Traders Market Weekly: Reasoning Inflation and Market Authenticity

August 6 – 12, 2023

FEAR NOT Brave Investors

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Data Dependent

The Week That Was – What Lies Ahead?

Contents

Click on the links below to navigate to the relevant section.

Editorial

When there is no fear, and the market is all one way it doesn’t take much to rock the boat. Volatility and other fear measures told us the market was ripe for a picking. Political misdirection and partisanship have sated many into believing what they want to believe without rational thought or critical thinking. There should have been no surprise when Fitch lowered U.S. debt from AAA to AA+, a day ahead of the Treasuries increased funding needs. Bonds reacted with fervor to what were higher than expected borrowings, the long end Treasuries went into a tailspin. Again, this should have been no surprise to the herd, but it was. The market this week was slapped with a touch of reality.

Bond markets don’t play, politicians should know that by now. Ten-year Treasury yields rose 8bps for the week to 4.03%, after trading up to 4.20% early-Friday following the release of the July jobs report. This was within two bps of the October 21st high, which was the peak yield back to June 2008. Investment-grade corporate CDS gained 5.6 bps this week, the largest increase since March to 68 bps. High-yield CDS jumped 27.3 bps, second only to the week of June 23rd (27.6 bps) for the largest weekly gain since March.

It should have been no surprise that the current Biden Administration would blame Trump’s time in charge, indeed almost like clockwork he was charged for election interference this week. The same time Russia increased the jail stay was a major opposition leader by 19 years, the US government criticized the Russia for political interference. At the same time the current US Admin had the biggest political opponent arrested. You can’t make this up anymore,

Incredulously both blind partisan us and them groups are likely triggered by our very mention of the week’s events. Huxley and Orwell would be even scratching their heads!

The U.S. labor market continues its resilience in July with U.S. employers adding 187,000 workers in July, lower than expected. The ADP Employment Report for July (actual 324,000; consensus 190,000) released a day ahead of the BLS employment report. The ISM services employment index rose to 50.7 vs 53.1 prior. Expectations ranged between +140K and +300K nonfarm payroll jobs added, with a consensus estimate for 200K. June’s employment gain was revised down by 25,000, from +306,000 to +281,000.

Wage gains exceed both their pre-pandemic pace and what Fed officials would likely see, 3.5% annual wage growth consistent with inflation near their 2% target, assuming that worker productivity grows modestly.

Bond markets don’t play, part two. Benchmark MBS yields traded above 6% early Friday for the first time since the (UK bond dislocation) October yield spike. MBS yields reversed a notable 26 bps in volatile Friday trading, ending the week up six bps to 5.74%. Long-bond yields surged a notable 19 bps this week to 4.20% (high since November).

We had reactions from Amazon and Apple, two of the magnificent seven. Amazon surprised and rallied hard for its part. More poignantly, remember when the market is all one way with green eyes? Apple dumped 4.8% after earnings Friday meaning losses for the week were 7.1%, the largest since November. On Monday, just four days prior, Apple closed trading at an all-time high, at that point with a y-t-d return of 51.6%. AAPL Thursday reported fiscal Q3 net Income of $19.881 billion, up 2% vs. Q3 2022. Revenues were down slightly y-o-y. The stock closed the week with a price-to-earnings ratio of 30.59.

This is a FOMO stock market environment as we have touched on regularly with the majority of analysts getting this wrong, many desks caught short and the dribbler groomers of FinTwit or CNBC that have no clue and just become echo chambers trying to cultivate an audience all wrong.

The winners have been the pro desks and technical analysts that concentrated and recognized the ‘securitization’ of the magnificent seven and in particular Apple and the AI shift early that lifted NVidia and Microsoft.

Guess which part of the market went full on FOMO, it can only go up come Monday?

The big winner has been the passive investor and middle America that invests in stocks. Those we never hear about, because will by nature they are passive and go about their business. We look at Tesla as it mirrors part of the FOMO crowd and part of the passive crowd, we can see from the chart it ran up ahead of earnings, dropped after it and sideways since. much like the belly of active stocks.

Risks Being Ignored or Opportunity Being Repriced?

With the swings of psychology and dominance of unemotional algorithm models dominating markets more than ever it is critical to stay unemotional and devoid of bias where best you can. For the next six months, we stick to our technical outlook via KnovaWave, watch the curve and EURUSD and USDJPY.

A reminder in these markets don’t get married to a view, leave biased partisan opinions at the door and find a leader. Right now, NVDA and TSLA continue to give us give good insights into crowd behavior. Note the divergence and convergence with it and other instruments. Be proactive.

These markets are constantly evolving, the important things is why we are here and it isn’t a surprise.

Where is the fear?

We got some movement these past weeks out of the tight range in markets but as we can see from the VIX chart it quickly reverted back after the initial breaks. We are aware of built-up energy ahead of key central bank decisions and potential fundamentals to set-up rate hikes or not. There is discontent globally with central banks and politician. The latest was the ushering in a new Governor at the Reserve Bank of Australia.

With optionality dominating markets along with quant funds, algorithms, systematic trading and automated trading volatility has collapsed as has been focused on at KnovaWave. The S&P 500 moved less than 1% in either direction for 36 of the 46 sessions heading into June, according to Dow Jones Market Data, the quietest 46-day stretch since December 2021. This was all in a period of a regional bank crisis and debt ceiling crisis. These systems have no emotion and trade accordingly. The weeks since then continued the pattern for the most part.

Driving quant funds is a self-reinforcing dynamic, when market volatility drops, they add which causes those funds that have paid higher volatility to cover and hence we get the churn. At the end of March, quant-focused hedge funds held about $1.13 trillion in assets, according to research firm HFR, hovering just below last year’s record high. That represents about 29% of all hedge-fund assets.

To break out of this requires a continuing break in a major down, or up move to ignite delta chasing or covering.

So-called vol-control and risk-parity funds, which tend to automatically load up on riskier assets during calmer periods, ramped up equity exposure, according to the Deutsche Bank data, available through May 18. Other quants, such as trend-following CTAs, or commodity trading advisers, have similarly piled in.

