SPX Rally Needs A Rest

VIX challenged Long-term support at 16.39, closing beneath it on Friday. Primary Cycle [C] has been delayed another week. While investors are heaving a sigh of relief, the Wave structure and Cycles suggest a strong reversal may be imminent.

(Bloomberg)  Two signposts of the global volatility complex suggest the risk rally is set to endure.

After a rare month in which implied swings for the S&P 500 Index exceeded those for emerging markets stocks, the relationship has flipped back to its historic norm. And after blowing out several times last year, the spread between volatility expectations on the Nasdaq and the S&P is drifting lower, too.

SPX stalls beneath Long-term resistance

SPX rallied through Intermediate-term resistance at 2654.84, closing short of Long-term resistance at 2727.40. After five weeks of unbroken gains, the rally needs a rest. In this case it also appears that a retest of the December low must take place. There is a probable Head & Shoulders neckline that, if reached in the next few weeks, may indicate the target of this decline.

(Fortune)  Despite trade wars and an historically long government shutdown, January was a banner month for stocks and the best in more than 30 years, the Wall Street Journal reported. That was after the worst December the markets had seen since the Great Depression.

The Dow Jones Industrial Average saw a rise of 7.2%, the best since January 1985. The S&P 500 was up 7.9%, which was the biggest start to a year since 1987. Nasdaq grew by 9.2%.

Pushing the gains were stocks of banks and smaller companies, both of which had taken a hit in December. The turnaround was helped in part by the Federal Reserve. Chairman Jerome Powell’s remarks in early January about more flexibility in interest rate increases and the body’s decision at the end of the month to leave interest rates where they had been boosted investor confidence.

 NDX breaks through Intermediate-term resistance

After two weeks beneath, NDX broke through Intermediate-term resistance at 6733.90, closing above it. 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 three years of gains. Stay tuned.

(ZeroHedge)  When the portfolio manager for the world's largest asset manager warns that, following a torrid market surge which saw virtually every major asset in January post positive returns, something which Deutsche Bank said had never before been seen, the market resembles a horror movie, it's probably a good idea to listen. Because that's just what BlackRock's Russ Koesterich has done in his latest blog post, asking "Have investors shifted market sentiment too quickly", and giving three specific reasons why that is indeed the case.

High Yield Bond Index closes at a new retracement high

The High Yield Bond Index tested Intermediate-term support at 196.90 before closing over 200.00 for the week. The Broadening Wedge trendline at 195.00, if broken, may clear the way to a potential Head & Shoulders formation that may wipe out up to two years of gains.  

(ZeroHedge)  While credit spread and leveraged loan prices rebounded sharply in the past month, the pain for leveraged loan funds has continued with another $935 million in outflows in the week ended Jan. 30, extending the losing streak to 11 weeks. According to Lipper, $718 million was pulled from mutual funds and $216 million from ETFs. In total, investors have pulled $3.15 billion from the funds year-to-date.

This week’s exodus is the latest in a string of outflows for leveraged loan funds which started in mid-November, and which included four of the biggest weekly withdrawals on record. The 11 week stretch of outflows is the longest such streak since 2017 according to Bloomberg data.

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Moon Kil Woong 2 months ago Contributor's comment

The S&P rally already got a little rest. Now, it doesn't need a rest as much as it needs to broaden. For too long the market has been driven by tech stocks with ever increasing valuations without a major increase in revenue growth or profitability usually required for upward valuation. This was somewhat understandable with low rates and anemic growth, however, this phase of the cycle is now over.