• Markets must be kept under control at any cost

    Markets are in a real difficult situation. The Thanksgiving bounce did not occur and there is more pessimism than ever. Since the S&P500 is now negative for 2018, if it stays negative by the end of November, statistically there will be no Santa Claus bounce.

    One of the big issue is the plunging oil prices. Oil has lost 33% in the past two months. Oil is the main commodity that is also used as debt collateral, especially for oil exploration and production companies. I believe that it is a matter of time before we have news of a major corporate bond related incident.

    Just as a small note here, I noticed that oil price uptrends started when there was a sudden price spike above the 5%-2% envelope (Green arrows), while downtrends started when we had a price break below the same envelope (Blue arrows.) The current successive Red arrows tell us that there is a general - longer term - issue at hand for this industry. Not sure we are even at capitulation levels.



    The past two months weakness in oil prices has already propagated to junk bonds. What we have to fear here is some forced liquidation of bad debt which could start a panic drop of the whole fixed income sector as investors will be afraid of a 2008 repeat. This is maybe the reason why the Fed as already sent signals that it would not raise rates too fast in 2019.





    The 10Y rates are now about to cross below the 3.1%-3.05% support and heading to the stronger 3.0%-2.95%



    There has been some Treasuries selling in the past few days though.



    Regarding equities, as I have been writing over the past few days, the current pullback does not seem to be triggering widespread selling. We can see below that the NQ8 Money Flow is still positive.



    The Money Flow on the whole S&P500 shows also a positive divergence.



    Below are the EV patterns of QQQ and QLD. Why do we have such a trend difference? What is happening to these ETFs?

    One explanation is that some deep pocket (the BOJ) has decided for political reasons to support US equities and is indeed buying the QQQ (and probably also some SPY.) On the other hand, leveraged long ETFs are probably not used for political purposes and hence have not been bought during the downtrend.







    Finally, if we look at the options put/call ratio we can see that spikes in this ratio most often occurred just before reversals.

    The spikes shown in Pink occurred during market reversals while the higher spikes in Red occurred during uptrends.



    Similar higher spike occurrences are shown below.



    Conclusions:

    For the coming week, what is really important is the context of the US/China trade issues. I believe that market moves are 90% linked to the fear that Trump will continue playing his strong hand of higher tariffs.

    Because funds will have a hard time selling positions if the trade discussions do not lead to a positive outcome in one week, they need to seek protection now. This probably means that markets could continue to weaken somehow, but I believe that there is a good chance that an agreement is reached at the coming G20.
    Comments 1 Comment
    1. Timfarm's Avatar
      Oil has also disconnected from global oil, gas, distillate, floating storage inventories, which are actually lower pretty much across the board than they were when Oil as near this price in July 2017. Strange things indeed are going on. We were also told earlier this fall that nat gas storage which is below five year average is not a positive because we have many wells which we can complete and turn to production. That it seems was of questionable accuracy. Although even though price of Nat Gas has done much better last several months the Nat Gas producers and equities have not moved much higher.