Macro Market · Market Commentary · Newsletter

Weekly Commentary – Uncharted Territory

On the heels of a decent jobs report, US stocks were on course early afternoon to finally break the 8-day losing streak, but it was simply not meant to be. And so this one is going to the record books – the 9-day losing streak is the longest since December 1980, as uncertainty over next week’s election prevailed.

http://www.marketwatch.com/story/sp-500s-9-day-losing-streak-longest-since-december-1980-2016-11-04

Nonetheless, it has been a rather subdued sell-off with SPX chipping off only 3pts, and closed a hair above the 200DMA. Should we break below, the post-Brexit gap would most likely be the next downside target.

20161105-SPX.png

The lack of selling capitulation is also indicative that a bottom is not in yet, as the TRIN index remains hovering around 1. However on the other hand, the 5-day put call ratio is closing in to extreme levels at 1.272, the highest since Aug 2015 and June 2012 which historically pointed to extreme fear and ST bottoms. That said, as we are on uncharted territory, the path of least resistance continues to point to a grind down into Election.

20161105-CPCSPX.png

Week over week, VIX rocketed an astonishing 39% to 22%, suggesting elevated demand for insurance against a potentially large decline. Considering markets are hardly down with SPX still up 2% YTD, an interesting observation is that the difference between implied volatility (VIX) and 20-day realized volatility (annualized standard deviation of last 20 days of return) is approaching extremity. Specifically, with the 20-day realized volatility at a subdued 6.76%, the difference with VIX stands at 15.77%, a rare level normally seen near the bottom of a major correction as shown below and last seen in August 2015:

20161105-VIXVolSPX.png

Statistically, of the 17 time periods going back to 2000 where the implied vs realized vol difference is above 15%, there is 75% chance of a rally in the next 2 days

Time Period VIX – Realized Vol Spread Last 20-Day SPX Return Next 2-Day SPX Return Next 5-Day SPX Return
2001/9/10 15.0% -8.3% -5.63% -12.33%
2001/9/17 – 21 18.7% -12.5% -2.21% -3.46%
2001/10/31 15.1% -0.9% 2.55% 5.15%
2002/7/23 15.0% -18.3% 5.01% 12.37%
2002/9/24 16.0% -12.4% 4.26% 3.43%
2003/2/7 15.3% -10.6% -0.06% 0.62%
2003/2/12 – 13 15.5% -10.8% 1.96% 2.23%
2009/1/12 – 16 15.0% -1.1% -3.23% -7.77%
2009/1/20 24.9% -9.3% 2.73% 4.91%
2009/2/20-23 15.4% -7.4% 0.40% -4.65%
2009/3/2 15.3% -15.1% 1.70% -3.53%
2010/5/7 20.1% -7.2% 3.96% 2.21%
2010/5/20 16.3% -12.0% 0.19% 2.89%
2011/8/8 16.9% -14.8% 0.12% 7.32%
2011/10/3 16.2% -5.7% 3.99% 8.34%
2015/8/24 – 25 20.0% -9.6% 2.47% 4.09%
2016/11/3 – 4 15.8% -3.6% ? ?
Average 1.14% 1.36%
% Positive 75.00% 68.75%

Notable exceptions during which markets followed with a severe decline were September 2001, before and after 9/11 Terror Attack, as well as January – March 2009 when markets were still lingering from the Great Financial Crisis. One thing for sure is that the current market condition parallels that of major crisis even though the magnitude of the decline so far has been comparatively small.

Sector-wise, Biotechs (IBB) were the worst performer with a -3.3% drubbing although it did diverge from the rest on Friday to rally 2%. The weekly technicals are at a critical juncture, as IBB was able to cling onto crucial neckline in a large H&S pattern, and must continue to hold to avoid next leg down:

20161105-IBB.png

Nasdaq (QQQ) and Technology (XLK) were not far behind with a hefty -2.95% and -2.66% drop. The QQQ played “catch-down” to the other flag ships indices by closing under 20WMA for the first time since the Brexit debacle. However, it did barely held the breakout horizontal support and is still above the uptrend just under 112 – until those are broken the LT bull trend is still intact.

20161105-QQQ.png

Also sea of red in equity markets around the world, and in particular Brazil (EWZ) -5% on the week but remain healthily in the green YTD. On the back of weakening US Dollar and strengthening of the Yen, Japan (DXJ) dumped 3% and failed at the LT descending trendline on the weekly chart. With a looming 50-200WMA death cross, the current uptrend off Brexit lows could be in jeopardy.

