SPX Makes Key Reversal

VIX expanded its retracement to 83.8% in the three week period since its high. What seems to be missed is the daily key reversal that has put the VIX back on a buy signal. The next Cycle Top may occur in the next 2-3 weeks.

(ZeroHedge)  Two months ago, we detailed what the current Fed Chair (then a mere mortal) Jay Powell said during the October 23-24, 2012 FOMC meeting – just one month after the Fed announced QE3, as during the October 23-24:

[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.

SPX also makes a weekly key reversal

SPX made a wide-ranging pattern known as a key reversal. It closed beneath the upper long-term trendline at 2726.01 and the prior week low. Should the lower short-term trendline at 2675.00 be broken, long-term support at 2569.73 may be tested. The fractal model suggests that the first test of the lows may bounce at Long-term support without breaking the low, but there may be multiple tests of that support.

(CNBC)  U.S. stocks closed well off session lows on Friday, helped by a sharp rise in health care shares.

The S&P 500 ended 0.5 percent higher at 2,691.25 after falling more than 1 percent. Health care sector was the best-performing sector, gaining 1 percent. Shares of Universal Health Services and Perrigo were among the best-performers in the index.

The Nasdaq composite rose 1.1 percent to 7,257.87 as the iShares Nasdaq Biotechnology ETF (IBB) advanced 2.4 percent. At its low, the Nasdaq fell as much as 1.3 percent.

The Dow Jones industrial average closed 70.92 points lower at 24,538.06 after falling as much as 391 points. Johnson & Johnson and Merck were among one of the best-performing stocks in the index, rising 1.2 percent each.

NDX also has a volatile week

The NDX also had a wide-ranging week, but did not close beneath the prior week low. However, the test of the upper trendline of the two-year channel failed. This implies a retest of the February 9 low. The Fractal Model also suggests that Long-term support at 6280.96 may be tested again..

(ZeroHedge)  As the recent swoon in the S&P showed, the lasting pain from the February vol unwind has combined with multiple policy shocks to weigh on markets.

However, while the early Feb swoon was largely the result of the “Quant Quake”, the transmission mechanism in this move lower is no longer systematic funds / vol target strategies, according to Morgan Stanley’s Chris Metli. Instead, the MS executive director notes that this time selling has come from more fundamental/discretionary investors – the MS PB Content team has noted that there were multiple large sell days from L/S HFs this week (versus buying the week of Feb 5th ) – exacerbated by a lack of liquidity.

Here the lack of liquidity is important.

High Yield Bond Index swings between support and resistance

The High Yield Bond Index rallied to Intermediate-term resistance at 193.35, then sold off to the trendline at 184.00. The sell signal remains and the Cycles Model suggests that Long-term support at 181.05 may be broken this week.

(Barrons)  There’s something funny in the high-yield bond market, and even Martin Fridson isn’t quite sure what it means—though he does believe the junk-bond market has enjoyed a false tranquility for the past 30 years.

Fridson, whom Institutional Investor calls “the dean of high-yield-bond analysts,” was combing through price data with his researchers, Kai Zhao and Yaxian Li. They were studying the magnitude of price movements in government bonds, investment-grade corporate bonds, and high-yield bonds, from 1987 to 2017—and something stood out.

Price swings should fall along a normal distribution. But it turns out the bell curve in high-yield bonds is messed up.