Death of the Yen carry trade

Markets seem convinced that the recent stock sell-off in the US is due to growth concerns — after a weak labor report. We think they are mistaken. The real cause of the sell-off is the unwinding Yen carry trade.

Hedge funds have been making a killing on the Yen carry trade, but they just got killed. Borrowing cheaply in Yen and investing in stocks and Treasuries in the US, the trade benefited from ultra-low interest rates in Japan, far higher short-term rates in the US, massive appreciation in the top ten stocks on the S&P 500, and a rapidly weakening Yen against the Dollar.

But the Bank of Japan just pulled the rug from under them, raising interest rates and indicating that they plan to normalize monetary policy over time. The move caused a sharp rise in the Japanese Yen, with the US Dollar plunging below 150.

USD/Japanese Yen

Japanese stocks followed, possibly due to concerns over the impact of a strong Yen on export sales.

Nikkei 225 Index

The contagion soon spread to neighboring markets.

South Korea KOSPI 100 Index

Stocks

Unwinding carry trades caused a sell-off in US stocks as traders hastily closed their leveraged positions. The S&P 500 broke support at 5400, and the Trend Index crossed to below zero, warning of a correction to test 5200.

S&P 500

The equal-weighted index ($IQX) similarly broke support at 6800, offering a target of 6600. The long tail indicates strong buying pressure but this often fails, or takes several days, to reverse a sharp market fall.

S&P 500 Equal-Weighted Index

There was nowhere to hide, with the Russell 2000 Small Caps ETF (IWM) also breaking support and the Trend Index dipping below zero.

Russell 2000 Small Cap ETF (IWM)

Treasury Markets

The Fed left rates unchanged this week but indicated that rate cuts will likely commence in September. Treasury yields fell but the primary driver was the strong flight to safety from the stock sell-off, with the 10-year yield plunging to a low 3.8%. We expect retracement to test resistance at 4.0% but the Trend Index peak below zero warns of strong buying, with downward pressure on yields.

10-Year Treasury Yield

Financial Markets

Financial market liquidity remains steady. The Chicago Fed Financial Conditions Index declined to -0.58, indicating further monetary easing.

Chicago Fed Financial Conditions Index

Commercial bank reserves at the Fed edged lower for the third consecutive week but the changes were marginal.

Commercial Bank Reserves at the Fed

Bitcoin is retracing to test support at $60K but shows no sign of a significant liquidity contraction at this stage.

Bitcoin (BTC)

Dollar & Gold

Unwinding carry trades also caused a sharp fall on the Dollar, with the Dollar Index testing support at 103.

Dollar Index

Gold failed to get much of a lift from the flight to safety, with most of the flow going to Treasuries.

Spot Gold

Silver, likewise, failed to benefit.

Spot Silver

Energy

Ismail Haniyeh was assassinated in Tehran, presumably by Israel. Iran’s supreme leader, Ayatollah Ali Khamenei, vowed that Israel would pay a price for killing the Hamas leader on Iranian soil, raising fears of escalation.

However, concerns over Middle East supply failed to move crude prices, with markets dominated by record US production of 13.3 million barrels per day.

EIA Crude Field Production

Nymex WTI crude is headed for a test of support between $72 and $73 per barrel. Breach would offer a target of $68. The US Department of Energy will likely support prices at this level, refilling the strategic petroleum reserve (SPR), as many shale producers’ cash costs are around $60 per barrel. Lower prices risk a drop in production as producers shut marginal wells.

Nymex WTI Crude

Uranium

Sprott Physical Uranium Trust (SRUUF) retreated below support at 18.00, confirming a bear market for uranium. Trend Index peaks below zero warn of strong selling pressure.

Sprott Physical Uranium Trust (SRUUF)

Base Metals

China over-invested in manufacturing capacity in an attempt to compensate for falling investment in their troubled real estate and infrastructure sectors. They now face resistance from international trading partners, unwilling to accept the massive surge in Chinese exports of manufactured goods and surplus steel and base metals. The dispute will likely cause increased trade protection and a sharp decline in global trade.

