VIX declined toward Long-term support at 16.57, extending its Master Cycle low on Friday.  The Cycle low put a new outlook on the Model, suggesting that these moves may be at a higher degree Cycle than originally thought.  

(Bloomberg)  Some of the nimblest hedge-funds that trade volatility are hoping history doesn’t repeat after suffering their worst year in over a decade.

Managers famed for posting steady profits from relative-value strategies, which shuffle between long- and short-volatility bets, lost a record 2.5 percent in 2018, according to Cboe Eurekahedge data.

You’d think funds that profit from swings would thrive from crazed markets. But these rarefied players were sunk instead by erratic moves in implied volatility and an outsized spike in U.S. equity angst versus the rest of the world.

SPX rallies to Intermediate-term  resistance

SPX extended its rally to test Intermediate-term resistance at 2680.03.  It has met the 50% retracement of its decline at 2644.00. Thus far it has been 16 market days from the December 26 low.  

(ABCNews)  Stocks in the U.S. and Europe jumped Friday as renewed hopes for progress in trade talks between the U.S. and China helped the markets finish the week with another strong gain.

Indexes jumped after Bloomberg News reported that China's government offered to buy more goods and services from the U.S., potentially eliminating its trade deficit by 2024. For investors, the encouraging news on trade builds on recent positive signs for the U.S. economy and indications from the Federal Reserve that it will be patient when considering future interest rate hikes.

The Dow Jones Industrial Average is up 5.9 percent and the S&P 500 index has risen 6.5 percent so far this year, a surprisingly strong showing coming off a punishing end to 2018.

 NDX meets Intermediate-term resistance

NDX continued its rally toward Intermediate-term resistance at 6814.12.  The Cycles Model suggests that NDX is either at or very near the end of its rally. There is a potential Head & Shoulders formation that, if triggered, may erase up to 3 years of gains.  Say tuned!

(ZeroHedge)  Earlier this week we reported that, according to Nomura's calculations, CTAs were about to cover their recent S&P short positions and turn increasingly longer the higher the market rose. And sure enough, the US stock market has only risen higher, with the latest two upside catalysts being the positive WSJ headline related to US-China trade talks on Thursday and today's Bloomberg report that China would seek to reduce its trade surplus with the US.

As a result, Nomura’s Masanari Takada writes, the bank's quant models suggest CTAs continued short-covering on major stock index futures like the S&P500 or Russell 2000 and adds, somewhat redundantly, that "US equity markets seem to have enjoyed such mechanical purchasing pressure by algo investors."

High Yield Bond Index closes above Intermediate-term resistance

The High Yield Bond Index rallied above Intermediate-term resistance at 197.44, making a 67% retracement of the decline.  The rally made more than three weeks of gains, a normal time for a retracement of this degree. The 7-year Trendline is due for a retest in the near future and with that, a potential Head & Shoulders formation that may wipe out up to two years of gains.  

(Bloomberg)  Corporate-bond funds saw inflows this week in another sign credit markets are improving following a selloff in December.

U.S. high-yield funds saw an inflow of $3.28 billion in the week ended Jan. 16, the biggest net increase since December 2016, Lipper data show. This followed an inflow of $1.05 billion last week.

U.S. junk bonds are on track for the best January in years, with a 3.45 percent return already this month. A dovish Federal Reserve, steady economic growth and lack of issuance are boosting the appeal of this market for fixed income investors, following a steep decline in prices at the end of 2018.

Treasury bonds fall back beneath the mid-Cycle resistance

The 10-year Treasury Note Index declined toward Short-term support at 121.07, where it may bounce. Note that UST is on a sell signal. Due care is advised, since a decline through Short-term support may instigate a strengthening of intensity in the decline.

(Reuters) - U.S. Treasury yields rose to three-week highs on Friday as investors piled back into Wall Street on hopes Washington and Beijing are moving to end their trade dispute and stronger-than-expected data on manufacturing output.

 Bond yields were on track for a second week of increases as 10-year yields climbed further from the near one-year low set two weeks ago.

 "The risk-on mood has caused yields to move higher," said John Canavan, market strategist at Stone & McCarthy Research Associates in New York.

The Euro confirms a fake-out move

The Euro broke down beneath Short-term support at 113.86, putting it on a sell signal.  The challenge of the mid-Cycle resistance was a fake-out. There is a potential Head & Shoulders formation beneath 112.00 that suggests a downside target that may be attained in the next month.  

