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Credit spreads widen as Financials breakdown on Treasury rally

May 30, 2018


2666-7, 2645-7, 2624, 2595-6, 2552-4     Support
2704-5, 2724-6, 2741-3                            Resistance

LINK TO TECHNICAL WEBINAR from last Thursday- 051718-


SPX - (1-2 Days)- Bearish-  Tuesday's decline looks to be a game changer near-term, as S&P broke lows going back since May 9 on much heavier volume than would be anticipated in post holiday trading.  While an oversold rally might be attempted given the -1%+ decline Tuesday, this should be used to sell into

SX5E- EuroSTOXX 50Bearish-  Tuesday's downward acceleration given Italian bank woes has caused trends and momentum to pick up pace on the downside near-term.  Additional pullbacks look likely to down near 3389, then 3340 near-term, with 3261 likely providing strong support.  

HSCEI- Bearish, but very close to key support at March/April lows which likely cause stabilization.  Demark indicators look to be potentially 1 day away from triggering counter-trend buys.  One can try to buy just below the 200-day ma at 11635





Short SPY  with 261.50 target , 271 as a stop
Short XLV 82.09 with targets at 80-80.50
Short XLK on a close under 68.79 with target 66
Long HSCEI at 11575-11650
Long Grains through WEAT, or CORN
Buy Gold on any daily close above 1309, anticipating a rally back to 1346-1365

Tuesday's break on much heavier volume than normal looked important as it violated lows going back since early May along with coinciding with a larger breakdown in the Financials sector which had looked last week to be near make-or-break support.  Heading into this week, it was seen as "more" probable that Tech and Industrials strength might carry stocks higher despite the increasing volatilty seen abroad in FX and Rates, yet this volatlity seemed to have spread much quicker than anticipated to the US, and caused US Treasury yields to fall dramatically down to 2.78%, a very low level considering that yields had just touched 3.11% roughly two weeks ago.  The escalation in Italian 2year yields proved to be larger than markets had witnessed even during the Euro crisis back in 2011, and the surge in Italian and Spanish rates caused a flight to safety into US Treasuries and Bunds, the latter which have seen 10-year yields drop nearly 40 bps in the last two weeks alone, a very parabolic drop.   European Financials came under severe stress, as Italian and other European banks dropped to the lowest levels seen in over a year.

Importantly, credit spreads have finally begun to give off warning bells, as the Bloomberg High Yield OAS spread made a breakout of a pattern that had existed for the last six months, rising to 3.72%.  While this still seems relatively tame and nearly unchanged from beginning of 2018, the technical breakout in High Yield does indeed look serious and likely causes Spreads to widen further in the days and weeks ahead.  This in turn likely paves the way for yet another bout of equity weakness into early to mid-June before rallies ensue.   Watching Treasury Yields will be important, as the US 10-year yields have led Financials and also led the Stock market lower as a whole.  Until yields start to turn up, (Despite being seemingly oversold, this still looks premature until next week at a minimum) equities likely face further downside pressure.   Tech has been resilient thus far in being able to weather the weakness in other sectors, and even FANG stocks on Tuesdayshowed signs of strength.  Yet, Tuesday's decline might cause these to pause and pullback a bit near-term before any further gains can happen.  While technically there was scant signs of weakness heading into this week in US equities to make a bearish call, now we're seeing this particularly in the Financials and in Credit in a way that merits a defensive tone and considering hedging at least for a bit more volatlity in the upcoming 1-2 weeks.  Cycles had suggested a June 12-14 bottom.  Up until today, I had thought this might prove to be a high.  Given the credit widening and Financials unwinding as SPX fell to new weekly lows, i'm putting this scenario back on the front burner, expecting weakness into end of week this week and potentially into next before any meaningful low. 

Additional charts and thoughts below.


S&P dropped under the lows of the last couple weeks and even on a late day rally attempt, could not manage to recoup prior lows that had been violated.   While the percentage of volume into DOWN vs UP stocks was a bit heavy, it wasn't capitulatory enough to call for a low.  Price action however, was quite negative and closing well down off yesterday's open suggests further weakness.   SPY might very well drop to near 261 before this weakness subsides which could still allow for a Triangle pattern to develop with minor higher lows and provide a buying opportunity into mid-June.   Regaining 270 on a close would be thought to be positive.  Yet early Wednesday strength, in my opinion, should be a selling opportunity. 


US 10-Year Treasury yields have now violated the entire uptrend since last September in "One Fell" swoop.   This chart was just published over the weekend showing yields near key support but unfortunately this break is important, and is bearish for yields (indicating further downside) and doesn't look to be complete.  Demark counter-trend signals of exhaustion remain at least a few days away from forming, indicating that yields might get down to 2.60% before any stabilization at a minimum.   


 European banks fell to the lowest levels since last Summer as seen in the Euro Banks ETF, EUFN.   Closing down near the lows of the day while yields failed to show much evidence of bottoming still suggests additional weakness could lie ahead, and is bearish for European Banks, which likely still underperform the US and show steep losses near-term.  Areas under $21 could be considered for buying dips, but for now, clearly look early technically speaking.