E SPX Retests Trendline In ‘Kiss Of Death’

VIX nearly did a 100% retracement to the August 2015 high as suggested last week. This week it pulled back to test the Cycle Top support/resistance at 22.31.  It appears to have yet another surge higher in store for it.The Cycles Model has a triple indicator of a higher Wave (3) top in the next week.   

(ZeroHedge  Less than a month ago, Goldman Sachs presciently published a note research report “VIX ETPs are now net short vega – should we worry“.

…. which as the title suggested showed that the net position of VIX ETPs has become short over the past few weeks, for only the second time in their eight year history.

This odd finding – namely that the VIX ETPs had shifted their traditional vol bias from long to short – prompted the Goldman strategist to ask glibly “Should we worry?”

SPX declines to Long-term support

SPX declined to challenge Long-term support at 2545.37…then bounced to its two-year Ending Diagonal trendline. A failed retest of a trendline such as this is often referred to as “the kiss of death.”  The Cycles Model suggests probable severe weakness lasting from a few days to more than a week..  

(Bloomberg)  One of the wildest runs in U.S. stock-market history began with the collapse of arcane bets on volatility and ended with a sober realization: The easy ride is over. After heart-stopping swings in the Dow (Down 1,000 points! Up 500 points!), a market correction is finally here. 

But why—and why now? Inflation, interest rates, valuations, computers, ETFs, Trump; plenty of reasons were offered up.  Among the lingering questions is the big one: Is this a hiccup or the start of something worse?

NDX violates its 2-year Diagonal trendline

The NDX declined beneath the lower Ending Diagonal trendline at 6840.00, giving a sell signal in the process. It also bounced from long-term support at 6103.87 to challenge the trendline again. A failure here allows the NDX to decline to mid-Cycle support and the 7-year trendline at 5240.83. A breakthrough at that point suggests a further decline to the October 2011 low.  

(ZeroHedge)  If it seems like it was just a few days ago  that we reported of the biggest ever inflow into equities, it’s because that’s precisely when it happened. It was then that according to BofA CIO Michael Hartnett, we observed a “non-stop euphoria cabaret” in which markets saw a record $33.2bn inflow to equity funds, record $12.2bn inflow to active funds, $1.5bn into gold (50-week high), as well as record inflows to tech & TIPS.

Incidentally, that was the day the S&P hit its all time high, and more importantly, the day BofA also said that its euphoria and panic-buying driven “sell signal” was just triggered few days ago  , and predicted a 12% selloff in the next three months.

In retrospect, it took just two weeks because that post marked the peak of the market, and it has been non-stop selling since.

High Yield Bond Index challenges Long-term support and trendline

The High Yield Bond Index fell through its Cycle Top support, declining an additional 9% to challenge the 6-year trendline and Long-term support at 180.10. The bounce out of the low was sharp but short.The sell signal remains and the Cycles Model suggests additional weakness going forward.

(ZeroHedge)  Yesterday saw rate vol ZeroHedge to accelerate, and today we see credit markets start to snap as equity market volatility contagion is spreading.

In fact, credit market volatility is spiking – and is above the Aug 2015 highs (higher relative to stocks where VIX remains below those levels)…

This is the biggest spike in ZeroHedge bond spreads since Aug 2015’s crash and raises relative funding costs to their highest since Dec 2016…

UST may show further weakness next week

The 10-year Treasury Note Index made a small bounce this week, but is being suppressed by its Cycle Bottom resistance, limiting its upward trajectory. There may be a further decline before another attempt at higher ground may be made. If so, UST may not see another bounce until late February.