Today’s probe higher in the BKX may be the final push in this correction. The Head & Shoulders formation may be due to hit its target before the end of October. The implications are enormous, should it come to pass.
SPX futures rose to 4347.40 in the overnight session. SPX finally hit the 4335.00 target, as discussed for the past two weeks. The length of time to accomplish this is confusing many into thinking that the bear market is over. It is not. The Cycles Model calls for a possible two more weeks of decline. Although treasuries have given some respite, their bear market is not over, either. Finally, bank earnings reports are due starting later this week. It could get very messy. In the meantime, the short-term outlook contains a possible probe toward 4375.00 before a reversal may be made. This dynamic may magnify the decline, with a high probability of reaching or exceeding the October low.
Today’s options expiration shows a closely matched contest between the puts and calls at 4300.00. Long gamma may start at 4320.00-4335.00, while short gamma begins at 4280.00.
ZeroHedge reports, “Futures are modestly higher, but well off session highs, led by small-caps as bond yields fall 10ps in the long-end of the curve after dovish comments by Fed officials and reports of more economic stimulus from China brought some risk appetite back to markets while investors continue to evaluate the potential impact of the Israel-Hamas conflict. Asian and European shares also rallied. At 7:45am ET, futures on the S&P 500 and Nasdaq 100 rose about 0.1% after Monday’s solid gains on Wall Street which took place with the Treasury cash market closed.
BBG reported that China may use an additional $137bn in fiscal stimulus to achieve growth targets, although as usual the market balked at the number which it viewed as too little. Treasuries jumped, catching up with Monday’s global government bond rally, when cash trading in the US was closed. The yield on the policy-sensitive 2Y Treasury dropped by the most since the end of August, while the benchmark 10-year had its best day since March. The dollar was steady after four days of declines. Commodities are muted despite the bullish China news; the USD is weaker for the 4th day in a row as the market appears to disregard geopolitical risk. Today lacks any major macro data with PPI tomorrow and CPI Thursday, while bank earnings kick off later this week.”
VIX futures have remained remarkably resilient in the overnight session, declining to 17.52. It remains above the mid-Cycle support at 17.26. While it may retest that support again today, the uptrend is firmly in place for the VIX.
TNX futures bottomed at 46.20 late last night as bonds were due for a brief correction. There are several factors suggesting higher yields are yet to come. First, the technical outlook suggests that TNX may exceed 50.00 by the end of the month. Second, banks may view this reprieve as an opportunity to sell duration. Third, China remains a seller of treasuries. Fourth, a yield-induced accident is overdue. Fourth, expectations are that yields will be lower from here (see below).
ZeroHedge observes, “A new market survey of Deutsche Bank clients finds smart money anticipates economic trouble ahead as extreme hawkish policy by central banks could trigger a ‘bigger financial accident’ and or ‘serious financial stress.’
Deutsche Bank’s Jim Reid wrote in the note that a global financial market survey was conducted between Oct. 3-6 and had 410 client responses worldwide. He said, “We take a look at expectations of central bank policy error, US recession risks, and financial market forecasts.”
The first question in the survey asked, “From its current levels, will the next 100bps move in 10yr USTs be higher or lower? (yields averaged c.4.75% during the survey).”
Most respondents (75%) believe the next 100bps move in the US 10-year bond yield is down.”
USD futures have reached an overnight low at 105.53 and may test support at the Intermediate level at 105.06. The Cycles Model suggests the current uptrend may last at least another week.
Crude oil futures have eased back from Intermediate resistance at 86.57. Monday’s bounce was needed to relieve the oversold pressure as shorts either took profits or were stopped out. There may be a few more days of consolidation before the next leg down. A decline beneath the 50-day Moving Average at 84.60 reinstates the sell signal.
Oil-Price.com states, “The world needs $14 trillion in cumulative investments in the oil sector by 2045 to ensure market stability and avoid energy and economic chaos, OPEC said in its annual World Oil Outlook on Monday.
The annual investments need to be around $610 billion on average, the bulk of which should go to the upstream segment, the cartel said, rebuffing calls for a halt in investments in new supply.
The cumulative investments in the upstream need to be around $11.1 trillion by 2045 or an average of $480 billion per year. Downstream and midstream requirements are estimated at a total of $1.7 trillion and $1.2 trillion by 2045, respectively.”