The dominance of quants has helped explain previous periods of calm trading, including long stretches in 2017 and 2018. Those periods were punctured by rapid selloffs, including the 2018 selloff dubbed “Volmageddon” when the dynamics exerting calm on the market suddenly went away. Some warn a repeat could be ahead.

Caitlin McCabe WSJ

Cboe Daily Market Statistics

Cboe Daily Market Statistics

Talking about manic behavior it is not hard to argue the punter is overwhelming and influencing markets like no other time, well until the next time. Swirling greed and know it all came home to roost. FOMO (fear of missing out) and TINA (there is no alternative) ended how they always do.

When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.

The VOLX`s underlying instrument is the Mini VIX™ Future. The CBOE Volatility Index (VIX) is an up-to-the-minute market estimate of expected volatility. The VIX is calculated using a formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls (options) on the S&P 500.

Worth repeating again in the low VIX environment.

Well, 2008 redux didn’t happen in the last few months, so the Fed moves have worked for now, much to Xi and Putin’s chagrin.

The doomsayers may be right, but we are seeing constant surprises to that theory. For example, early signs that the US housing market slump is finding a base are emerging, pending home sales having risen for a third month and to a 6-month high. we will keep an eye on consumer sentiment and business activity. We are far from being out of the woods, remember the market is not the economy. Saying that we got quite the distorted job picture per our main job stories which we reprise below. Are we simply taking some air out or is the beginning of the great meltdown?

What we continue to notice is how this market is still being treated by ‘experts’ as those in the past, hence the volatility and extreme in bulls/bears. Understanding crowd behavior is essential in these markets. The moves have caught analysts and strategists by surprise with the uber bear running amok in the past few weeks. Typical thinking is this from Morgan Stanley strategists a month ago; “Given the events of the past few weeks, we think … equity markets are at greater risk of pricing in much lower estimates”, noting that earnings estimates were 15-20% too high even “before the recent banking events.”

What non-traders are failing to grasp is this market with so many variables is not trading as they expect and they are constantly wrong. S&P 500 earnings for the first quarter are estimated to have fallen 5% from 2022, followed by an expected 3.9% drop in the second quarter, Refinitiv data shows. During recessions, however, earnings tumble at a 24% annual rate on average, according to Ned Davis Research. However how important is that in such a chaotic market? There is the answer structure your thinking around game theory or even chaos theory.


Week Ahead: CPI, Fed Speakers

Eyes will be on top macroeconomic reports that will emphasize the health of the US and global economies. Eyes and ears will be on central bankers given the market turmoil and the hiking of rates.

It will be a busy week for earnings from Alibaba Group Holding (BABA), Allianz (OTCPK:ALIZF), Bayer (OTCPK:BAYZF), Berkshire Hathaway (BRK.A) (BRK.B), China Mobile (CHL), China Telecom (OTCPK:CHJHF), Eli Lilly (LLY), Honda Motor (HMC), Novo Nordisk (NVO), Palantir Technologies (PLTR), Rivian Automotive (RIVN), RWE, Saudi Arabian Oil, Siemens (OTCPK:SIEGY), SoftBank Group (OTCPK:SFTBY), United Parcel Service (UPS), and Walt Disney (DIS).

How Hot is the American Economy?

More Macro and Micro data points, some highlights include

  • Monday: June Consumer Credit
  • Tuesday: July NFIB Small Business Optimism, June Trade Balance
  • Wednesday: Weekly MBA Mortgage, Weekly oil inventories
  • Thursday: July CPI, Weekly Initial and Continuing jobless claims, Weekly natural gas inventories, July Treasury Budget
  • Friday: July PPI and preliminary August University of Michigan Consumer Sentiment survey

How is the Consumer Hanging?

The US relies on services for up to 90% of GDP. it relies on the consumer who is being battered by the California and New York regional bank debacle. On top of that is cumbersome if not ignorant politicians, with no clear regard for main street the evidence suggests in their behavior. Key retailers all gave a cautionary note with tightened household budgets continue to hit demand for big-ticket items and curb discretionary spending.

We get more data to help us gage the consumer: Weekly MBA Mortgage, Weekly Initial and Continuing jobless claims.  We also get

Earnings season continues with earnings from Tyson Foods (TSN), Paramount Global (PARA), Roblox (RBLX), Wynn Resorts (WYNN), United Parcel Service (UPS), Ralph Lauren (RL) and Walt Disney (DIS).

Click here to see the Full Week Ahead List Below

Some things never change, when you think Greed is Good

So how Screwed are We?

  • The banking system is on much greater Credit risk than mortgage risks were offloaded during the 2008 mortgage finance Bubble. At $25.6 TN, Banking System Assets ended 2022 almost double the 2007 level.
  • Financial Sector debt growth jumped to a 9.66% rate last year, the strongest since 2007’s 13.50% Z.1 data showed. Now we are looking at this given the quick demise of regional banks and the concerns of the commercial structure. Why? we simple note a jump in Financial Sector borrowings signals a surge in risk intermediation. Is this fateful late-cycle intermediation gong to haunt the financial sector and economy when the Bubble bursts.
  • If it doesn’t burst well, we circle back to the popular view that Financial Sector debt included in analysis would be “double counting” borrowings already included elsewhere (i.e. mortgage and business). The swift end to backs, the shocking management out there and geopolitical cold war out there has us ready to expect the unexpected and aware of moves to mitigate by Central banks as we saw a few weeks ago.
  • GSE Assets expanded an unprecedented $2.094 TN, or 29.4%, over the past three years to a record $9.224 TN. FHLB Assets surged $524 billion, or 72%, in 2022, with indications for Q1 growth upwards of (yes) $400 billion.
  • FHLB plays a pivotal role, last year prolonging the lending boom and last month stabilizing bank liquidity.

The Credit cycle downturn is coming to the surface.

We have the reflective destabilizing Monetary Disorder. Take a peek at China and the markets collective cognitive dissonance to the property market there, the shadow banking as just one example. Have a look around the world. The hope is the collective mass continues to evolve and survive, while each time the destruction is evident in massive disproportion shifts of wealth and attempts of mind, if not physical control of the masses. Dial that back and try and get in the minds of those trying to right the ship and the market components that matter, not what the dribblers think matter.

