S&P 500: Flight to safety

10-Year Treasury yields are near record lows after Donald Trump’s announcement of further tariffs on China. The fall reflects the flight to safety, with rising demand for Treasuries as a safe haven.

10-Year Treasury Yield

Crude found support at $50/barrel. Breach would warn of a new down-trend, with a target of $40/barrel. Declining crude prices reflect a pessimistic outlook for the global economy.

10-Year 3-Month Treasury Spread

The S&P 500 found support at 2850. Rising volatility warns of increased market risk. A test of support at 2750 remains likely.

S&P 500

Declining Money Flow on the Nasdaq 100 reflects rising selling pressure. Expect a test of 7000.

Nasdaq 100

The Shanghai Composite Index broke support at 2850. A Trend Index peak at zero warns of strong selling pressure. Expect a test of support at 2500.

Shanghai Composite Index

India’s Nifty is testing support at 11,000. Breach would offer a target of 10,000.

Nifty Index

Dow Jones Euro Stoxx 600, reflecting large cap stocks in the European Union, is testing primary support at 368. Strong bearish divergence on the Trend Index warns of a double-top reversal, with a target of 330.

DJ Euro Stoxx 600

The Footsie is similarly testing support at 7150. Breach would offer a target of 6600.

FTSE 100

I have warned clients to cut exposure to the market. It’s a good time to be cautious.

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.”

~ Jesse Livermore

The eye of the storm

“On Wednesday, the US Department of Commerce added Huawei – and 70 other companies – to its “Entity List.” …. Huawei cannot buy parts or components from US companies without the explicit approval of the US government.” (Trivium China)

We are sliding towards a fully-fledged trade war. Following straight after the imposition of tariffs by both the US and China, US action against Huawei will be taken as a direct attack on Chinese industry.

The CCP is already stoking nationalist sentiment to bolster public support.

“Last night and today, CCTV replaced regularly scheduled programming with two films about the Chinese army fighting the US in the Korean War.” (Trivium China)

Market response is so far muted. On the daily chart, the S&P 500 correction is modest. Expect another test of 2800. Breach would offer a target of 2600.

S&P 500

The Nasdaq 100 retreated below its new support level at 7700 but Money Flow remains strong.

Nasdaq 100

China’s Shanghai Composite found support at 2900.

Shanghai Composite Index

Japan’s Nikkei 225 is ranging between 20000 and 24000. Expect another test of primary support at 20000.

Nikkei 225

India’s Nifty is testing support at 11000. Respect would confirm the primary up-trend.

Nifty Index

In Europe, The DJ Euro Stoxx 600 is undergoing a correction that is likely to test support at 365. But Trend Index above zero continues to signal buying support.

DJ Euro Stoxx 600

The Footsie found support at 7200, with Trend Index again signaling buying support.

FTSE 100

10-Year Treasury yields are testing support at 2.40%. One of the few clear signs that markets are growing increasingly risk averse, as demand for bonds drives down yields.

10-Year Treasury Yields

Robust US employment but global bear market warning

The US economy remains robust, with hours worked (non-farm) ticking up 2.2% in January, despite the government shutdown. Real GDP growth is expected to follow a similar path.

Real GDP and Hours Worked

Average hourly earnings growth increased to 3.4% p.a. for production and non-supervisory employees (3.2% for all employees). The Fed has limited wiggle room to hold back on further rate hikes if underlying inflationary pressures continue to rise.

Average Wage Rate Growth

History shows that the Fed lifts short-term interest rates more in response to hourly wage rates than core CPI.

Average Wage Rate Growth, Core CPI and 3-Month T-Bills

The Leading Index from the Philadelphia Fed ticked down below 1% (0.98%) for November 2018. While not yet cause for concern, it does warn that the economy is slowing. Further falls, to below 0.5%, would warn of a recession.

Leading Index

Markets are anticipating a slow-down, triggered by falling demand in China more than in the US.

S&P 500 volatility remains high and a large (Twiggs Volatility 21-day) trough above 1.0% (not zero as stated in last week’s newsletter) on the current  rally would signal a bear market. Retreat below 2600 would strengthen the signal.

S&P 500

Crude prices have plummeted, anticipatiing falling global (mainly Chinese) demand. Another test of primary support at $42/barrel is likely.

Light Crude

Dow Jones-UBS Commodity Index breached primary support at 79, signaling a primary decline with a target of 70.

DJ-UBS Commodity Index

China’s Shanghai Composite Index is in a bear market. Respect of resistance at 2700 would confirm.

Shanghai Composite Index

Bearish divergence on India’s Nifty also warns of selling pressure. Retreat below 10,000 would complete a classic head-and-shoulders top but don’t anticipate the signal.

