Today’s action implies that the Master Cycle low may have been made last Thursday, May 12, on day 252 of the Master Cycle. There is a strong alternate outlook that there may actually be a lower low in the next 8-9 days that may qualify as the actual MC low. Thursday’s low occurred on day 44 from the Wave (2) high, making this decline a shorter one than the Wave (1) decline that was 52 days in length. Should that be the case, a retracement back to the Lip of the Cup with Handle may follow.
The Shanghai Composite Index has begun its decline into Wave 5 of Wave (3) of Primary Wave [C], a very strong degree. This may have a great influence on the tech-heavy NDX.The Cycles Model suggests the decline may last through the end of May, which may stretch the decline in U.S. stocks, especially the NDX.
ZeroHedge reports, “Three things we learned last week:
1. China’s credit growth plunged. Friday’s data showed banks lent 645 billion yuan ($94.9 billion) of new loans in April, when Shanghai was locked down. It was less than half of the amount expected, and the lowest since 2017. The credit slump creates a strong case for policy easing, as Bloomberg economist David Qu wrote. Indeed, nine of 14 economists surveyed by Bloomberg expect the benchmark one-year loan prime rate will be cut this week.
Lower rates may help on the margin, but when Covid restrictions disrupt the economy and life, business and households may remain reluctant to borrow to expand production or buy homes. The biggest stimulus would be a turnaround in public-health policies.”
NDX futures are coming down after reaching a high of 12496.00. Despite the massive rally on Friday, the rate of decline is steepening. In today’s expiring options, the Max Pain zone is near 12425.00. Puts are favored in the options at 12400.00 and below.
In the NDX options (301.94), Max Pain is at 306.00 and puts are favored at 305.00 and below, with short gamma starting at 300.00. You can see that the dealers and hedge funds supporting the options market avoid short gamma at all costs, since that is the trip wire for a panic decline.
ZeroHedge reports, “Friday’s bear market rally dead-cat bounce appears to be over, and global stocks have started the new week in the red with US equity futures lower after a “huge miss”, as Bloomberg put it, in Chinese data fueled concerns over the impact of a slowdown in the world’s second-largest economy. As reported last night, China’s industrial output and consumer spending hit the worst levels since the pandemic began, hurt by Covid lockdowns.”
SPX futures rallied to 4045.00 before easing back down to the Max Pain level at 4025.00. While the call are thin above that level, puts begin in earnest at 4000.00 and short gamma kicks in at 3950.00 to 3975.00. Note that current market valuations are being compared to 5 and 10-year averages, precisely when the Fed was pumping liquidity. Things will get much worse…
ZeroHedge remarks, “Wilson now worried about bear market rally
In the short term that is. The real bear has not fully revealed himself yet…Wilson: “The bottom line is that this bear market will not be over until either valuations fall to levels (14-15x) that discount the kind of earnings cuts we envision, or earnings estimates get cut. However, with valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, stocks appear to have begun another material bear market rally. After that, we remain confident that lower prices are still ahead. In S&P 500 terms we think that level is close to 3,400, which is where both valuation and technical support lie” (Morgan Stanley Strategy)
The forward 12-month P/E ratio for SPX of 16.6 is below the 5-year average (18.6) and below the 10-year average (16.9).”
VIX futures have begun a rally from Friday’s low that may trigger the Head & Shoulders neckline. The Cycles Model suggests a burst of trending strength on Tuesday that may break the range-bound consolidation that has been in place since December.
TNX may be retesting the Cycle Top at 28.82 this morning. The Cycles Model suggests the decline may continue through the end of May, with the 50-day Moving Average as the prime target. This falls in line with the idea that the stock market decline may also extend to the end of the month.
USD futures show that it reached a weekend high of 105.15. This morning it has eased back down. The Cycles Model shows trending strength today and again at the end of the week. This may be due for the demand for USD from the liquidation of stocks.