Wild sessions last week in Wall Street

Market Pulse.

Ends a wild week in Wall Street, with the SP500 and the Nasdaq, already settled in a bearish environment, with its worst week since March, and almost all technical indicators negatives. Both started the week very optimistic (Monday + 2%) after the G20 and the news of an apparent truce in the US-China trade war, a fact that was losing strength as details of it were known, and protagonists of it, like Trump or Kudlow, began to spoke. The final thrust occurred half a week ago with the arrest of Ms. Meng Wanzhou, Huawei CFO, a police-diplomatic event that, if misused by the Chinese as it seems to be, can cause major problems for the markets. Wall Street understood it, finally closing with a worrying cumulative weekly drop of -5% in its main indices. And, technically, SPX has already lost the key SMA 200-day support, and now is facing a 'death cross' pattern between the moving averages 50 and 200-day, a clear bearish signal. It is not infallible but it must be taken into account, as well as the following points:

This 2018 SPX chart shows, in the circle, the "death cross" pattern between the moving averages of 50 and 200-day, which is produced for the first time this year. Also seems to be formed, not very clear, a bearish downtrend channel in which the SPX is bouncing. Finally, the fundamental aspects, which will be commented on in this post, will determine if this year the usual Christmas mini-rally will take place.

The Yield Curve flattening

This curve is decisive for the next weeks' market behavior. Some of its yield spreads have already been reversed this week. The main one, the 2 and 10-year is one step away from doing so. Historically, whenever this investment occurred, it marked the beginning of a recessive cycle in the US and the consequent fall of the stock markets. The 10-year T-Bond yield TNX has been falling to 2.8% levels, flattening the curve more and more, favoring the bonds and hurting the dollar and the financial sector XLF that has been sinking since October. The word recession comes more and more in the US, and signals begin to appear everywhere ...

The chart that everyone in Wall Street fears: whenever there was a recession cycle (shadow in green), the spread between the 2 and 10-year US T-Bond became negative a few months earlier. We are at that point now. This data is so important that it's possible that FED may back off its Rate Hike program for December.

Market Volatility spike

This week exceeded the psychological value of 20, its average for years and generally used as a reversal point in the markets. However, this does not happen, and the fear index VIX continues to rise, closing the week above 23. You know, when it spiked, stocks come under pressure. The smart thing to do when its above 20, approaching 30, is waiting for the VIX decline: check market fundamentals and, technically, its Bohlinger Bands and SMA200, before playing a buy order.

Chart of the "fear index" behavior this year. As you see, the popular Bohlinger Bands works fine with the VIX: as it trades, volatility rises or falls as it bounces off the upper and lower bands, that means overbought and oversold conditions. Except for some specific peaks, the whole year has moved between these bands, which makes it an efficient indicator, regardless of the tone of the market, bullish or bearish.

Another simple and good indicator for the VIX is its moving average 200-day: its signal varies rapidly from support to resistance according to the behavior of the market. Its best application is given when price touches it: since October the SMA200 is acting three times as a powerful support. Use the ETN VXX, that follows the fear index, or the UVXY, at triple speed, with this two easy indicators.

The Trade War influence

Some indicators published this week suggest that it has not been so convenient for the US, because the applied tariffs have not helped to reduce its gigantic fiscal deficit as expected, because the Chinese, in fiscal surplus, do not buy anything from US. Was a Trump's error pushing it? Assuming this, it is possible that the influence of this 'war' on the stock market's behavior diminishes, this judging by a recent Trump tweet that usually moves the market, was ignored by it.

In other months of this year, a tweet like this meaning a +1% spike of the SPX. This week: nothing...

The FAANGs pullback

The FAANG stocks, with its prices falling, continue pulling all the values of the Nasdaq, with such force that the usual effective 'buy the dip' method that is applied by many traders in each pullback no longer works, and rather the investors are taking profits as soon as they achieve them ('sell the highs'), a short-term attitude that resembles what is happening with the yield curve.

The Nasdaq has fallen more than 13% since its peak in October and at the moment there is no technical support for a rebound, so the fundamentals, that we are discussing here, will probably indicate the end of this fall.

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Bad week, once again, for the FAANGs (Since highs in early October: Facebook FB -10%, Amazon AMZN -10%, Apple AAPL -25%, Netflix NFLX -20% and Google GOOG -9%). It is insistently talked about on Wall Street that its prices are exaggeratedly overvalued and they need a clear correction like the one that has been taking place.

The big question: are prices ready now for buying the dips? The first thing that a trader usually does is see the ratio P/E, which has decreased strongly in all the FAANGs, however, I think it is not enough. I prefer to check Apple news and reports first, and now there aren't positives: Apple predicted a weaker-than-expected holiday shopping quarter in November and other reports about the slow demand for iPhones, analysts have cut the Cupertino company's net income estimates for the month of December by almost 1,000 million dollars. So, better wait some weeks before entering long here.

OPEC agreements on Crude Oil production

It seems to have found a good support at the psychological price of $50, as it comes ranging all week. Apart from the decisions of the trio USA-Russia-Arabia, those that really command the price of crude oil, this half-week we have an agreement between the OPEC and non-OPEC countries to reduce their production in 1.2mbd helps in this sense, but it's not enough even for the large existing supply, generated by the US, which continues to increase its production. In my opinion, a difficult 2019 awaits for crude oil, although Goldman Sachs forecasts /CL price hovering around $ 70 in next Q1.

The three "defensive" Sectors leading

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This comparison chart shows the performance of the nine main sectors during 2018. Show in blue sky is the SPX. As we see, by far, the three default defensive sectors (Staples XLP, Health XLV, and Utilities XLU) continue leading this bear market, signing a clear downtrend, confirm by the Sector Rotation Model, above, deeply in the red. More recession signals.