(TheHill)  Twenty years ago, 11 members of the European Union took the historic first step of merging their national currencies into a common unit, the euro. Today, 19 EU members constitute the eurozone, and the euro appears well-established, with further candidates waiting to join.

Birthdays are moments for celebration and reflection. There is much to celebrate about the euro, but honest reflection also reveals its flaws. 

The euro’s economic record is mixed, though largely positive. But the euro was always more than an economic project; it played an important political role as a tool to create a truly integrated European Union.

On that score it has been far less successful, and the euro’s political weakness threatens its future and that of the EU. 

EuroStoxx approaches key resistance

The EuroStoxx rally gathered strength as it approaches key Intermediate-term resistance at 3153.12 and the trendline just above it. The Cycles Model suggests Cyclical strength may peak this weekend, with weakness to follow through the middle of February.

(CNBC)  European stocks closed higher on Friday after a report of progress on U.S.-China trade talks raised hopes of a breakthrough in their long-running dispute.

The pan-European Stoxx 600 was up more than 1.7 percent following afternoon deals, hitting its highest level since December 5. All sectors and major bourses were trading in positive territory.

For the week Europe’s blue chip stocks gained more than 2.2 percent.

Stocks in the baskets of Autos and Basic Resources — with their heavy exposure to China — were among the top gainers.

It comes after the Wall Street Journal reported Thursday that U.S. Treasury Secretary Steven Mnuchin proposed lifting all or some of the tariffs on Chinese imports. The goal is to push forward trade talks and get China’s support for longer-term reform.

.The Yen may find strong support beneath it

The Yen continues its pullback to Long-term support at 90.24, where it may be capable of a bounce.  The Cycles Model suggests a continued probe to the upper trendline by the end of the month.

(Bloomberg)  A strengthening link between the dollar-yen exchange rate and the U.S.-Japan yield differential augurs well for the Asian currency, with a number of strategists predicting it will extend its recent rally.

The correlation between the two variables climbed to 0.63 this month, the highest in a year, data compiled by Bloomberg show, as the benchmark 10-year U.S. yield hit a one-year low amid Federal Reserve Chair Jerome Powell’s signal to pause policy tightening. Standard Chartered Plc, Citigroup Inc., Bank of America Merrill Lynch and HSBC Holdings Plc are all expecting a stronger yen in the months ahead.

Nikkei approaches resistance

The Nikkei is approaching Short-term resistance at 20868.87. The Cycles Model turns negative early next week, remaining so through the first week of February.  The bounce may be running out of time.

(JapanTimes)  The Nikkei average staged a strong rally on the Tokyo Stock Exchange Friday, boosted by the yen’s drop against the dollar and higher U.S. stock prices.

The 225-issue Nikkei average jumped 263.80 points, or 1.29 percent, to end at 20,666.07, the best finish since Dec. 19. On Thursday, the key market gauge fell 40.48 points.

The Topix index of all first-section issues closed up 14.39 points, or 0.93 percent, at 1,557.59, after gaining 5.43 points the previous day.

Stocks spurted from the outset on purchases activated by the dollar’s rise above ¥109, market sources said.

U.S. Dollar challenges Intermediate-term resistance

USD rallied to challenge Intermediate-term resistance at 96.05.  The USD remains on a sell signal. The Cycles Model suggests weakness for the next 3-4 weeks.   

(Investing.com)- The greenback picked up steam on Friday despite U.S. consumer optimism hitting its lowest level since Donald Trump was elected president and the government shutdown moving into its 28th day.

The dollar was supported by a stronger-than-expected report for U.S. industrial production in December, in which manufacturing posted an impressive 1.1% gain from November. Such positive surprises relieve some of the worries about the strength of the economy after the slowdown at the end of last year. They also underline the relative strength of the U.S. compared to the Euro zone, where the Bank of Italy warned Friday that the country may have slid into recession with a second straight decline in GDP in the fourth quarter of last year.

Gold eases to the bottom of its trading range

Gold eased to the lower end of its trading range, leaving another “inside” week. The right shoulder of a potential Head & Shoulders formation is complete and the reversal may have begun.  The Head & Shoulders formation matches targets with the already existent Broadening Wedge formation.

(MarketWatch)  Gold futures prices dropped Friday to log their first weekly loss since mid-December, as investors pushed into riskier assets, including stocks, fueled by hope of potential progress toward a resolution in the U.S.-China trade dispute.

