VIX closed beneath Short-term resistance at 12.60, leaving it on a sell signal for a third week in a row. It appears to be in a holding pattern for the end of the quarter. However, the Cycles Model shows a likely surge in strength for the VIX through late October.
(MarketWatch) Stock-market investors should prepare themselves for a wild ride in coming weeks.
I say that not because I have any special insight into all the things that could sabotage the stock market in coming weeks—everything from an escalating trade war to political turmoil in Washington. Instead, my prediction is based on something far less inscrutable: The calendar.
October is just around the corner.
SPX reverses from its high
SPX reversed from its all-time high on September 21, exactly 18.5 years from its March 2000 high, and has closed lower for the week. Both price and time targets appear to have been met. The Cycles Model now implies a powerful decline that may last through early November. The last time this has happened was in 2008.
(Bloomberg) Reading market forecasts for the November congressional elections, you get the sense something is missing.
Like, the market forecasts. While Wall Street is awash with efforts to frame outcomes as the vote approaches, there’s a discernible vagueness when you get to the part where strategists say what stocks will do. What’s causing this? Something to do with the last round of predictions, perhaps.
You may recall a certain trepidation in the air over how markets would receive a Donald Trump victory in November 2016. Forecasts for declines of 5 or 10 percent in the S&P 500 were common and 20 percent wasn’t unheard of. As everyone knows, they didn’t come true, and this time around strategists are leaving a wider margin for error.
NDX closes September without a new high
After a bad start of the month, NDX put in a lackluster performance by not making a new high in September. A decline beneath Short-term support at 7495.09 may trip the NDX sell signals. The Cycles Model suggests that the next several months may bring pain to equities. The weakest part of the Presidential Cycle often occurs in October. Will the NDX gain or lose strength as the election approaches?
(ZeroHedge) Among the major groups of stocks around the world that we follow, US small-cap stocks have been the best performer over the last decade as the USD experienced a strong bull market. US small caps have outperformed our mid/large group of developed companies by almost 40% over the last 10 years.
The relative performance has been highly correlated to the movement of the USD. US small caps made an intermediate high in April 2015 after the USD soared from about 80 to 100. They then tested this high in December 2016 as the USD once again reached new highs. Recently, as the USD was on the rise once again, small caps again tested their decade-long relative highs.
However, over the last few weeks, as the USD slowly rolled over, small caps are down about 3.5%.
High Yield Bond Index reverses beneath the trendline
The High Yield Bond Index appears to have made its high on September 21. Since then it has declined beneath its 3-year trendline. A sell signal is confirmed beneath Intermediate-term support at 199.71. While this index has not made a new all-time high, several passive ETFs have made new highs.
(ZeroHedge) For the latest confirmation of the upside down market, look no further than corporate bonds where the riskiest, CCC-rated junk bonds are set to make a positive return for the 3rd consecutive year, the longest winning streak since records began in 1997.
Not only have the lowest quality junk bonds, those rated CCC or lower, generating respectable absolute returns of 5.8% YTD, they have also outperformed higher quality debt with a 1% total return so far this month, according to Bloomberg and ICE data. Additionally, the lowest rated junk bonds have also outperformed the broader junk bond index, which has returned 1.9% YTD.
UST due for a reversal
The 10-year Treasury Note Index appears to have made its Cycle low on September 25 at 118.35. From here we may see UST rally back toward the Head & Shoulders neckline near 123.00. This rally may be painful for the speculative short sellers in treasuries as it may induce short-covering.
(Forbes) Outspoken billionaire investor Jeff Gundlach garnered headlines recently highlighting that there was a “massive increase” in the number of investors short 10-year and 30-year U.S. Treasury bonds. As the DoubleLine Capital CEO observed, these short Treasury positions were the “highest for both in history.” “[It] could cause quite a squeeze,” he added.
We wholeheartedly agree.
Wall Street consensus has built a massive net short position across the entire Treasury bond curve. (See our table below showing the latest Wall Street consensus positioning data for all assets.)
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