Nifty Index

DJ Stoxx Euro 600 rallied but is likely to respect resistance at 365/370, confirming a bear market.

DJ Stoxx Euro 600 Index

The UK’s Footsie also rallied but is likely to respect resistance at 7000. Declining Trend Index peaks indicate selling pressure, warning of a bear market.

FTSE 100 Index

My conclusion is the same as last week. This is a bear market. Recovery hinges on an unlikely resolution of the US-China ‘trade dispute’.

Concessions to adversaries only end in self reproach, and the more strictly they are avoided the greater will be the chance of security.

~ Thucydides (460 – 400 B.C.)

Deal or no deal

Brexit

No one knows what the outcome of Brexit will be but, whatever the outcome, it is unlikely to send global markets into a tail-spin. There is bound to be short-term pain on both sides but the long-term costs and benefits are unclear.

China

Far more likely to send investors scuttling for shelter is a ‘no deal’ outcome on US trade negotiations with China. I would be happy to be proved wrong but I believe that a deal is highly unlikely. There may be press photos with beaming officials shaking hands and tweets from the White House promising a rosy future for all (with or without a wall). But what we are witnessing is not straight-forward negotiations between trading partners, which normally take years to resolve, but a hegemonic power struggle between two super-powers, straight out of Thucydides.

Thucydides wrote “When one great power threatens to displace another, war is almost always the result.” In his day it was Athens and Sparta but in the modern era, war between great powers, with mutually assured destruction (MAD), is most unlikely. Absent the willingness to use military force, the country with the greatest economic power is in the strongest position.

One of the key battlefronts is technology.

“China is now almost wholly dependent on foreign chipsets. And that makes leaders nervous, especially given a series of actions by foreign governments to limit the ability of Huawei and ZTE to operate internationally and acquire Western technology.” ~ Trivium China

“To address this risk, President Xi Jinping aims to increase China’s semiconductor self-sufficiency to 40% in 2020 and 70% in 2025 as part of his ‘Made in China 2025’ initiative to modernize domestic industry.” ~ Nikkei

Xi is unlikely to abandon his ‘Made in China 2025’ plans and the US is unlikely to settle for anything less.

USA

The US economy remains robust despite the extended government shutdown and concerns about Fed tightening.

“Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they had expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight.” ~ The Wall Street Journal

This is just spin. As I explained last week. Fed run-down of assets is more than compensated by repayment of liabilities (excess reserves on deposit) on the other side of the balance sheet. Liquidity is unaffected.

Charts remain bearish as the market views global risks.

Volatility is high and a large (Twiggs Volatility 21-day) trough above zero on the current S&P 500 rally would signal a bear market. Retreat below 2600 would strengthen the signal.

S&P 500

Asia

Hong Kong’s Hang Seng Index is in a bear market but shows a bullish divergence on the Trend Index. Breakout above 27,000 would signal a primary up-trend. This seems premature but needs to be monitored.

Hang Seng Index

India’s Nifty has run into stubborn resistance at 11,000. Declining peaks on the Trend Index warn of selling pressure. Retreat below 10,000 would complete a classic head-and-shoulders top but don’t anticipate the signal.

Nifty Index

Europe

DJ Stoxx Euro 600 is in a primary down-trend. Reversal below 350 would warn of another decline.

DJ Stoxx Euro 600 Index

The UK’s Footsie has retreated below primary support at 6900. Declining Trend Index peaks warn of selling pressure. This is a bear market.

FTSE 100 Index

This is a bear market. Recovery hinges on an unlikely resolution of the US-China ‘trade dispute’.

War is a matter not so much of arms as of money.

~ Thucydides (460 – 400 B.C.)

Risk averse rather than fearful

The S&P 500 is again testing the band of primary support between 2600 and 2550. Follow-through below this level would warn of a bear market. Volatility (21-day) is in the amber zone between 1% and 2%. A real test of market resilience will be the next sizable rally or advance. If declining volatility remains above 1%, that would warn of an imminent market sell-off.

S&P 500

The Nasdaq 100 is in a similar position, with declining Money Flow warning of medium-term selling pressure.

Nasdaq 100

Of the big five tech stocks, only Microsoft looks strong. Facebook is in a primary down-trend but Apple and Google are testing primary support. Apple’s exposure to China is obviously a concern. China accounts for roughly 25% of Apple’s global market but Apple estimates that it is responsible for 4.8 million jobs in China which gives them some negotiating clout.

Big Five tech stocks

If two more of the big five broke primary support, that would in my opinion signal a bear market.

Asia

The Shanghai Composite Index is consolidating in a narrow band below 2700. Downward breakout is likely and would signal another decline, with a target of 2300.