“The gold price is moving lower today as [risk-on] investors are optimistic about the U.S.-China trade deal despite the fact the Treasury has denied all the recent rumors. But the fact is that Washington and Beijing want to make the deal now and it appears that they have understood the consequences of this turmoil,” said Naeem Aslam, chief market analyst with Think Markets.

Crude finishes a flat correction

Crude oil is approaching the top of the December corrective bounce, where it may find resistance. While the Cycles were neutral last week, options expiration put a positive twist on the rally. The decline may resume as early as next week through early February.

(CNBC)  Oil prices hit a roughly two-month high on Friday, rising with the stock market, on news that China has put forward a plan to eliminate its trade surplus with the United States.

U.S. West Texas Intermediate crude futures ended Friday’s session up $1.73, or 3.3 percent, at $53.80 per barrel, the best closing price since Nov 21.

International Brent crude oil futures were up $1.50, or 2.5 percent, at $62.68 per barrel around 2:30 p.m. ET. Brent earlier rose as high as $63, its best intraday price since Dec. 7.

Shanghai Index approaches Intermediate-term resistance.

The Shanghai Index continued its bounce, approaching Intermediate-term resistance a 2610.10.  The Cycles Model correctly anticipated further weakness extending through the month of January.  It may continue to decline with a potential bottom near 2000.00-2200.00.

(SouthChinaMorningPost)  Hong Kong and China stocks climbed on Friday, boosted by higher hopes for a resolution to the US-China trade war and a strong comeback by a clutch of companies that plunged suddenly on Thursday.

The Hang Seng Index climbed 1.25 per cent, or 335.18 points, to close the week at 27,090.81 with eight of the nine sub-indexes in positive territory. Friday’s close was at the highest level so far this year, and it is up nearly 5 per centper cent since January trading began.

The Shanghai Composite Index rose 1.42 per cent, or 36.36 points, to 2,596.00. The CSI 300 of blue-chips closed up 1.8 per cent, or 56.75 points, to 3,168.17. Both were up for their third straight week and saw their biggest weekly gains in two months. The Shanghai Composite – the worst performer among major markets in the world last year – is up 4 per cent for the year.

The Banking Index shoots past resistance

BKX suddenly shot up (despite disappointing earnings reports) to reach the 50% retracement of the 2018 decline. The Liquidity Model has turned negative. The Cycles Model suggests the decline may resume the retest of the December low over the next 4 weeks. The structure may become more bearish.

(CNBC)  Banks’ trading desks ended 2018 with a whimper – and nowhere as much as at Morgan Stanley.

The New York-based firm had the worst bond trading performance among the big five Wall Street investment banks, a precipitous 30 percent decline to $564 million. It was one of the most meager hauls since Morgan Stanley revamped the struggling business at the end of 2015, prompting a flurry of questions from analysts.

“I’m struggling with the quarter understanding exactly what happened,” Mike Mayo, a veteran bank analyst at Wells Fargo, said Thursday during the call. “On the one hand, we could say, ’Oh, this is Morgan Stanley acting conservatively, scrubbing the balance sheet, etc. On the other hand, it could be the Morgan Stanley of old where you had hiccups in fixed income like the second half of 2015 or 2013 or during the financial crisis.”

(Bloomberg)  Societe Generale SA is planning to substantially cut costs at its corporate investment-banking unit, a person familiar with the matter said, after the French lender warned that “challenging” conditions in the fourth quarter dented revenue from market units.

Reductions are an urgent priority for Chief Executive Officer Frederic Oudea and may be announced as soon as February, said the person, who requested anonymity because the details are private. A spokesman for Societe Generale declined to comment.

France’s third-largest bank warned on Thursday that trading revenue probably declined about 20 percent in the fourth quarter, undermining Oudea’s efforts to deliver on growth targets. SocGen said that market conditions were behind the drop, and that trading revenue last year was probably about 10 percent lower compared with 2017.

(ZeroHedge)  One may not know it by looking at banker bonuses last year, but 2018 was a banner year if only for bank shareholders and upper management: this is the year when the 6 biggest banks generated (well) over $100 billion in profit. They can thank Trump's tax cuts, the Fed's payment of interest on reserves, rising interest rates, a jump in dealmaking and a retail-banking boom (if not so much the "bad volatility" that resulted in a plunge in fixed income, currency and commodity trading fees).

As Bloomberg first noted, JPMorgan, Bank of America, Wells Fargo and their peers have already reported more than $111 billion of profit for 2018, and Morgan Stanley will complete the money-center picture tomorrow when it releases its fourth-quarter results Thursday and only makes this number bigger.