The down-trend in copper and aluminum is expected to continue.

Copper & Aluminum

Labor Market

A weak July labor report reinforced the Fed’s stance on early rate cuts, with job growth slowing to 114 thousand in July.

Employment Growth

The normally reliable Sahm recession indicator broke above 0.50 to indicate a recession. But the unemployment rate is rising off an unusually low base, so this time could be different.

Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months. (Claudia Sahm)

Sahm Rule & Unemployment

Layoffs fell to 1.5 million in June which is different from what one would expect when the unemployment rate rises.

Layoffs & Discharges

Average weekly hours fell to 34.2, however, usually a warning that economic activity is slowing.

Average Weekly Hours

Job openings of 8.2 million in June are still above unemployment, indicating a tight labor market.

Job Openings

Continued claims for unemployment remain below 2.0 million, also indicating a tight labor market. Above 3.0 million would warn of recession.

Continued Claims

Average Hourly Earnings

Average hourly earnings growth declined to an annualized 2.75%, indicating that inflationary pressures are easing.

Average Hourly Earnings

Economy

Aggregate hours worked are growing at 1.3% year-on-year, suggesting low but positive GDP growth in the third quarter.Real GDP & Total Hours Worked

Heavy truck sales also held up well in July, indicating sustained economic activity.

Heavy Truck Sales

Employment in cyclical sectors — Manufacturing, Construction, and Transport & Warehousing — also grew by 40 thousand jobs in July, showing no sign of a recession.

Employment in Cyclical Sectors: Manufacturing, Construction, and Transport & Warehousing

ISM Manufacturing

ISM manufacturing PMI declined to 46.8% but remained above the 42.5% threshold typically accompanying a recession.

ISM Manufacturing PMI

Though declining new orders indicate some slowing ahead.

ISM Manufacturing New Orders

Conclusion

Stocks are expected to undergo a correction, with the S&P 500 testing support at 5200. Sales are fueled by unwinding carry trades as the Japanese Yen sharply strengthened after the Bank of Japan raised interest rates and indicated that they plan to normalize monetary policy.

The sell-off in stocks fueled a flight to safety which mainly benefited Treasuries, causing a sharp fall in the 10-year yield to 3.8%.

Gold and silver were left on the sidelines but could still benefit from low long-term interest rates and a weakening Dollar.

Declining crude oil and base metal prices warn of weak industrial demand from China. China’s efforts to compensate by exporting excess production is likely to meet stiff resistance from trading partners. Increased trade barriers are expected to further slow Chinese manufacturing and commodity imports, impacting Australia and other resource-based economies.

The Sahm rule warns of a US recession but the unemployment rate is rising from an unusually low base and there are plenty of signs of continued robust economic activity in the US economy. Expectations of a recession are likely premature, with a slow-down more likely to occur in 2025.

The full impact of a hawkish Bank of Japan monetary policy on US Treasury and financial markets should not be underestimated. However, the change is likely to be gradual, with frequent consultation with the US Treasury to minimize disruption after the initial impact of unwinding carry trades.

Acknowledgements

Santa rally: Monetary easing offsets China woes

China’s economy is struggling despite injection of moderate stimulus and efforts to support a collapsing real estate sector. Shrinking demand from China threatens a global economic contraction. G7 central banks have responded with monetary easing, causing a broad rally in stocks. This is most likely a bear market rally, with far shorter duration than a bull market.

China’s Shanghai Composite Index is testing primary support at 2900, warning of an economic contraction. The Trend Index peak near zero confirms selling pressure.

Shanghai Composite

Copper, however, has penetrated its descending trendline. Follow-through above 8500 would test resistance at $8750 per metric ton, threatening a wide double-bottom reversal with a target of $9500. Breakout above $8750 would signal global economic recovery, while reversal below $7800 would warn of a global recession.

Copper

US Stocks

The S&P 500 is testing it 2022 high at 4800, buoyed by injections of liquidity into financial markets.

