VIX advanced during the short holiday week, making a new high and higher low, closing above its weekly Cycle Top at 20.63. Note the Head & Shoulders formation which may give it more impetus in the next week. VIX is also positioned for a triply-indicated surge of strength through mid-December.
(Bloomberg) An aggressive implied volatility storm has not developed amid the recent declines in global stock market indexes.
The relationship between S&P 500 and VIX has flattened, leaving put spreads on the index outperforming volatility call options. SPX realized volatility remains historically elevated (10-day at the 80th-percentile of the 5-year range) but there’s no sign of extreme downside hedging panic on short-dated skews.
SPX approaching the neckline
SPX resumed its decline during the shortened holiday week, nearing the neckline of a proposed Head & Shoulders formation that promises further declines. The Cycles Model now implies a week-long decline that may test its weekly Cycle Bottom at 2113.32.
(Bloomberg) The nasty sell-off in equity markets has raised doubts about the Federal Reserve’s willingness to follow through with its plan to boost interest rates again in December. It shouldn’t.
The odds that market participants place on a rate hike had dropped to around 65 percent from a high of more than 80 percent a few weeks ago. The decline comes even as central bankers give little reason to doubt that another rate hike is coming. New York Federal Reserve President John Williams, a permanent voting member on the Federal Open Markets Committee, reiterated this week his expectation that the Fed would “be likely raising interest rates somewhat but it’s really in the context of a very strong economy.”
NDX breaks through the neckline
NDX managed to break through its Head & Shoulders neckline at 6600.00, potentially triggering that formation. The Cycles Model suggests the sell signal may be intensified in the next week. Margin calls may resume beneath the neckline as leveraged positions appear to be threatened.
(ZeroHedge) It gets serious. Margin calls?
No one knows what the total leverage in the stock market is. But we know it’s huge and has surged in past years, based on the limited data we have, and from reports by various brokers about their “securities-based loans” (SBLs), and from individual fiascos when, for example, a $1.6 billion SBL to just one guy blows up. There are many ways to use leverage to fund stock holdings, including credit card loans, HELOCs, loans at the institutional level, loans by companies to its executives to buy the company’s shares, or the super-hot category of SBLs, where brokers lend to their clients. None of them are reported on an overall basis.
High Yield Bond Index breaks the trendline again
The High Yield Bond Index broke through its long-term trendline and appears to be challenging its Long-term support at 193.49. It is on a sell signal. High yield bonds are also anticipating further weakness through the end of the November and possibly extending into mid-December.
(Investing) U.S. fund investors renewed their concerns about credit quality in corporate debt markets during the latest week, hitting leveraged loan and high-yield debt funds with multibillion-dollar withdrawals, Lipper data showed on Friday.
So-called “loan participation funds,” made up of funds that buy loans to highly indebted companies that typically must pay investors more as interest rates rise, posted $1.7 billion in withdrawals during the week ended Nov. 21. That was the most cash pulled from those funds since December 2015, the research service’s data showed.
High-yield “junk” bond funds based in the United States recorded $2.2 billion in withdrawals, the most in four weeks. Those funds include bonds from issuers with lower credit ratings.
UST maintains Intermediate-term support
The 10-year Treasury Note Index managed to remain above Intermediate-term support at 119.09 this week, maintaining its buy signal. UST may extend its rally into December according to the Cycles Model.
