E VIX Rises Above Support; Government Shutdown Impact On Markets

VIX ramped above Long-term support/resistance at 10.86, closing above it. This resulted in a a buy signal for the VIX. The calm may be broken.  A breakout above the Ending Diagonal trendline suggests a complete retracement of the decline from January 2016, and possibly to August 2015.  

(Bloomberg)  Volatility was one of the never-ending talking points of 2017. Hardly a day went by without stories citing the almost eerie calm in U.S. stock markets. The Chicago Board Options Exchange Volatility Index, or VIX, finished the year with the lowest average daily level on record. During the course of the year, we saw the market’s fear gauge set a new record low when it closed at 9.14 on Nov. 3.

SPX goes parabolic

SPX continues its parabolic rise above its Ending Diagonal channel in a throw-over formation. A decline beneath its Cycle Top and upper Diagonal trendline at 2720.39 suggests the rally is over and profits should be taken. A break of the Intermediate-term support at 2635.04 and the trendline nearby, generates a sell signal. Should that happen, we may see a sharp decline in the next two weeks.  

(CNBC)  Stocks closed higher on Friday as investors shrugged off worries about a possible government shutdown.

The S&P 500 rose 0.4 percent to close at 2,810.30, a record high, with consumer staples as the best-performing sector. The Nasdaq composite climbed 0.6 percent to finish at 7,336.38, also a record.

“The prospect of a government shutdown isn’t putting a lid on this boiling market—investors simply aren’t fazed,” said Mike Loewengart, vice president of investment strategy at E-Trade. “For traders, many are looking beyond the beltway and finding fundamentals in US companies as sound as they’ve been in a long time.”

NDX throws over its Channel trendline

The NDX continues its rally this week to throw over its Trading Channel trendline as well.  A decline beneath the Cycle Top at 6627.78 suggests that the rally may be over.  A further decline beneath lower Diagonal trendline and Intermediate-term support at 6355.50 may produce a sell signal.    

(RealInvestmentAdvice)  “Today’s equity market valuations have only been eclipsed by those of 1929, and 1999.”

In March of 2017, we examined traditional equity valuations in a new light to help better compare today’s valuations versus those of past business cycles. In particular, we adjusted the popular price-to-earnings (P/E) ratio for economic growth trends. The logic backing the analysis is that investors should be willing to pay a larger premium if economic growth is strong, and therefore corporate earnings are higher, and vice versa if economic growth is comparatively weak. The premise is similar to the popular price-to-earnings growth (PEG) ratio commonly used by equity investors. While P/E assesses the value of a stock on the basis of trailing earnings, PEG is more forward-looking using the expected growth of earnings. Essentially, the ratio tells us how much a current investor is willing to pay for a unit of expected earnings.

High Yield Bond Index reverses

The High Yield Bond made a new all-time high on Wednesday, then reversed course, closing lower for the week. Last week I suggested, “The Cycles Model calls for a loss of strength over the weekend.  Perhaps a reversal may be in the making?” While the trend is still up, there may be a significant low in the next two weeks.  A sell signal may be generated with a decline beneath the lower Diagonal trendline at 183.00.

(Reuters) – U.S. fund investors pulled $3.1 billion from high-yield “junk” bonds during the latest week, Lipper data showed on Thursday, offering new warning signs about risk appetite despite global markets’ continuing triumph.

The junk bond withdrawals – from both mutual funds and exchange-traded funds (ETFs) during the week ended Wednesday – mark the largest of any week since November, according to the research service.