S&P 500

The equal-weighted S&P 500 broke resistance at 6300, suggesting a broader rally than just the top 7 stocks. Retracement that respects the new support level would confirm the target at 6665.

S&P 500 Equal-Weighted Index ($IQX)

The Russell 2000 small caps ETF (IWM) threatens a similar breakout above 200, offering a target of 240. Breakout would confirm that investors are growing more aggressive (risk-on) and downplaying risks.

Russell 2000 Small Caps ETF (IWM)

Interest Rates

Ten-year Treasury yields are retracing to test resistance at 3.9% or 4.0%; respect is likely and would confirm the target of 3.5%.

10-Year Treasury Yield
An increase in supply of Treasury Notes will test bulls’ conviction next week:

A raft of fresh, post-Christmas government bond supply will put that comprehensive bullishness to the test. Next week, Treasury will auction $57 billion, $58 billion and $40 billion in two-, five- and seven-year notes, respectively. That’s up 20%, 15% and 7% from their average sizes over the past four monthly auctions. (Grant’s Current Yield)

The 2-year Treasury yield (purple below) is falling in anticipation of Fed rate cuts next year. A peak in the 2-year tends to lead the first rate cuts by 6 to 9 months. The signal misfired with the SVB banks crisis in March but the October peak warns of Fed rate cuts in Q2 or Q3 of 2024.
Fed Funds Rate Minimum Target & 2-Year Treasury Yield

International Stocks

The FTSE 100 is testing resistance at 7700, with a Trend Index trough at zero signaling buying pressure.

FTSE 100

The DJ Stoxx Euro 600 — reflecting the top 600 stocks in Europe — broke resistance at 470. Follow-through above 480 would test the 2022 high of 494.

DJ Euro Stoxx 600

Japan’s Nikkei 225 is testing long-term resistance at 33750. Breakout would signal a fresh primary advance but declining Trend Index peaks show a lack of commitment from buyers.

Nikkei 225 Index

The ASX 200 is testing resistance at 7600, buoyed by strong iron ore prices and falling long-term bond yields. A sharp rise in the Trend Index indicates buying pressure but reversal below 7400 would warn of a correction to test support at 7000.

ASX 200

Gold & the Dollar

The US Dollar Index respected resistance at 102.50, confirming the target at 100. Trend Index peaks below zero signal strong selling pressure.

Dollar Index

Gold broke through resistance at $2050, closing at $2053 per ounce. Expect retracement to test the new support level; respect would confirm another attempt at $2100. A falling Dollar and increased bullion demand from central banks is expected to maintain upward pressure on Gold prices.

Spot Gold

Conclusion

Stocks are rallying in response to falling long-term Treasury yields and in anticipation of Fed rate cuts next year. But falling LT Treasury yields is a medium-term rally in a long-term bear market, with LT yields expected to rise in 2025. Fed rate cuts are also a bearish sign, normally preceding a recession by several quarters — falling earnings are definitely not bullish for stocks.

Investors will need to be agile, to take advantage of the current bullishness in stocks while guarding against:

  • a trend reversal in long-term yields; and
  • signs that the broad economy is falling into recession.

Vacation

This is our last newsletter of the year as we close our office for two weeks over Christmas and the New Year.

We wish all our readers peace and goodwill over the festive season and hope for a less tumultuous year ahead.

The Magpie by Claude Monet

The Magpie by Claude Monet

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.

Bears in the East, Bulls in the West

Market fears of a trade war appear to be easing but investors in China and South Korea remain cautious.

The Shanghai Composite Index is retracing to test resistance at the former primary support level at 3000.

Shanghai Composite Index

Dow Jones – UBS Commodity Index shows a similar retracement in commodity prices.

DJ-UBS Commodity Index

While crude oil prices have found support at the LT rising trendline.

Nymex Light Crude

South Korea’s Seoul Composite Index is in a primary down-trend but retracement to test the former primary support level at 2350 is likely.

Seoul Composite Index

Japan is more isolated and the Nikkei 225 is testing resistance at 23,000. A rising Trend Index suggests that breakout is likely, which would test the January high at 24,000.

