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1) Negative price action ( Bounces as opportunities for selling)
Price action have shifted to selling bounces since early March 2018. Taking references from the S&P500 chart below, we have bad strong rebounds since the February 2018 [Short VIX futures ETF short covering induced major sell off ]. Bounces have however been capped to 2800. And we never saw the highs again. I take this sign as EXTREMELY DISTURBING for holders of longs. Every dip in the market for the past 3 years have been met with swift bounces to all time highs within two months, yet we are far from this occurrence. I will explain several factors as possibilities why this time is different in the various points below after this technical analysis explanation.
We have seen 3 occasions of major bounces in March 2018 but all of them as of this weekend have shown to be failures. The 200MA Daily (2594) on the S&P500 have been strong support for most of last week. This level if broken along side a downward move to 2500 will likely trigger major stop losses / short hedges. Target levels on the break will trigger a bear market, with target levels of 2200. (15% lower from current 2600 levels)
We are also looking at possible death cross occurring in April 2018. A death cross is when the 50MA crosses under the 100MA. Bearish signal on the technical analysis will further reinforce the downside story.
I am looking at risk of a crash, 1987 style come this year 2018. A break of 2530 on the S&P500 levels greatly increases the chances. What causes a crash? Not fundamental news in my view. It will have to be due to lack of liquidity in the markets. No buyers. Only fear and blood going around.
2) Death of XIV Short Vix ETF ( Lack of VIX Short buyers to push up the S&P500 indirectly, reason for no new ATH this round)
The crash on 5/2/18 was caused by the demise of XIV. XIV was the ETF that short nearby month S&P500 VIX futures and continued the exposure by rolling over spot month VIX futures short positions to the next month. This has been a profitable trade in the past 4 years given the large contango in front month VIX futures then.
This situation has however changed due to the event acceleration by Credit Suisse to close down the XIV ETF. This has thus removed around 2 Billion USD worth of monthly short VIX rollover action in the market, which have artificially been depressing volatility of the S&P500.
With XIV ETF out of the market during Feb18, we have not seen VIX trade lower than 13%, which have in some way limited the bounce for the S&P500 to new all time highs as what we have seen in the past 2 years.
As below is a chart of the XIV ETF to give you guys an idea of how much money was made selling VIX and artificially controlling S&P500 volatility, before the big crash as the fund had to short cover by buying VIX Futures, and inturn market markers selling S&P500 futures which accelerated the flash crash of 5/2/18 and 6/2/18.
3) Central Banks put is dead. Global Central Banks have changed their stance in 2018. Unwillingness to trash talk the market with stimulus (aka Fed/ECB Put), opting for stealth stimulus in hopes to save the market.
From 2010-2016, whenever we saw a 5-10% draw down on the markets, we will see central banks coming out with various statements, to do whatever it takes to save the market. This was known as the central banks put. However if one has noticed, this stance has changed in 2018. Central banks have actually allowed a near 10% correction, without commenting on any new stimulus threat to kill off speculators. This is partly in bid to calm the hot stock market which have been trading to an almost parabolic extent until January 2018.
I believe most market participants have noticed this change, and this could be another reason why we did not see a new all time high this round. FED and ECB do not want to kill their credibility as the talk has been for rate hikes. They are likely afraid that a change in stance would in turn cause a fall in confidence which would be asset price negative overall.
What the central banks have done since was to increase purchases of financial assets be it bonds for the ECB and FED, and also increased ETF purchases by the BOJ in bid to save the equity markets. This has somewhat been successful, to defend the 200MA levels, but i am rather sure this is not a solution in the mid term. When levels get broken, and fear kicks in, stealth stimulus will no longer work as the speculators note the weakness of the central banks.
4) Generals are being shot and hung out to dry
Every fund manager favourites, FANG has had a tough month in March 2018 with various generals being targeted.
I say these stocks are generals as they have been the leading darling on the stock market rally since 2015. Once generals are shot, we have to be careful as the rally army will lose direction without its generals.
Facebook under attack for privacy issues which have promoted very negative feedback from the public. I am excited to see how the next few quarterly reports show us any indication of lower user base and ad revenue.
Amazon has been under constant attack by POTUS Donald Trump on Twitter. It is almost as if Trump and Co. has been short Amazon given how constant the attacks have been this week with regards to Amazon taking over brick and mortal stores which have killed the retail sector, for not paying taxes and also the post office delivering parcels for Amazon at low cost. Reasons above maybe all bullshit but Jeff Bezos to be attacked by Trump, is a bad sign.