Here’s a thought, knowing about the power of cognitive dissonance does not necessarily protect you from its effects. Traders are only too aware of this eureka moment when you grasp it. Why some of the best trades you ever do, are the ones you don’t. In option parlance, being delta neutral sometimes is the best trade.

Key this coming week will be the commencement of the next round of such indicators that will test whether these gains were one-offs or something that is sustainable. The key will be the extent to which downside risks to the US economy have been reduced enough to influence global central banks, and how markets react.

The Fed’s aggressive tightening cycle has had little affect on loose financial conditions.

Where to from here? It’s also okay to acknowledge and process any difficult emotions or experiences that you may have had during the past year. Looking back on the past year with perspective can help you to gain a greater understanding of what you have been through and how you have coped. I hope that you are able to find ways to manage any challenges that come your way and that you continue to feel fine moving forward. Embrace the chaos that is headed your way in 2023!

China; Behind the Iron Curtain

A big shift in 2022, China’s population is now falling and below that of India. China’s population fell for the first time since 1961 as births have steadily fallen in recent years despite the removal of the “one child policy”. The stalling working age population and its likely decline ahead means that potential growth in China is down from around 10% or so in the 2000s to around 4-5% now.

Growth in China’s metric of system Credit growth, Aggregate Financing, dropped to $175 billion, down significantly from March’s $773 billion and only 61% of estimates. It was also the weakest monthly growth since last October.

“China is warning domestic brokerages not to spread information that compromises national security, reinforcing a campaign that has roiled consulting firms and providers of financial data.”

  • August 3 – Bloomberg: “China is expected to speed up roll-out of a plan to resolve its local government debt risks, with measures including debt swap, extension and restructuring, China Securities Journal says in a front-page report… Select local governments are likely to get approval to issue bonds to swap out part of their hidden debts so as to extend their debt payment, lower interest expenses and reduce risks…”
  • August 3 – Bloomberg: “China’s central bank said it would increase funding support for the private sector after meeting with executives from the property industry, identifying several companies by name in a statement that underscores growing urgency among regulators to boost market confidence. Newly appointed People’s Bank of China Governor Pan Gongsheng met with representatives from eight private firms…”
  • August 4 – Reuters (Winni Zhou and Rae Wee): “China’s consumers and companies are tying up trillions of yuan in longer-dated deposits with banks, effectively taking a vast pool of money out of circulation and risking the kind of liquidity trap that hobbled Japan’s economy in the 1990s. Latest official data shows financial institutions issued 5.5 trillion yuan ($766.12bn) worth of long-term deposits known as certificates of deposit (CD) in the first quarter of this year – the largest such quarterly issuance since the product was introduced in 2015.”

The Market Tripod of Destruction.

  • Firstly, financial asset overvaluation has swung way past any sound underlying economic wealth structure.
  • Secondly over-leverage in crowded bets.
  • Thirdly we have greed enthused, as always in these cycles, risk engineering, transfer and management that ignores or understands bifurcation and contagion outcomes.

Leverage has become toxic, a development that if not addressed will have deep and with far-reaching sequels. It’s not too farfetched to suggest that the markets are on the verge of a rupture that would be difficult to contain. Should the crisis of confidence dynamics that hit Britain feed into other markets a powerful global contagion could be unleashed. The markets are dislocated, and financial stability is at risk. A sobering thought is the UK is just the initial first world pension system in this cycle facing the harsh reality of a steep devaluation of assets and the prospect of widespread insolvencies and debilitating negative sentiment.

Inflation Matters

Inflation with Henry Kaufman

Kaufman is the legendary chief economist and head of bond market research at Salomon Brothers is someone who knows Inflation.  Henry Kaufman in an interview with Bloomberg’s Erik Schatzker Jan 14, 2022:

 “I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally. In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”

“The longer the Fed takes to tackle a high rate of inflation, the more inflationary psychology is embedded in the private sector — and the more it will have to shock the system.”

“‘It’s dangerous to use the word transitory,’ Kaufman said. ‘The minute you say transitory, it means you’re willing to tolerate some inflation.’ That, he said, undermines the Fed’s role of maintaining economic and financial stability to achieve ‘reasonable non-inflationary growth.’”


Independence – Never Take It for Granted Traders

“In aggregate, the market goes from order to disorder, and on that journey little pockets of order can form, including in commodities, bonds, stocks, currencies that circle back and reorder disorder. Then there is us the market player that reflects through order and disorder in an ever-evolving loop towards independence. It all starts with gravity and ends with equilibrium and back we go.” KnovaWave “The rules of market flux”

The Fed has kicked off its first real tightening campaign since 1994, with securities markets already at the brink of illiquidity and dislocation. Markets could soon be screaming for assurances of the Fed’s “buyer of last resort” liquidity backstop, while the Fed is prepared to begin withdrawing liquidity by selling Treasuries and MBS.

Another important aspect is the Fed doesn’t Control corporate pricing or wage decisions. Let us be clear geopolitical, climate change developments and what an out of depth, politically motivated administration are outside the Fed’s sphere of influence. There has been over $5.1 Trillion new “money” in 126 weeks, it’s a reasonable conclusion the Fed has lost control of Inflation.

We need to grasp all the risks to be wary off and received plenty of flak from it. We always talk here about expect the unexpected and now that is front and center, gage the market’s reaction, the market is always right and that’s why we focused on the crowd psychology aspect over the past few weeks.

“We have a market trying to interpret the Fed who is trying to find out how they can interpret their long-only portfolio at a risk parity where rates cannot rise.”

– MoneyNeverSleeps

This move has crept up on many, to the extent the S&P 500’s is over the traditional measurement of a new bull market typically measured as a 20% gain from a significant low. The index above 4292.438 got that 20% move. That ended the longest bear market since 1948. The DAX and CAC40 have seen all-time highs recently also.