Nikkei 225 Index

India is stronger, with the Nifty breaking resistance at its January high of 11,100 to signal a primary advance with a target of 12,000. But first, expect retracement to test the new support level.

Nifty Index

Europe

Dow Jones Euro Stoxx 600 was boosted by news that the EU-US trade dispute is settled. A Trend Index trough above zero signals strong buying pressure. and another test of 400 is likely.

DJ Euro Stoxx 600 Index

A bullish saucer pattern on the Footsie suggest further gains. The Trend Index trough above zero indicates buying pressure. Breakout of the index above 7800 would signal another advance, with a target of 8200.

FTSE 100 Index

North America

The Nasdaq 100 retreated when Facebook (FB) and Twitter (TWTR) reported disappointing growth for the quarter. Bearish divergence on the Trend Index warns of selling pressure but this appears secondary and support at 7000 is likely to hold. Respect would confirm another advance.

Nasdaq 100

Friday’s retreat is also evident on the S&P 500 daily chart. Expect retracement to test new support at 2800. A strong GDP result should strengthen support.

S&P 500

Canada’s TSX 60 retraced to test the new support level at 970. Respect would signal a test of 1000 but breach is as likely, testing support at 940.

TSX 60 Index

Japan & China rally

Japan’s Nikkei 225 Index broke resistance at 17500 while rising Money Flow indicates buying pressure. Target for the rally is the November 2015 high of 20000*.

Nikkei 225 Index

* Target medium-term: 17500 + ( 17500 – 15000 ) = 20000

Shanghai Composite Index followed through after a brief consolidation at 3200, offering a target of 3400*. Expect retracement to test the new support level at 3100 but rising Money Flow suggests respect is likely.

Shanghai Composite Index

* Target medium-term: 3100 + ( 3100 – 2800 ) = 3400

Asia pulls back

China’s Shanghai Composite Index retreated below resistance at 3100. Prospects of a primary up-trend have dimmed and further consolidation between 2800 and 3100 is likely.

Shanghai Composite Index

Japan’s Nikkei 225 Index is pretty directionless, retreating from resistance at 17000. Breach of 16000 would warn of another test of primary support at 15000. But a broad base between 15000 and 17000 is likely.

Nikkei 225 Index

India’s BSE Sensex is the most promising, consolidating in a bullish narrow range around 28000. Upward breakout would signal a further advance towards the 2015 high of 30000. Bearish divergence on Twiggs Money Flow warns of long-term selling pressure, however, and downward breakout would warn of a correction to 25000 or 26000.

SENSEX

Asia: Shanghai weakens

The Shanghai Composite Index broke medium-term support at 2900, warning of another test of primary support at 2700. Reversal of Money Flow below zero would warn of a decline to 2400*.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is edging higher but trend strength is weak. Breakout above resistance at 17000 was followed by a retreat to 16000. Support is weak and breach of 16000 would signal another test of primary support at 15000.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17500 ) = 15000

India’s Sensex is more bullish, testing its upper trend channel at 26000. Short retracement is a bullish sign and breakout above 26000 would signal that the down-trend is ending. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal.

SENSEX

* Target calculation: 23000 – ( 25000 – 23000 ) = 21000

Signs of recovery

A strong blue candle on the S&P 500 daily chart suggests that the latest correction is over. Penetration of the descending trendline would confirm. 21-Day Twiggs Money Flow recovery above zero would strengthen the signal. Recovery above 2120 would signal an advance to 2200*. Look for confirmation from the Dow Jones Industrial Average and Transport sector.

S&P 500 Index

* Target calculation: 2120 + ( 2120 – 2040 ) = 2200

CBOE Volatility Index (VIX) at 13 indicates low risk typical of a bull market.

S&P 500 VIX

Dow Jones Industrial Average also shows signs of a recovery. Reversal above 18000 would confirm the correction is over. Breakout above 18300 would offer a target of 19000*. 13-Week Twiggs Money Flow holding above zero continues to signal a healthy primary up-trend. Breach of support at 17500 is unlikely, but would warn of a correction to test primary support (and trendline) at 17000.

