SPX Breaks Critical Supports

VIX made a near-Fibonacci retracement of 78.7% against the prior week high in only 5 days. It appears that those who fled the inverse VIX products of the week before may have added even more losses. Even so, the downtrend in the VIX is broken. The next Cycle Top may not occur for the next 4-6 weeks.  

(Bloomberg)  If you think bitcoin’s moves are extreme, look at what’s happened to the Cboe Volatility Index. The VIX’s 10-day volatility increased to a record 520 percent Wednesday as Bloomberg rebounded for a Bloomberg day from their plunge last week. The reading was not only the highest in the VIX’s 28-year history, but also surpassed the cryptocurrency’s peak for the past 7 1/2 years: 501 percent, set in April 2013.

SPX rockets back to the Ending Diagonal trendline

SPX launched from the lower Ending Diagonal trendline to the top trendline this week. To most investors it felt as if nothing had happened over the past 3 weeks. However, critical supports were broken and the nature of the market is to retest them. The second retest of the lows may not be quite as successful.  

(CNBC)  Stocks closed slightly higher on Friday, extending their winning streak to six days in a row, and posted strong weekly gains.

But the major averages ended off their session highs after news broke that special counsel Robert Mueller indicted 13 Russian nationals and three Russian entities for allegedly interfering with the 2016 U.S. presidential election.

The market soon stabilized after Deputy Attorney General Rod Rosenstein emphasized in a press conference that these indictments had no allegations of willing support to the Russians by Americans. “The nature of the scheme was that the defendants took extraordinary steps to make it appear that they were ordinary American political activists,” he said.

NDX rallies back to challenge its Cycle Top

The NDX rallied back to challenge its Cycle Top at 6798.30 after finding support at the Intermediate-term level and lower Ending Diagonal trendline.  Closing beneath Cycle Top resistance allow the NDX to do a retests of the lower supports. A failure here allows the NDX to decline to mid-Cycle support and the 7-year trendline at 5260.01.   A breakthrough at that point suggests a further decline to the October 2011 low.  

(Forbes)  There’s a problem lurking in the stock market known as the “risk-parity” trade.

The strategy, which involves investors switching between different assets based on changes in market volatility, has now grown so big that it threatens to sink the market.

How big? Some estimates peg the amount of money pursuing this type of strategy at as high as half a trillion dollars. Trades designed to profit from changes in volatility, which are inextricably linked to risk-parity, add as much as a further $2 trillion.

The issue is not the strategy itself, it is when investors decide that it is no longer useful and decide to exit their positions. In other words, when all at once they dump their positions the market will likely tank.

High Yield Bond Index bounces to Intermediate-term resistance

The High Yield Bond Index retraced 50% of its decline, challenging Intermediate-term resistance at 192.90, then closing beneath it. The sell signal remains and the Cycles Model suggests additional weakness going forward.

(ZeroHedge)  Earlier this week, GMO’s James Montier repeated verbatim  one of our recurring puzzling observations about the current market: while “a recent Bank of America ML survey showed the highest level of those citing “excessive valuation” ever. Yet despite this, the same survey showed fund managers to still be overweight in equities.”Back in August, we called this just one of the many bizarre market paradoxes observed in the market.Here is another paradox.   As we noted earlier, after last week’s volocaust, this week was the best week for global ZeroHedge since 2011 as traders and algos furiously BTFD (and sold vol), clearly forgetting what happens when markets become too stretched, as they are becoming again. It wasn’t just stocks: junk bond yields dropped the most in three months, and CCC yields saw the biggest drop in more than five weeks yesterday amid what is reportedly buying flurry. As Bloomberg put it, “it was as if high yield investors were making up for the lost week” with HYCDX rising the most in 11 months, and junk bond ETFs, JNK and HYG, saw the biggest increase in three months.