Our weekly reminder for risk. The downside is clear with the absence of moral hazard from repeated Federal Reserve market bailouts in an environment of some would say obscene liquidity pumps. Pure greed is the other part, not wanting to miss out on fees. The obvious question is, how deeply ingrained is this attitude through the markets? How do we ween the markets off this continuous dip feed? At this point the Central Banks have kicked that answer down the road.


Part A – Stock Markets

Weekly Highlights – USA

Indices

  • S&P500 fell 2.3% (up 16.6% y-t-d),
  • Dow declined 1.1% (up 5.8%).
  • S&P 400 Midcaps declined 1.3% (up 10.3%),
  • Small cap Russell 2000 dipped 1.2% (up 11.1%).
  • Nasdaq100 dropped 3.0% (up 39.6%).
Major US Stock Indices

YTD Report Card for the S&P Sectors

Many Have Been Long Energy, Short Tech – July 21 23 YTD shows that is one of the worse positions in stocks.

Sectors

  • Utilities sank 4.7% (down 10.6%).
  • Banks lost 1.2% (down 12.8%),
  • Broker/Dealers fell 1.4% (up 12.7%).
  • Transports slumped 2.2% (up 21.9%).
  • Semiconductors sank 4.0% (up 46.1%).
  • Biotechs fell 3.0% (down 1.9%).
  • With bullion down $16, the HUI gold equities index lost 3.5% (down 0.3%).

Biggest SPX Stock Winners and Losers Last Week

Major US Indices

When Markets Get Short Behind the Curve

Worth reading again what fueled the recent rally…

We analyzed the short component of this year’s rally back in May and it an important component of the market’s structure. Global stocks have continued to climb the wall of worry in 2023, with what has become a series of saves from the brink of economic disaster in a political episode worthy of the best Monty Python minds. The end result has left many investors over insured at times as we have been focusing on with option saturation, short bets and long only investors out of the market. The latter in a rising market essentially makes them short.

This background is not new we have seen it many times over the last 20 to 30 years. The difference here is the sheer weight of money in the system and the introduction of shorter dated options and so many playing it.

Speculators and hedge funds had put on the largest short positions in the S&P 500 since 2007 according to Bespoke Investment Group using CFTC data measured as a percentage of open futures-market interest.

At the same time, they have bet long on the Nasdaq-100, with net bullish plays nearing the highest levels since late last year, remember that. Markets go where the most pain is. The move, in a world where averaging your position is seen as trading has fueled larger positions. Anyone understand the martingale principle?

Fed Assets expanded $364 billion over three weeks in March in banking crisis liquidity operations (the market has a short memory that was only 8 weeks ago and helped create bigger shorts out there). Assets remain about $45 billion above the March 1st level. FHLB assets expanded an unprecedented $317 billion during Q1 ($802bn over 4 quarters). Indicative of the liquidity surge, money market fund assets inflated $384 billion in the five weeks beginning March 8th. In affect we got a massive boost a surge in financial sector Credit with those FHLB money market borrowings to finance its massive banking liquidity support operations.

That’s all well and good the trouble it is up, and substantially and the cost of carry is around 6-12% not 0-2% from last year. Trading from the short side is about timing, recognition and as they say strike like a cobra. The demise of the Californian and New York Regional Banks was a prime example, they were on the radar and once the cracks appeared, go hard, go fast.

Where are the Shorts Trapped at? (Becomes the Longs After Wave C’s or 3’s)

There is two ways of looking at this the bears and the dribblers out there argue it all has to come down. The rationale being the S&P 500 was up 12% this year, however it would be negative without the contribution of seven big tech companies. The argument is should any of those plunges then we are back to bringing it all down. The problem is it has gone up, we look at the AAPL and NVDA for just two names that dominate structure.


Global Stock Market Highlights

Highlights – Europe Stocks

Week/YTD

  • U.K.’s FTSE equities index fell 1.7% (up 1.5% y-t-d).
  • France’s CAC40 fell 2.2% (up 13.0%).
  • German DAX equities index dropped 3.1% (up 14.6%).
  • Spain’s IBEX 35 equities index sank 3.3% (up 13.8%).
  • Italy’s FTSE MIB index dropped 3.1% (up 20.6%).

Germany’s benchmark Blue Chip DAX 30 index (Deutscher Aktienindex) expanded to 40 companies on 20 September 2021 adding 10 new members to the German stock index from the MDAX which will be reduced from 60 to 50 members.

Highlights – Asia Stocks

Week/YTD

  • Japan’s Nikkei Equities Index lost 1.7% (up 23.4% y-t-d)
  • South Korea’s Kospi index dipped 0.2% (up 16.4%).
  • India’s Sensex equities index declined 0.7% (up 8.0%).
  • China’s Shanghai Exchange Index increased 0.4% (up 6.4%).

HighlightsAustralian Stocks

  • Australia’s S&P/ASX 200: +0.2% to 7325.4 Friday (-1.0% for the week)
  • Top Stocks: TPG Telecom +8.76% Gold Road Resource +6.80%
  • Worse Stocks Abacus Property Group −25.40% Silver Lake Resources −14.80%

Highlights – Emerging Markets Stocks

Week/YTD 

  • Brazil’s Bovespa index slipped 0.6% (up 8.9%),
  • Mexico’s Bolsa index lost 1.7% (up 11.4%).
  • Turkey’s Borsa Istanbul National 100 index jumped 4.7% (up 34.3%).
  • Russia’s MICEX equities index rose 2.8% (up 43.6%).

Technical Analysis

S&P 500

Daily: The daily SPX closed above the previous roof (Key Spits) which were also at 7/8 and clustered around the 50% & August breakdown. With energy and with a very low VIX it has mirrored the get cloud to get through overhead. The bullish take is that we completed the correction off last year’s high at the low and this is a larger 1-2 to go higher with support at the previous resistance and cloud. The bearish outlook is this move becomes a rising wedge and we are working out the uber bears before new lows.

When we talk about crowd psychology this is a great example. The market after spitting the 4100 and 38.2% retracement broke to capture the Tenkan. This underscores the power from the SPX spat of June & October lows with impulse through the tenkan and Kijun energized by the daily cloud twist that fueled this rally. The completive wave came off extreme fear and bear that ended with relief. Now we have sated much of the greed phase and short fear phase. We have completed that cycle and from here we measure the alternatives.