Dow Jones Industrial Average

* Target calculation: 18300 + ( 18300 – 17600 ) = 19000

Bellwether transport stock, Fedex surged to test primary resistance at $184. Rising 13-week Twiggs Money Flow indicates buying pressure. Breakout would offer a target of 204* — a positive sign for the economy.

Fedex

* Target calculation: 184 + ( 184 – 164 ) = 204

A long tail on Canada’s TSX 60 suggests strong support at 855. Recovery above the descending trendline would indicate the correction is over. A 13-week Twiggs Momentum trough above zero would signal continuation of the primary up-trend, while breakout above 900 would offer a long-term target of 1000*.

TSX 60 Index

* Target calculation: 900 + ( 900 – 800 ) = 1000

Europe

Germany’s DAX is testing support at 11000. Recovery above the descending trendline would indicate the correction is over. Declining 13-week Twiggs Money Flow continues to warn of selling pressure, but penetration of the descending trendline would also suggest that buyers are back in control. Reversal below 11000 is unlikely, but would offer a target of 10000*.

DAX

* Target calculation: 11000 – ( 12000 – 11000 ) = 10000

The Footsie is testing support at 6700/6750. Declining 13-week Twiggs Money Flow continues to warn of selling pressure, but penetration of the descending trendline would suggest the return of buyers. Breakout above 7100 would confirm a primary advance with a long-term target of 8000*. Reversal below 6700 is unlikely, but would warn of a primary down-trend.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6000 ) = 8000

Asia

The Shanghai Composite broke 5000. The situation appears artificial, considering current economic data, and I believe the accelerating up-trend will lead to a blow-off.

Shanghai Composite Index

* Target calculation: 3500 + ( 3500 – 2500 ) = 4500

Retracement on Japan’s Nikkei 225 Index respected support at 20000, suggesting an advance to 22000*. Oscillation high above zero on 13-week Twiggs Momentum signals a strong primary up-trend.

Nikkei 225 Index

* Target calculation: 20000 + ( 20000 – 18000 ) = 22000

India’s Sensex is testing primary support at 26500. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure, however, and recovery above zero would strengthen the signal. Respect of support and penetration of the descending trendline would suggest another primary advance. Breach of primary support is less likely, but would warn of a primary down-trend with support at 23000*.

SENSEX

* Target calculation: 26500 – ( 30000 – 26500 ) = 23000

Australia

“Unemployment has fallen to a one-year low of 6 per cent in May as an estimated 42,000 jobs were added to the economy last month.” ~ ABC News

The ASX 200 found support at 5500 after solid employment numbers and a rally in US markets. Recovery above 5650 and the descending trendline would indicate the correction is over, suggesting a fresh advance. Breakout above 6000 is still some way off but would offer a target of 6500*. Reversal below 5450 remains as likely, however, and would warn of a test of primary support at 5120/5150.

ASX 200

* Target calculation: 6000 + ( 6000 – 5500 ) = 6500

Moderate decline of 13-week Twiggs Money Flow indicates medium-term selling pressure, typical of a secondary correction not a reversal.

The Banking sector [XBAK] dragged the index lower over the last two months, but now faces solid support at its two-year low of 83. Twiggs Momentum (13-week) bearish divergence warns of a down-trend, but recovery above zero would suggest otherwise.

ASX 300 Banks


More….

The Impunity Trap by Jeffrey D. Sachs | Project Syndicate

RIP ZIRP | PIMCO

How much longer can the global trading system last? | Michael Pettis

Crude retraces

Gold breaks $1180 support

Australian exports hammered

Itzhak Perlman: Schindler’s List

Mike Batt: Caravans (on the move)

The law locks up the man or woman
Who steals the goose off the common
But leaves the greater villain loose
Who steals the common from the goose.