Shanghai Composite Index

India’s Nifty is testing resistance at 11,000. Respect would be bearish, warning of another test of primary support at 10,000. Declining peaks on the Trend Index warn of long-term selling pressure.

NSX Nifty

Europe

Dow Jones Euro Stoxx is in a primary down-trend. Follow-through below 350 confirms a bear market, warn of a decline to test 305/310.

DJ Euro Stoxx 600

The Footsie also broke primary support at 6900. Retracement is testing the new resistance level but respect of 7000 is likely and would confirm a bear market, with a target between 5600 and 6000.

FTSE 100

There is a high level of uncertainty in global markets at present. Europe has Brexit and Italy. The US has investigations into Donald Trump’s election campaign. China has the threat of a trade war with the US. But my sense is that the market has become risk averse rather than fearful. There is no sign of panic selling as yet. But investors are clearly on the defensive and prepared to sell off vulnerable stocks.

Adopt the pace of nature: her secret is patience.

~ Ralph Waldo Emerson

East to West

The S&P 500 put in a strong blue candle this week but one swallow doesn’t make a summer. Follow-through above 2800 would signal a test of 2950. Small bullish divergence on Twiggs Money Flow looks promising but is secondary in nature and may not alter the larger trend.

S&P 500

The Nasdaq 100 shows a similar W-shaped bottom but weaker divergence.

Nasdaq 100

Bellwether transport stock Fedex recovered above the former primary support level at 225 but still looks weak. Reversal below 220 would warn of another decline.

Fedex

Asia

The Shanghai Composite Index rally ran out of steam. Respect of 2700 warns of another decline, with a target of 2300.

Shanghai Composite Index

India’s Nifty is headed for a test of 11,000. Respect would be bearish, warning of another test of primary support at 10,000. Declining peaks on the Trend Index warn of long-term selling pressure.

NSX Nifty

Australia

The ASX 200 is testing primary support at 5650 following a down-turn on the mining index. Bullish divergence on Twiggs Money Flow has now rolled over, with penetration of the rising trendline. Breach of primary support would warn of a decline, with a target of 5000.

ASX 200

Europe

Dow Jones Euro Stoxx warns of a bear market. Breach of primary support at 365, and respect of the new resistance level on the subsequent retracement, warn of a decline to test 305/310.

DJ Euro Stoxx 600

The Footsie is testing support at 6900, while bearish divergence on the Trend Index warns of selling pressure. Breach would signal a decline, with a target between 5600 and 6000.

FTSE 100

Never cut a tree down in the wintertime. Never make a negative decision in the low time. Never make your most important decisions when you are in your worst moods. Wait. Be patient. The storm will pass. The spring will come.

~ Robert Schuller

No explanation required

In the past week, I have seen a number of market commentators attempting to explain the current correction. Reasons given vary from rising interest rates, Fed shrinking its balance sheet, the impact of trade tariffs on manufacturing input costs and inflation, mid-term elections and peak growth in earnings.

Truth is, there is no single reason that could justify the dramatic market falls. Some of the reasons cited are insufficient while others are invalid. But no explanation is necessary. Market sentiment has simply shifted. The scale has tipped and more investors are taking profits than new money coming into the market. When that happens, prices fall. And falling prices become a self-fulfilling prophecy, scaring off new investors and panicking investors with a short-term outlook.

How long this will go on for, I cannot tell. But I am sure there are growing numbers of long-term investors picking through the debris looking for opportunities. And the greater the fall, the greater the opportunity.

Earlier in the week I cited Netflix (NFLX) as one such example. Price has fallen almost 20% in October 2018, while recently released earnings announced a 34% year-on-year increase in revenue for the third quarter and a 130% increase in operating income.

Netflix

Patience is required but opportunities abound.

East to West

A quick recap of markets.

China’s Shanghai Composite Index is in a primary down-trend, having broken primary support at 2650, but rising troughs on the Trend Index warn of strong support. I suspect this is government-orchestrated as investors have little reason for optimism.

Shanghai Composite Index

India’s Nifty is testing primary support at 10,000.

Nifty

Europe is in a primary down-trend, with the DJ Euro Stoxx 600 respecting its former primary support level at 365/366.

DJ Euro Stoxx 600

The Footsie is testing primary support at 6900/7000.

FTSE 100

Dow Jones Industrial Average is undergoing a strong correction. Bearish divergence on the Trend Index warns of a reversal but only breach of primary support at 23,500, completing a double-top, would confirm.

Dow Jones Industrial Average

Dow Jones Transportation Average is already testing primary support at 10,000. Reversal signals on both averages would confirm a bear market according to Dow Theory.

Dow Jones Transportation Average

But technology stocks play a far larger role than in Charles Dow’s day, more than a hundred years ago. The Nasdaq 100 is still a long way above primary support at 6,300. Bearish divergence on Money Flow warns of selling pressure, but only breach of primary support would confirm a bear market.