Daily S&P 500 3 waves

It is worth looking back at the completive highs (all-time highs) and how we played out so far. Tracing back from highs the fuel from the top of the channel after completing 3 waves off ATH, accelerated after broke the Tenkan through to the 4600 OI where it reversed with impulse back to Tenkan. Bulls, this is likely a (ii) of a 5. Bears this is 1-2 of (i) completive V of degree. We watch if this low was a (iii), (a) or C. We have to respect the number of alternatives of degree of 5. With such trends keep it simple. From no fear to panic is the driving element.

On the downside the Kijun and those June lows now critical and is our trading Bear/Bull pivot in a high vol scenario. Watch each measured 3 wave move on the 240 & Murrey Math highlighted in the podcast. The prices pulled through the downward cloud pulled by the twist ‘helium contusion’ on the completive. For fractal purposes, SPX completed 5 waves up where it reversed with impulse. Energy fueled from the power impulse down from +1/8 ATH spit of a spit fail. On the way down (just like up) it accelerated after it broke the Tenkan through the rejected Kijun and then through the median after tapping 8/8.

Weekly: The SPX has a clear channel off the lows on the weekly timeframe off the sphere of influence and has ground higher since it closed over the cloud above the Tenkan. Key support is the Tenkan, channel and +1/8. Power initially came from launching out of the sphere of influence as one would expect in a 3 or C. We had the Kijun spit also. Above is the channel and +3/8.

In the bigger picture we are playing out S&P 500 energy after it held the sphere of influence from Nov 2020 reversed higher after spitting the 38% and key lows. At the time we opined “We do have a weekly cloud twist; however, the energy is waning without sharp impulse.” We got the sharp impulse right to weekly Kijun. For major cycles we watch the S&P 500 over 4,231, the 50% retracement of losses from the Jan. 3 & June 16 close. Since 1950 there has never been a bear market rally that exceeded the 50% retracement then gone on to make new cycle lows. Is this time different, as we tested and spat those June lows?

On the way up each new high evolved after testing Tenkan key support on the way and we are now getting a retest as resistance. We reiterate this needs to be recovered for a resumption of the uptrend meanwhile the bear market plays out. Watch Tenkan this week and watch for Kijun reaction. Extensions are difficult to time, keep it simple.

S&P500 Weekly Outlook

THE KEY: Key for the impulse higher was the spit or retest of MM 8/8 and Tenkan San, which held with the previous highs and Tenkan.  To repeat “We look for 3 waves down and reactions to keep it simple with the alternatives in the daily.”  Keep an eye on the put/call ratio with recognition to the sheer size of contracts AND keep in mind the stimulus distortion. The spit per channel fractal and Adams rule launched back over the cloud where we were encased AND we are back testing it. Watch if a spit or clear break support as Chikou rebalances

A reminder that Apple Inc $AAPL, Microsoft Corp $MSFT, Amazon.com Inc $AMZN, Facebook Inc $FB, and Google-parent Alphabet Inc $GOOGL make up approximately 23% of the total weight of the S&P 500. With that comes gyrations that are an outsized impact on broader markets

NASDAQ 100

The down move saw Nasdaq spit the weekly Kijun and a 1-2 off tenkan we spat MM 5/8 after holding the key 61.8% Fib. We watch the Tenkan & Kijun confluence above, the breakup level and between the 38/50 Fibs. The Nasdaq is well behind the S&P pace with the weekly cloud and 50wma well above. Support the 61.8% retest.

Recall ATH was after it broke and held the weekly Tenkan to see a spit of a spit fail which is completive of 5 of some degree with Chikou rebalancing. Watch Chikou for divergence for continuation or failure. Divergence with Russell also a clue.

NASDAQ Record Highs to 61.8% of impulsive

Dow Jones

The Dow led the indices and closed above the weekly Tenkan after closing and testing last week. Prior test after the reaction off the June lows and sphere of influence. Support is the channel and Fibs. Tenkan and Kijun after the reaction empowered. Support is the channel and Fibs.

Russell 2000

The small cap Russell RUT bounced in double bottom off 1600 5/8 confluence which was the Nov 2020 breakup. Russell 2000 Resistance Tenkan and Kijun, note previous rejections. This is the index showing more of the fast money crowd and is trading like it. Needs to get traction in here for bulls. 7/8 & 8/8 support collapsed on the way down and is now major resistance.

Russell Index Negative Divergence to NASDAQ

Semiconductors

NVidia $NVDA

Nvidia NVDA stock chart

NVidia surged 179.3% in H1 2023. It has been relentless since earnings and is the focus of the AI craze. With all manic moves beware of the pullbacks and topping potential. That said the extensions have played out and so far to +2/8 on the weekly. This was a classic set up as we can see. It has a textbook of KnovaWave methodology and rules from the 61.8% break and reverse through the sphere. NVDA accelerated after it broke the double top spheres at 5/8 giving is a near 4/8 move. A reminder that the dominance was in.

NVDA took off after the breakup retest from May 2021. NVidia is a clear leader of SOX & SMH look for cues there and ABC failures for changes. NVDA never looked back after the Key Break (mauve) and Tenkan to a flat cloud and holding support the recent low at the 61.8% extension.

Apple $AAPL

Apple AAPL Stock Chart

Apple has consistently driven upwards after it held the sphere of influence after retesting 6/8 & break up. Kijun and Tenkan crossing and then the 50wma with the cloud twist have been magnetic. Apple & other mega-cap names dominant the major indices, and a plethora of funds that hold it as a core position. The Vanguard Mega-Cap Growth ETF (MGK) delta is important to watch.

A firm rejection at $175 at +2/8 triggered a waterfall down for Apple last year. We regathered that and more and broke the weekly bull flag higher. On the way up Apple gently motored up to new ATH over the massive $160 then $170 thru to $180 gamma level on the way down these levels became key energy levels all the way to $132. Support held at the May break (just like NVDA) where from there it spat the cloud pulled by a flat Tenkan and Kijun as it rebalanced Chikou. The old channel break and MM +2/8 is now key. Remember the impact $AAPL has, at least short term on all the major indices.