~ Medieval English ditty from Jeffrey Sachs The Impunity Trap

ASX breaks support

Australia

The ASX 200 broke through the band of support between 5650 and 5550, warning of a test of primary support at 5120. Declining 13-week Twiggs Money Flow indicates medium-term selling pressure, typical of a secondary correction not a reversal.

ASX 200

If we look at the two biggest sectors on a monthly chart, Metals & Mining has been in a down-trend since 2011 and is testing the lows of 2008. The Australian economy withstood the decline primarily because of low employment in the mining sector relative to its size.

ASX 300 Metals & Mining

Banks held up surprisingly well on the back of a resilient real estate market — I would call it a housing bubble because of the high average price to household income ratio. Pressure is mounting to improve bank capital ratios (especially after the Murray Inquiry) and curb aggressive lending. The long-awaited correction is under way and likely to find support between 82 and 84. The weight of the sector means the ASX 200 index is likely to follow.

ASX 300 Banks

Twiggs Momentum, however, shows a bearish divergence and has crossed below zero, warning of a (sector) reversal. Breach of primary support would strengthen the signal.

North America

The S&P 500 is ranging in a bullish narrow band between 2100 and 2120 on the daily chart. 21-Day Twiggs Money Flow holding above zero suggests moderate buying pressure. Upward breakout would signal an advance to 2200*, while reversal below 2100 would warn of a correction to 2040/2050. Look for confirmation from the Dow Jones Industrial Average.

S&P 500 Index

* Target calculation: 2120 + ( 2120 – 2040 ) = 2200

CBOE Volatility Index (VIX) indicates low risk typical of a bull market. The 63-day moving average holding below 20 reinforces the signal.

S&P 500 VIX

Dow Jones Industrial Average found support at 18000. Expect another test of resistance at 18300. Breakout would offer a target of 19000*. Reversal below 18000 is unlikely, but would warn of a correction to test the primary trendline and support at 17000.

Dow Jones Industrial Average

* Target calculation: 18300 + ( 18300 – 17600 ) = 19000

Canada’s TSX 60 continues to test resistance at 890. Breakout would confirm the end of the correction and indicate another test of long-term resistance at 900. 13-Week Twiggs Momentum holding above zero suggests a primary up-trend. Breakout above 900 would offer a long-term target of 1000*.

TSX 60 Index

* Target calculation: 900 + ( 900 – 800 ) = 1000

Europe

Germany’s DAX retreated from resistance at 12000. Declining 13-week Twiggs Money Flow warns of further selling pressure. Reversal below 11000 is unlikely, but would offer a target of 10000*.

DAX

* Target calculation: 11000 – ( 12000 – 11000 ) = 10000

The Footsie is ranging in a bullish narrow band on the weekly chart. Gradual decline of 13-week Twiggs Money Flow is typical of a secondary correction or consolidation. Breakout above 7100 would confirm a primary advance, offering a long-term target of 8000*. Reversal below 6900 is unlikely, but would warn of a correction to 6700.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6000 ) = 8000

Asia

The Shanghai Composite is testing 5000 after a brief retracement to 4500. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. I am wary of long-term prospects for the Chinese economy and believe the current accelerating up-trend is likely to end in a blow-off.

Shanghai Composite Index

* Target calculation: 3500 + ( 3500 – 2500 ) = 4500

Japan’s Nikkei 225 Index is headed for a target of 22000*, but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure.

Nikkei 225 Index

* Target calculation: 20000 + ( 20000 – 18000 ) = 22000

India’s Sensex is headed for a test of primary support at 26500. Succesive peaks below zero on 13-week Twiggs Money Flow warn of reversal to a primary down-trend. Breach of primary support would confirm. Recovery above 28000 is unlikely, but would signal another test of 30000.

SENSEX


More….

Treasury yields surge but Dollar falls

Gold tests support at $1180

U2 busking in NYC subway

Yann Tiersen: The Fall

Life is a school of probability.

~ Walter Bagehot

Stocks find support

Breakouts on the S&P 500 and in China and Japan, together with buying support across Europe and Asia, indicate a broad resurgence.