20161105-DXJ.png

Moving on to commodities space, Gold outshined other asset classes with a 2% gain and held above 1300, but jury is still out as it remains capped under the cluster of trendline resistance and right shoulder. On the other hand, Crude Oil was the polar opposite with a whopping -9% decline following previous week’s false breakout. Technically, we are most likely headed for the inverse H&S right shoulder line at 42 before any material support could be found:

20161105-WTIC.png

The US Dollar confirmed a bearish shooting star reversal on the weekly chart with a -1.2% plunge below July swing point, which points to further losses until the 20WMA and 50WMA support.

20161105-DXY.png

Heading into Election Day, the markets are no doubt in shaky grounds and justifably so given the fact the election outcome is now virtually a coin-flip.

http://www.newsweek.com/presidential-election-polls-november-5-2016-517411

Even as a number of sentiment and technical indicators are suggestive of a bounce, it would certainly not be surprising if we see the losing streak extend to 11-days until the Election result is in. Stay nimble, and have ample of cash ready to buy once the dust settles is perhaps the best strategy, or look for opportunities uncorrelated with the broad market, such as the Pound ETF (FXB), which broke a steep downtrend and should march towards 20WMA and broken swing point post flash crash in October.

20161105-FXB.png

 

 

 

Weekly Market Snapshot

Sector ETFs by Weekly Return %

SYMBOL NAME CLOSE DAILY (%) WTD % MTD %
XLB Materials Select Sector SPDR 46.4  

0.16

0.35%

-0.71% -0.75%
XLU SPDR Select Sector Fund – Utilities 47.95  

-0.15

-0.31%

-1.05% -2.99%
XLI SPDR Select Sector Fund – Industrial 56.47  

0.05

0.09%

-1.10% -1.29%
KRE SPDR KBW Regional Banking ETF 42.99  

0.05

0.12%

-1.15% -1.83%
XLFS S&P SmallCap Financials Portfolio 30.75  

-0.12

-0.39%

-1.38% -1.25%
XLF SPDR Select Sector Fund – Financial 19.49  

-0.06

-0.31%

-1.42% -1.27%
DIA Dow Jones Industrial Average ETF 178.71  

-0.4

-0.22%

-1.46% -1.36%
XLY SPDR Select Sector Fund – Consumer Discretionary 76.73  

-0.15

-0.20%

-1.68% -1.75%
SMH HOLDRS Merrill Lynch Semiconductor 66.59  

-0.35

-0.52%

-1.77% -2.46%
SPY SPDR S&P 500 208.55  

-0.23

-0.11%

-1.88% -1.88%
XLV SPDR Select Sector Fund – Health Care 66.48  

0.46

0.69%

-1.92% -1.31%
IWM iShares Russell 2000 115.74  

0.74

0.64%

-1.94% -2.33%
XLP SPDR Select Sector Fund – Consumer Staples 51.61  

-0.47

-0.91%

-2.01% -2.25%
IYR iShares Dow Jones U.S. Real Estate Index Fund 73.95  

0.39

0.53%

-2.08% -3.51%
XLG Rydex Russell Top 50 ETF 147.03  

-0.41

-0.28%

-2.20% -2.01%
PFF iShares S&P US Preferred Stock Fund 38.14  

0.1

0.26%

-2.26% -2.08%
XLE SPDR Select Sector Fund – Energy Select Sector 67.77  

-0.37

-0.54%

-2.31% -1.24%
XRT SPDR S&P Retail ETF 41.07  

0.03

0.07%

-2.52% -2.75%
XLK SPDR Select Sector Fund – Technology 46.18  

-0.08

-0.17%

-2.66% -2.61%
QQQ PowerShares QQQ Trust 113.65  

-0.4

-0.35%

-2.95% -2.85%
IBB iShares Nasdaq Biotechnology 251.7  

4.83

1.94%

-3.37% -1.94%

 