ARKK ETF

Ark ARKK ETF Stock Chart

The ARK Innovation ETF (ARKK) finally found some support at -1/8, 78% off highs and the 423.6% extension! The ARK Innovation ETF returned 29% for Q1 2023. The fund is filled with growth stocks and was the top-performing U.S. equity fund tracked by Morningstar in 2020, it has not been a pretty slide. For the quarter, Nasdaq Computer Index up 25.7% and the NYSE Arca Technology Index gaining 26.1%. The Nasdaq100 (NDX) jumped 20.5%.

The ARKK ETF trading clinically, tested triangle breakdown and failed off 50 WMA. Some work at support at 61.8% of whole move and then wrecked again. Clear crowd behavior, we saw ATH in NASDAQ & SPX, yet this couldn’t raise a bid – very telling negative divergence. $ARKK rebalanced Chikou at week’s end

ExxonMobil XOM

ExxonMobil Weekly Chart

XOM has completed 5 waves from -3/8 to +3/8 on the weekly. with a double top. Alternatives 5 complete of degree. We are in a 1-2 (A-B depending on degree. Support is the cloud which has held 3 times since the high and the 50WMA resistance the tenkan and Kijun. Pattern wise we are in the bull flag until proven otherwise.


Part B: Bond Markets

Bond Watch

Treasuries

It was vicious week for bond markets this past week as yields continued to rise and then saw bust out moves after Fitch lowered U.S. debt from AAA to AA+. U.S. Treasuries finished the week rallying after the July jobs report. Ten-year Treasury yields rose 8bps for the week to 4.03%, after trading up to 4.20% Friday following the release of July payroll data. This was within two bps of the October 21st high, which was the peak yield back to June 2008. The 5-yr note and shorter tenors went positive for the week while 10s and 30s trimmed their losses from the past three days.

Treasury Yield Watch

Friday/Week

  • 2-yr: -12 bps to 4.78% (-12 bps for the week)
  • 3-yr: -11 bps to 4.47% (-7 bps for the week)
  • 5-yr: -14 bps to 4.16% (-4 bps for the week)
  • 10-yr: -13 bps to 4.06% (+9 bps for the week)
  • 30-yr: –9 bps to 4.21% (+18 bps for the week)

Higher for longer is a serious threat.

Surging market yields are a serious issue for a banking system loaded with long duration securities portfolios. This may well be a push over the cliff for troubled commercial real estate (CRE). Leveraged lending and leveraged finance gets more costly. Simply there are trillions of floating rate loans among individuals, speculators, businesses, and nations.

Remember this? There is a reason why we focused on it recurring, you didn’t need Fitch to remind you:)

  • The iShares Investment Grade Corporate ETF (LQD) declined 1.01% Thursday, the largest loss since May 1st. The 2.40% loss for the week was the largest since February.
  • The iShares High Yield ETF (HYG) declined 0.73% Thursday, also the largest decline since May 1st. The 1.63% loss for the week, the worst weekly performance since early-March.
  • Friday Bloomberg headlines: “HYG ETF Daily Outflows $1.13 Bln, Biggest Move Since March 28th.” and “Two Giant Credit ETFs Hit by $2 Billion Exit on Hawkish Fed Bets.”

For our complete Weekly Fixed Interest Analysis and Outlook visit our Bond Traders Weekly Outlook:

Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates jumped 12 bps to an eight-month high 6.92% (up 193bps y-o-y).
  • Fifteen-year rates rose 11 bps to 6.31% (up 205bps).
  • Five-year hybrid ARM rates gained eight bps to 6.51% (up 226bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates added three bps to 7.41% (up 203bps).
Mortgage News Daily

Global Debt Monitor

Highlights Unprecedented and Ongoing Surge in Global Debt

Last week, the Institute of International Finance (IIF) released their Q1 2023 Global Debt Monitor (GDM), highlighting the unprecedented – and ongoing – surge in global debt.

GDM Highlights:

  • “The global debt stock grew by $8.3 trillion to a near-record $305 trillion in Q123; the combination of high debt levels and rising interest rates has pushed up debt service costs, prompting concerns about leverage in the financial system.”
  • “Total debt of emerging markets hit a fresh record high of over $100 trillion (or 250% of GDP) – up from $75 trillion in 2019.”
  • “At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly.”
  • “Rise of private debt markets: Non-bank financial institutions (NBFLs) continue to gain prominence in global credit intermediation. The so-called ‘shadow banks’ now account for more than 14% of financial markets, with the majority of growth stemming from a rapid expansion of U.S. investment and private debt markets.”
  • “The Size of Private Debt Markets Surpassed $2.1 Trillion in 2022, Up From Less Than $0.1 Trillion in 2007.”

From the end of Q3 2019 through Q1 2023, Total Global Debt jumped $52.3 TN, or 20.7%, to $305 TN.

Over this period, “Mature” economy debt expanded 13.4%, while “Emerging” economy debt surged 38.9%. It’s worth nothing that in the “Emerging” category, “Household” debt surged 41.7%, “Non-Financial Corporate” 35.1%, and “Government” 55.7%. Since 2016, total global debt-to-GDP has surged from 210% to 360%. Global financial conditions remain loose. When they inevitably tighten, be prepared for serious dislocation.


Part C: Commodities

Highlights

July 21, 2023

Key Long Term Commodity Charts

Copper

Copper Supply Crunch

Gold

China added to its gold reserves for an eighth consecutive month. People’s Bank of China holdings of bullion rose by 680,000 troy ounces last month, according to official data released Friday. That’s equivalent to 23 tons.

