept afloat through permanent open market operations (POMO) to stabilize bank reserves and keep the markets liquid. This may continue through mid-October as taxes and pension payments must be made.

(Bloomberg) After the chaos this week in short-term funding markets, the Federal Reserve faces yet another tough task: how to shore up the multitrillion-dollar network that keeps funds flowing through the U.S. financial system without stoking fears of a systemic problem or fueling talk of a recession.

Morgan Stanley expects the central bank will turn to rebuilding its balance sheet by announcing permanent open market operations -- known as POMOs -- to support funding markets. These procedures aren’t anything unusual for the central bank, which has long used POMOs to help stabilize reserves, and offset the growth of currency in circulation. But the Fed will have to communicate how they’re distinct from the aggressive asset purchases it undertook in the wake of the 2008 crisis to help drag the economy out of recession.

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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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