Netflix, has not been directly attached by the media thus far. However, it is the most financially weak among the fangs. 20B in debt with a high cash burn rate to acquire more media content. I am not too sure if this is a sustainable business model in a rate hiking environment. All works well when it is happy days, but when stress returns to the financial markets due to lower asset prices, I say Netflix would be the first to be affected financially. Just a matter of time before the media starts to talk about the large debt. You can take reference to what has happened to Tesla this week.
As below is a chart of the FANG INDEX. We have seen the first 10% draw down since a long long time, and once we break the current lows, we all know how its like taking a lift down a building compared to taking an escalator up.
5) March the month of weaker PMI globally. Bulls hope it is just transitory.
A month of equity markets turbulence, followed by weaker global PMI. This could be transitory but something to watch out for the bulls and it could signal a turn in the economy. I will keep updating this space.
6) USA Corporate tax cuts
Major boost to US Corporate earnings due to tax cuts from the Trump Administration. There are various on off inclusion which have been a good boost to earnings which the equity market has taken in a very positive light. I am not trying to say this is in any way negative, but the sentiment over strong EPS growth would have to be tapered to some extent given some of the inclusion to the tax cuts is one off.
7) Trade wars? Real wars?
On the 4th and 5th of April 2018, we saw a massive bounce in the equity markets even when the US and China published proposals for upcoming tariffs as threats to each other. The market had taken the fact that no timeline published for the threats would mean they are just tools for negotiation and the US have mentioned that they are having good discussions backdoor between both nations to try to resolve this matter.
This was however denied by China on 6th April 2018 at their 1230GMT press conference in which the Chinese spoke person denied any of such talks in place. This is the most important takeaway with regards to the trade war so far.
It is confirmed that both nations are not speaking to each other, and will do whatever it takes to win back their national glory in this case of tit for tat between pre-school kids. Both parties will have losses,. Trump is flying solo in this event as proven when the Director of National Economic Council Larry Kudlow told reporters that he has only known of Trump's new 100B Chinese Tariff proposal the same time as the rest of us.
China being Nationalist will do whatever it takes to win this trade war for their sake to being the global "Big Brother" and to save their face ( which is very important to the Chinese).
All hopes for a peaceful non trade war style negotiations have been trashed, while we await more trash talking and real actions from both parties next week. Russia who have also faced additional and very serious sanctions with regards to Aluminium will surely be China's friend in the trade war against USA.
I am excited to see if there will be any friends left to the USA as I am pretty sure that the EU have a favour to pay to the Chinese for their assistance in the EU Debt crisis bond purchases that have calmed down the market then.
A bazooka suggestion to China at this stage would be to consider selling part of their US Treasuries holdings, to cause a spike in yield and to prompt a rating cut for US. Financial markets would be doomed and Trump and his nation would be brought to his knees.
8) Rising Libor-OIS Spread and effects on Deutsche Bank AG.
Much reports on the rising Libor-OIS Spreads since the beginning of the year due to reasons caused by the repatriation of corporate cash piles and a splurge of bill issuance by the US Treasury. However as we have gotten pass March 2018 and the glut of bill issuance by the US, we have yet to see a drop in the spreads.
This is worrying as we are on a similar pattern to what we have saw in August 2007 with the spread rising from 10bps to 50bps than, only do we see stress in the funding markets affecting large banks involved in mortgage lending. Current Libor-OIS spread stands at near 60bps, highest level since 2009. This is weird given we are not seeing exact stress in asset valuations yet we do have a stress on dollar funding in London.
The bad news is that given how Central Banks have lowered rates through QE in the past 10 years to achieve low lending rates via banks, corporate debt is on a high level which could affect many corporate going forward. At risk would largely be companies involved in commodity financing which would have a negative impact if PMI contraction lead to lower commodity prices. Highly leverage Technological companies would be highly at risk too. Any defaults would likely send fears in the inter-bank markets prompting central banks to revert back to easy monetary policy ( if the BOJ and ECB can get any easier), will surely be a backlash to the confidence to the global economy and I don't think I will need to explain on how equity prices will react as they will surely react faster than you can click your sell button.
I somehow think the recent decline in share price of Deutsche Bank from $20 to $13 could be linked to the rising Libor-OIS Spread. I will do some more research into it and come out with my next post very soon.
Good luck trading, while I prefer to sit tight on the way down.
Thebigbear