North American Stocks

The S&P 500 is retracing to test the new support level at 2120 after its recent breakout. Respect of support would confirm a further advance to 2200*. 21-Day Twiggs Money Flow is oscillating in a narrow range above the zero line, suggesting mild buying pressure. Upward breakout would signal another advance, while reversal below zero would warn of a correction.

S&P 500 Index

* Target calculation: 2120 + ( 2120 – 2040 ) = 2200

CBOE Volatility Index (VIX) at 12 continues to indicate low risk typical of a bull market.

S&P 500 VIX

St Louis Fed Financial Stress index below -1.0 likewise displays low levels of stress in financial markets.

St Louis Fed Financial Stress Index

Dow Jones Industrial Average continues to test resistance at 18300. Buying pressure remains positive and breakout would offer a target of 19000*, confirming the S&P 500 signal. Reversal below 18000 is unlikely, but would warn of a correction to test the primary trendline and support at 17000.

Dow Jones Industrial Average

* Target calculation: 18300 + ( 18300 – 17600 ) = 19000

Canada’s TSX 60 is testing resitance at 890. Breakout would signal the end of the correction and another test of long-term resistance at 900. 13-Week Twiggs Momentum holding above zero continues to indicate a primary up-trend. Breakout above 900 would offer a long-term target of 1000*.

TSX 60 Index

* Target calculation: 900 + ( 900 – 800 ) = 1000

Europe

Germany’s DAX broke its descending trendline, indicating another attempt at 12500. A 13-week Twiggs Money Flow trough above zero would confirm long-term buying pressure. Reversal below 11000 is unlikely.

DAX

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* Target calculation: 12500 + ( 12500 – 12000 ) = 13000

–>

Shallow retracement on the Footsie suggests buying pressure. Recovery of 13-week Twiggs Money Flow above its descending trendline strengthens the signal. Breakout above 7100 would confirm a primary advance. The long-term target is 8000*.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6000 ) = 8000

Asia

The Shanghai Composite broke resistance at 4500, indicating continuation of its strong advance. 13-Week Twiggs Money Flow troughs high above zero reflect long-term buying pressure.

Shanghai Composite Index

* Target calculation: 3500 + ( 3500 – 2500 ) = 4500

Economic data, however, continues to warn of a slow-down.

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Japan’s Nikkei 225 Index broke resistance at 20000, suggesting an advance to 22000*. Recovery of 13-week Twiggs Money Flow above the descending trendline would strengthen the signal.

Nikkei 225 Index

* Target calculation: 20000 + ( 20000 – 18000 ) = 22000

India’s Sensex respected support at 26500 and is now testing resistance at 28000. Breakout above 28000 and the descending trendline would signal another attempt at 30000. Recovery of 13-week Twiggs Money Flow above zero would strengthen the signal. Another (TMF) peak below zero is unlikely, but would warn of a primary down-trend.

SENSEX

Australia

The ASX 200 found support between 5650 and 5550, highlighted by the latest long-tailed candle. Recovery above 5750 would signal the correction is over and another test of 6000 is likely. Mild decline on 13-week Twiggs Money Flow indicates medium-term selling pressure — not a reversal. Breach of 5550 is unlikely, but would warn of a test of primary support at 5120.

ASX 200

* Target calculation: 6000 + ( 6000 – 5750 ) = 6250


More….

Liquidity Mismatch Helps Predict Bank Failure and Distress

T-Bonds Burn

Philip Glass: Glassworks

Elodie Sablier: Vertigo

B.B. King: The Thrill Is Gone

Teach us that wealth is not elegance; that profusion is not magnificence; and that splendour is not beauty. Teach us that taste is a talisman which can do greater wonders than the millions of the loanmonger. Teach us that to vie is not to rival, and to imitate not to invent. Teach us that pretension is a bore. Teach us that wit is excessively good-natured, and, like champagne, not only sparkles, but is sweet. Teach us the vulgarity of malignity. Teach us that envy spoils our complexions, and that anxiety destroys our figure.

~ Benjamin Disraeli, The Young Duke (1831)