Nasdaq 100

The only thing we have to fear is fear itself.

~ Franklin D. Roosevelt, 1933 inaugural address

East to West: Europe faces a stern test

The Shanghai Composite Index broke primary support at 2650 but rising troughs on the Trend Index indicate buying pressure. Expect retracement to test the new resistance level at 2700.

Shanghai Composite Index

India’s Nifty is testing primary support at 10,000. Descending peaks on the Trend Index warn of selling pressure. Breach of support at 10,000 would indicate weakness but we need a lower peak to confirm a down-trend.

Nifty Index

European stocks are under the pump, with threats from the Asian contagion, Brexit, Italy and recent US volatility. Breach of support at 365 warns of a primary down-trend.

DJ Euro Stoxx 600 Index

The DAX also breached primary support (11,800). Retracement respected the new resistance level and descending Trend Index peaks warn of growing selling pressure.

DAX Index

France’s CAC-40 index is testing primary support at 5000.

CAC-40 Index

The Footsie is testing primary support at 7000, with descending Trend Index peaks again warning of selling pressure. Breach would signal a primary down-trend.

FTSE Index

A down-turn in Europe would add to uncertainty in US markets.

Nasdaq warns of broad market correction

Tech stocks fell sharply, with the Nasdaq 100 closing below support at 7400, warning of a correction. Twiggs Money Flow (21-day) cross below zero indicates medium-term selling pressure. Follow-through of the index below 7300 would signal a correction to test 7000.

Nasdaq 100

The S&P 500 has so far respected support at 2870. Breach would confirm  a broad market correction and test the rising LT trendline at 2800.

S&P 500

Asia

In China, the Shanghai Composite Index is headed for another test of primary support at 2650. Trend Index peaks at/below zero indicate long-term selling pressure. Breach of 2650 would offer a long-term target of 2000, the 2014 low.

Shanghai Composite Index

India’s Nifty is undergoing a strong correction. Breach of support at 10,000 would warn of a primary down-trend.

Nifty Index

Europe

Dow Jones Euro Stoxx 50 is again testing primary support at 3300. A Trend Index peak at zero warns of mounting selling pressure. Breach of 3300 would warn of a primary decline, with a target of 3000.

DJ Euro Stoxx 600 Index

The Footsie is also testing primary support, at 7250, but a recovering Trend Index indicates buying pressure.

FTSE 100 Index

Rising US interest rates are already hurting developing economies like India and China, and a looming US-China trade war would threaten a global contraction.

Only when the tide goes out do you discover who’s been swimming naked.

~ Warren Buffett

East to West: Trade tariffs spark rally

Commodities rallied and Asian stocks found support after a three-month sell-off.

DJ-UBS Commodity Index

From Reuters (September 19):

Copper jumped to its highest in three weeks on Wednesday, boosted by a weaker dollar after a new round of U.S.-China trade tariffs were not as high as previously expected.

China will levy tariffs on about $60 billion worth of U.S. goods in retaliation for U.S. tariffs on $200 billion worth of Chinese goods. Washington’s new duties, however, were set at 10 percent for now, rising to 25 percent by the end of the year, rather than starting immediately at 25 percent…….

“In some ways the bad news had been priced into the markets and, if anything, the news on trade had been slightly less severe than we had thought it would be,” said Capital Economic analyst Caroline Bain.

“It’s still too early to talk about this as sustainable … it just seems to be a bit of a relief rally after all of the bad news.”

The Shanghai Composite Index rallied off primary support at 2650, a slight bullish divergence on the Trend Index signaling short-term buying pressure. Penetration of the descending trendline would suggest that a bottom is forming.

Shanghai Composite Index

Japan’s Nikkei 225 is testing its January high at 24,000.

Nikkei 225 Index

India’s Nifty is testing support at 11,000. Long tails indicate buying pressure. Respect of support would signal another advance.

Nifty Index

Europe

Dow Jones Euro Stoxx 50 rallied off primary support at 3300 but is yet to break the down-trend.

DJ Euro Stoxx 600 Index

The Footsie also rallied, finding support at 7250, but a declining Trend Index warns of continued selling pressure.

FTSE 100 Index

North America

The S&P 500 rallied off the new support level at 2875 and is likely to test its long-term target of 3000.

S&P 500

The Nasdaq 100, however, continues to test support at 7700. Breach would warn of a correction to test 7000.

Nasdaq 100

Canada’s TSX 60 found support at 950 but declining peaks on the Trend Index continue to warn of selling pressure.

TSX 60 Index

Markets are dominated by one concern, a US-China trade war, and volatility is likely to remain high until a resolution is found.