Gold in Perspective

Energy

For complete Oil and Natural Gas Coverage please visit our dedicated publications ‘Around the Barrel’ and ‘Into the Vortex.’ – Weekly Analysis and Outlook for Energy Traders and Investors

WTI Oil

WTI Weekly KnovaWave Shape

Natural Gas

US Natural Gas KnovaWave Weekly Grid
Energy Market Closes

BDI Freight Index

Baltic Dry Index Weekly

For our complete Weekly Commodity Analysis and Outlook visit our Commodity Traders Weekly Outlook:

Charts and commentary via KnovaWave on:

  • Grains: Wheat, Corn, Soybeans
  • Metals: Copper, Aluminum
  • Precious Metals: Gold Silver
  • Lumber
  • Oil and Natural gas are covered separately (see below)

Part D: Forex Markets

John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”

Highlights

  • For the week, the U.S. Dollar Index rallied 0.3% to 102.017 (down 1.4% y-t-d). 2022 gains were 8.2%
  • For the week on the upside, the Norwegian krone increased 0.6%.
  • On the downside the South African rand declined 4.5%, the Brazilian real 2.9%, the South Korean won 2.5%, the Mexican peso 2.3%, the Australian dollar 1.2%, the New Zealand dollar 1.1%, the Canadian dollar 1.1%, the British pound 0.8%, the Singapore dollar 0.6%, the Japanese yen 0.4%, the Swiss franc 0.3%, the Swedish krona 0.3%, and the euro 0.1%. The Chinese (onshore) renminbi declined 0.34% versus the dollar (down 3.82%)

Weekly Foreign Exchange Price Change

For our complete Forex Weekly Analysis and Outlook visit our Forex Traders Weekly Outlook:

Charts and commentary via KnovaWave on the US Dollar, Euro, Japanese Yen, British Pound, Euro Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar, Turkish Lira, Mexican Peso. Currency dynamics are complex. There are myriad facets to analyze and contemplate that influence all markets.

Cryptocurrencies

Bitcoin

Bitcoin continues to be plaything of levered speculators, this week we saw the markets turn against those short. Where did this come from? Forced coverage from yield curve punts blowing up. Yen shorts and levered “carry trades” at risk.

It had been a churn following the FTX collapse. BTC had been stuck in the sphere of influence in continuation awaiting a catalyst, and it came. Continues to perform technically to perfection. Impulse begets impulse. To understand panic, understand greed. $BTC tested the top of a rising channel after the preceding sharp downturn which was the downside breakout of an earlier bearish flag, after breaking downside a H&S top and then down it went….

Recall Bitcoin exploded higher following it’s correction impulsively upon completing 5 waves up at +2/8. Each Tenkan and Kijun tap saw an explosive kiss of death until we completed 3 waves to around 28,000. From there we have seen extreme volatility.

Bitcoin KnovaWave Weekly Outlook

Looking back Bitcoin put in a high of $63,000 around Coinbase, the largest US crypto exchange successfully went public which signaled profit-taking. The high over $68,000 came after the launch over the Bitcoin ETF. From that high we have 2 main alternatives a V of a 1 of a V. For bears it a completive five with impulse right to the 50wma – an incredible 26% fall in a Friday night session. That’s impulse!

Bitcoin Mania in Perspective

Ethereum

Ethereum Weekly

On the Risk Radar

Fed Warnings on Possible Medium To Long Term Risks

 Geopolitical Tinderbox Radar

Turkey Geopolitical
Turkey Risk Monitor

Economic and Geopolitical Watch

Banks

Major US Banks for Q2, 2023

America’s big money center banks kicked of second quarter earnings with a solid start with solid beats by JP Morgan Chase, BlackRock, Wells Fargo, Citigroup and State Street.

Q223 Reports

Akio Morita mistakes

The Week Ahead – Have a Trading Plan

What Macro and Micro Risks and Opportunities Lie Ahead this week

Global Watch

Next Week’s Risk Dashboard via Scotiabank

Central Bank Watch

In the week ahead we have India’s RBI, Mexico’s Banxico and Peru’s BCRP who are all expected to leave monetary policy settings unchanged at next week’s decision. Following the US jobs report and with CPI next week eyes will be on Fed speakers with appearances by Bostic, Bowman o and Harker.

Eyes and ears will be on central bankers. We have the backdrop of a more hawkish Fed Chair in the face of escalating systemic risk. How will this affect Fed policy given the massive treasury positions out there and the risk of uninsured funds? In this environment we get pivots daily. How much damage is the Federal Reserve willing to do in the guise of controlling inflation?

This Week’s Interest Rate Announcements (Time E.T.)

In the week ahead we get 3 central banks delivering policy decisions.

Thursday, August 10, 2023

  • 00:30 India RBI Interest Rate Decision
  • 15:00 Mexico Interest Rate Decision
  • 19:00 Peru Interest Rate Decision

For our complete Central Bank Analysis and Outlook Visit our Central Bank Watch:

U.S. Economic Data Watch

US Data Focus

  • Monday: June Consumer Credit (Briefing.com consensus $13.0 bln; prior $7.3 bln) at 15:00 ET
  • Tuesday: July NFIB Small Business Optimism (consensus 92.1; prior 91.0) at 6:00 ET; June Trade Balance (consensus -$65.1 bln; prior $-$69.0 bln) at 8:30 ET; June Wholesale Inventories (consensus -0.3%; prior 0.0%) at 10:00 ET; and $42 bln 3-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -3.0%) at 7:00 ET; weekly crude oil inventories (prior -17.1 mln) at 10:30 ET; and $38 bln 10-yr Treasury note auction results at 13:00 ET 
  • Thursday: July CPI (consensus 0.2%; prior 0.2%), Core CPI (Briefing.com consensus 0.2%; prior 0.2%), weekly Initial Claims (consensus 230,000; prior 227,000), and Continuing Claims (prior 1.700 mln) at 8:30 ET; weekly natural gas inventories (prior +14 bcf) at 10:30 ET; $23 bln 30-yr Treasury bond auction results at 13:00 ET; and July Treasury Budget (prior -$227.80 bln) at 14:00 ET
  • Friday: July PPI (Briefing.com consensus 0.2%; prior 0.1%) and Core PPI (consensus 0.2%; prior 0.1%) at 8:30 ET and preliminary August University of Michigan Consumer Sentiment survey (consensus 70.9; prior 71.6) at 10:00 ET

US Stocks Watch Earnings and Event Watch

Earnings Highlights This Week:

