SPX Rises Above Long-Term Resistance

 

VIX extended its Master Cycle low to the close on Friday, challenging the weekly mid-Cycle support at 13.95 and closing beneath it. Primary Cycle [B] appears to be over, or nearly so. While huge gains have been made by shorting Volatility, the Wave structure and Cycles suggest a strong reversal may be imminent.

(ZeroHedge)  We discussed the collapse in the VIX earlier, when we pointed out that at least according to the world's largest bond manager, this artificial market calm foreshadows another surge in volatility just around the corner, which is also why Pimco's CIO had one recommendation: start selling now.

However, while Pimco may be accused of merely talking their book, there is another empirical indicator which suggests that a violent market reversal may be imminent.

SPX rises above Long-term resistance

SPX rose above Long-term resistance at 2743.91 last week, completing 8 weeks of rally from the Christmas low. While there is a chance of reaching its Diagonal trendline at 2850.00, the Cycle is already stretched. The current period of strength may run out early next week.

(Bloomberg)  It was a heck of a week, considering nothing much happened.

U.S. stocks just finished marginally higher for the past four days. The S&P 500 Index rose 0.6 percent, having not closed up or down more than 18 points in any session. In fact, the so-called fear gauge for equities, the Cboe Volatility Index, posted the lowest average reading in the past four months.

That won’t ring many alarm bells for investors. After all, the S&P 500 has gained 16 percent over the past nine weeks, so a pause is understandable. No cause for panic. Unfortunately, there are plenty of other reasons for that.

A menace was lurking in plain sight amid this sea of tranquility: Growth fears have sent so many investors into the safety of Treasuries now with benchmark yields not far from the lowest in a year. The term premium has collapsed. Bond volatility is evaporating. And the bad economic omens have appeared by the day.

 NDX holds near Long-term support/resistance

While NDX rose above Long-term resistance at 70547.65, it has not made much progress this week. The Cycles Model suggests that any residual strength may run its course by early next week. There is a potential Head & Shoulders formation that, if triggered, may erase up to 3 years of gains. Stay tuned!

(ZeroHedge)  One of the recurring market themes we have observed in recent weeks is that just because hedge funds have been painfully - if only from a P&L perspective - underexposed to the recent rally in the stock market, the "pain trade" is higher and that the higher the market rises, the more investors will be forced to enter the market. This thesis has been most aggressively pitched by JPM's Marko Kolanovic who believes that as VIX drops, resulting in greater leverage among the systematic community, the more buyers will emerge, creating a positive feedback loop that sends the market higher for the next three months.

And at least superficially, this take is accurate because as the following chart from Goldman Sachs Prime Services as of Feb 15 2019 shows, both gross and net hedge fund exposure is near the lowest level of the past 2 years. As noted earlier, in its latest hedge fund monitor publications, Goldman said that hedge fund gross exposures have rebounded modestly alongside the equity market "but remain well below levels registered during most of the prior 18 months", and adds that at roughly 230%, current gross exposures are similar to levels in late November 2018.

High Yield Bond Index tests a prior high

The High Yield Bond Index tested its December 4 high, coming within 12 ticks of matching it. The Cycles Model suggests that strength may be waning. The Broadening Wedge trendline at 196.95, if broken, may clear the way to a potential Head & Shoulders formation that may wipe out up to two years of gains in that period of time.  

(Bloomberg)  There are 1.2 trillion reasons for U.S. junk bond and leveraged loan issuance to stay relatively strong this year.

That’s how much money private equity firms globally had available to deploy as of the end of last year, a record level that’s 17 percent above 2017 figures, according to Preqin. The buyouts they’ll need to finance should keep U.S. issuance volume from plunging this year.
 

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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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