Commodity & Bond ETFs

SYMBOL NAME CLOSE DAILY  (%) WTD % MTD %
GDX Market Vectors TR Gold Miners 25.07  

-0.23

-0.91%

5.29% 2.24%
SLV iShares Silver Trust 17.46  

0.04

0.23%

3.50% 2.89%
GLD SPDR Gold Trust 124.39  

0.09

0.07%

2.31% 2.01%
TLT iShares Barclays 20 Year Treasury Bond Fund 131.74  

1.17

0.89%

0.99% 0.37%
AGG iShares Barclays Aggregate Bond Fund 111.24  

0.23

0.21%

0.07% -0.05%
LQD iBoxx $ Investment Grade Corporate Bond Fund 120.81  

0.36

0.30%

-0.05% -0.14%
DBA PowerShares DB Agriculture Fund 20.42  

0

0%

-1.02% -0.49%
HYG iShares iBoxx $ HY Corp Bond Fund 84.98  

0.04

0.05%

-1.51% -1.21%
USO United States Oil Fund 9.98  -0.1

-1%

-9.36% -5.22%

Country ETFs

SYMBOL NAME CLOSE DAILY (%) WTD % MTD %
EWS iShares MSCI Singapore Index Fund 10.27  

-0.09

-0.87%

-0.39% -0.77%
EWA iShares MSCI Australia Index Fund 19.9  

-0.16

-0.80%

-1.29% -1.87%
EWL iShares MSCI Switzerland Index Fund 28.63  

-0.08

-0.28%

-1.51% -1.31%
EWY iShares MSCI South Korea Index Fund 54.38  

-0.16

-0.29%

-1.57% -1.75%
EWM iShares MSCI Malaysia Index Fund 7.83  

-0.05

-0.64%

-1.63% -1.88%
FXI iShares FTSE/Xinhua China 25 Index Fund 36.24  

-0.32

-0.88%

-1.66% -1.68%
EWU iShares MSCI United Kingdom Index Fund 14.73  

-0.15

-1.01%

-1.87% -1.80%
EWJ iShares MSCI Japan Index Fund 12.38  

-0.15

-1.20%

-1.90% -1.98%
EWC iShares MSCI Canada Index Fund 24.93  

-0.14

-0.56%

-2.04% -1.66%
EWT iShares MSCI Taiwan Index Fund 15.31  

-0.09

-0.59%

-2.17% -2.86%
EWH iShares MSCI Hong Kong Index Fund 21.13  

-0.27

-1.27%

-2.18% -2.04%
EWQ iShares MSCI France Index Fund 23.53  

-0.27

-1.14%

-2.20% -2.16%
EWN iShares MSCI Netherlands Index Fund 23.94  

-0.12

-0.50%

-2.25% -2.21%
EWO iShares MSCI Austria Index Fund 16.17  

-0.36

-2.20%

-2.30% -1.64%
EWK iShares MSCI Belgium Index Fund 17.51  

-0.16

-0.91%

-2.40% -2.18%
EWW iShares MSCI Mexico Index Fund 49.35  

0.5

1.02%

-2.55% -2.91%
EWG iShares MSCI Germany Index Fund 25.19  

-0.18

-0.71%

-2.59% -2.78%
EEM iShares MSCI Emerging Index Fund 35.93  

-0.37

-1.02%

-2.71% -3.26%
EWP iShares MSCI Spain Index Fund 26.69  

-0.31

-1.15%

-2.73% -2.77%
EWD iShares MSCI Sweden Index Fund 26.9  

-0.25

-0.93%

-3.13% -2.32%
EWX SPDR S&P Emerging Markets Small Cap ETF 41.56  

-0.32

-0.77%

-3.17% -3.35%
DXJ WisdomTree Japan Total Dividend Fund 43.38  

-0.44

-1.01%

-3.62% -3.92%
EWI iShares MSCI Italy Index Fund 10.82  

-0.13

-1.19%

-4.42% -4.08%
EWZ iShares MSCI Brazil Index Fund 35.36  

-0.15

-0.42%

-5.43% -6.36%

 

 

 

Week Ahead – Events and Economic Data

11/8 Tuesday

Time Event / Data
10:00am JOLTs Job Openings
7:00pm Polling stations start to close and first state projections made based on exit polls
11:00pm Earliest possible time the election will be “called” for either candidate by US TV networks

* US Election Day Schedule

http://www.telegraph.co.uk/news/0/what-time-are-the-us-election-results-in-the-uk-and-what-is-the/

 

11/9 Wednesday

Time Event / Data
10:30am Crude Oil Inventories

 

11/10 Thursday

Time Event / Data
8:30am Initial Jobless Claims

 

 

11/11 Friday

Time Event / Data
10:00 Michigan Consumer Confidence

 

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