  • Monday includes Saudi Aramco, Tyson Foods (TSN), Lucid Group (LCID), Paramount Global (PARA), Palantir Technologies (PLTR), Viatris (VTRS), Skyworks (SWKS), Beyond Meat (BYND), Paramount Global (PARA), BioNTech (BNTX), Mannkind (MNKD), KKR (KKR), Chegg (CHGG), Hims & Hers Health (HIMS), Manitowoc (MTW)
  • Tuesday includes Eli Lilly (LLY), United Parcel Service (UPS), Li Auto (LI), Coupang (CPNG), Datadog (DDOG), Barrick Gold (GOLD), Organon (OGN), Twilio (TWLO), AMC Entertainment (AMC), CRISPR Therapeutics (CRSP), Novavax (NVAX), Duke Energy (DUK), Upstart (UPST), Li Auto (LI), Digital Turbine (APPS), Under Armour (UAA), Rivian Automotive (RIVN), Blink Charging (BLNK), Wynn Resorts (WYNN), Take-Two (TTWO), Lyft (LYFT), Hecla Mining (HL), iRobot (IRBT), Akamai Tech (AKAM), 23andMe (ME), Bumble Inc. (BMBL), Marqeta (MQ), Fox Corporation (FOXA), Dutch Bros (BROS), New York Times (NYT), GlobalFoundries (GFS), LivePerson (LPSN), Sealed Air (SEE), SeaWorld Entertainment (SEAS)
  • Wednesday includes Disney (DIS), Trade Desk (TTD), Roblox (RBLX), Wynn Resorts (WYNN), Plug Power (PLUG), Brookfield Asset Management (BAM), 3D Systems (DDD), Illumina (ILMN), PENN Entertainment (PENN), Clean Energy Fuels (CLNE), Ballard Power (BLDP), Pan Am Silver (PAAS), Manulife Financial (MFC), Royal Gold (RGLD), Coeur Mining (CDE), Wendy’s (WEN), Sonos (SONO), ODP Corporation (ODP), Lions Gate Entertainment (LGF.A), AppLovin (APP)
  • Thursday includes Alibaba (BABA), US Foods (USFD), Wheaton Precious Metals (WPM), Himax Tech (HIMX), CyberArk (CYBR), Hanesbrands (HBI), Six Flags (SIX), Flowers Foods (FLO), Dillard’s (DDS), News Corp. (NWSA), Ralph Lauren (RL).
  • Friday includes Spectrum Brands (SPB) and Soho House (SHCO).

Investors (and algos) will focus on the conference calls and outlooks. Last quarter everyone expected the worse, we saw critical updates on production in coronavirus impacted regions and if there is extended halting of operations weighing on multi-nationals. 

Events

Notable conferences running during the week include:

Monday

  • All day – The three-day Ai4 artificial intelligence conference in Las Vegas will include speakers from Block (SQ), Walmart (WMT), Mastercard (MA), Snap (SNAP), General Motors’ Cruise (GM), and Faraday Future (FFIE).

Tuesday

  • All day – The six-month restriction ends for MGM Resorts (MGM) to make another push to acquire Entain (OTCPK:GMVHF).
  • 8:00 a.m. Keros Therapeutics (KROS) conference call and webcast to provide an overview of TROPOS, its global Phase 2 clinical trial to evaluate KER-012 in combination with background therapy in patients with pulmonary arterial hypertension.
  • 12:00 p.m. The EIA will release its monthly Short-Term Energy Outlook.

Wednesday

  • All day – The pretrial hearing in the FTC case to challenge InterContinental Exchange’s (ICE) purchase of Black Knight (BKI) is scheduled amid talk that a settlement could be in the works.
  • All day – The two-day JPMorgan Auto Conference will include presentations from Westport Fuel Systems (WPRT), AEye (LIDR), Carvana (CVNA), Aptiv (APTV), Gentherm (THRM), Stoneridge (SRI), Arbe Robotics (ARBE), Blackberry (BB), Cepton (CPTN), Innoviz Technologies (INVZ), American Axle & Manufacturing (AXL), Hertz Global (HTZ), Luminar Technologies (LAZR), Dana (DAN), Adient (ADNT), and Aeva Technologies (AEVA). The JPMorgan event will also feature execs with Ford Motor (F) taking part in a fireside chat to discuss the Ford+ plan to grow and create value in a new era of connected and electric vehicles.
  • All day – Kellogg Company (K) Investor Day for institutional investors and analysts at the New York Stock Exchange. Ahead of the planned split by the food company into two businesses, the Day@K presentation format will include talks from management teams for both Kellanova and WK Kellogg Co., outlining each company’s respective strategy, capital structure, capital allocation priorities, and financial outlook.
  • 4:30 p.m. Athersys (ATHX) business update conference call to provide an overview of the company’s recent clinical and operational progress, and discuss timing to conduct an interim analysis with MASTERS-2, a Phase 3 pivotal trial of MultiStem treatment in ischemic stroke.

Thursday

  • All day – Wayfair (W) Investor Day with financial analysts and institutional investors at its Boston headquarters.
  • All day – The annual Def Con hacker convention. Five teams of hackers will be in a sanctioned competition to successfully remotely infiltrate and hijack a U.S. government satellite while it is in space. In addition, companies such as OpenAI, Microsoft (MSFT), Google (GOOG), Nvidia (NVDA), and startups Anthropic, Hugging Face, and Stability AI have all agreed to provide their AI models for a hacking test.
  • 7:30 a.m. Alibaba (BABA) earnings call, potential share price move for the broad Chinese tech sector.
  • 8:30 a.m. Wix.com (WIX) virtual Analyst & Investor Day. Wix’s management team are expected to present Wix’s newest product releases and plan to further incorporate generative AI into its platform.

Friday

  • 10:00 a.m. University of Michigan Consumer Sentiment update will be released.

Sovereign Rating Updates

  • Finland (Fitch)
  • Denmark (S&P),
  • Switzerland (S&P)
  • Germany (Moody’s)

IPO Wrap

US IPO Week Ahead:


Focus on yourself and what YOU CAN INFLUENCE, set your trading plan and goals in be set for 2022.

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