East to West: Global stocks rally

In Asia, South Korea’s Seoul Composite Index found support at 2450 but be careful of a bearish divergence forming on Twiggs Trend Index. Reversal below zero would warn of a test of primary support at 2300.

Seoul Composite Index

Japan’s Nikkei 225 Index remains bullish. Trend Index troughs high above zero indicate strong buying pressure.

Nikkei 225 Index

China’s Shanghai Composite Index found support at 3250. Breakout above 3450 would signal a primary advance.

Shanghai Composite Index

India’s NSE Nifty Index broke resistance at 10500, signaling a fresh advance. Trend Index troughs above zero signal buying pressure. The immediate target is 11000*.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

In Europe, the Footsie is advancing strongly after breaking through resistance at its June high of 7600. Trend Index is still declining but recovery above the declining trendline indicates buyers are taking control.

FTSE 100

Europe, represented by the DJ Euro Stoxx 600, remains weak. A declining Trend Index warns of selling pressure despite breakout above resistance at 396.

DJ Euro Stoxx 600

Moving to the US, the S&P 500 chart says it all. Investors continue to shrug off concerns about high valuations. The rising Trend Index, high above zero, indicates strong buying pressure. We need a correction fairly soon to prevent an accelerating up-trend leading to a blow-off.

S&P 500

Commodities are also advancing, led by stronger crude oil prices.

Nymex Light Crude

It’s about time that the Fed and other central banks took the punch bowl away, before the party really gets out of hand.

East to West: Footsie surprise

The Footsie is testing resistance at its June high of 7600. Trend Index is still declining but recovery above 0.2% would indicate buyers are taking control.

FTSE 100

Europe is weaker, with tall shadows on weekly Dow Jones Euro Stoxx 600 candles and a declining Trend Index warning of selling pressure.

DJ Euro Stoxx 50

In Asia, South Korea’s Seoul Composite Index broke support at 2450, confirming the bearish divergence on Twiggs Trend Index. Expect a correction to test primary support at 2300.

Seoul Composite Index

Japan’s Nikkei 225 Index remains bullish, consolidating in a narrow band below resistance at 23000. Trend Index troughs high above zero indicate strong buying pressure.

Nikkei 225 Index

China’s Shanghai Composite Index found short-term support at 3250. Bearish divergence on the Trend Index warns of selling pressure.

Shanghai Composite Index

India’s NSE Nifty Index is testing resistance at 10500 after a mild correction to 10,000. Twiggs Trend Index respecting zero signals strong buying pressure. Breakout above 10500 is likely and would indicate another primary advance with an immediate target of 11000*.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

Moving to the US, the S&P 500 continues to shrug off concerns over high valuations and a flattening yield curve. The rising Trend Index, high above zero, indicates long-term buying pressure.

S&P 500

Bellwether transport stock Fedex has advanced to 250, signaling strong economic activity, a bullish sign for the entire economy.

Nasdaq 100

Putin, pawns and propaganda (with Garry Kasparov) | Stay Tuned with Preet Bharara

Join Preet Bharara, former U.S. Attorney who fought corruption, financial fraud and violent crime, in a series about justice and fairness.

East to West: Asia, Europe weaken but US powers on

Starting with Asia, South Korea’s Seoul Composite Index continues to test support at 2450. Bearish divergence on the Trend Index warns of selling pressure but this appears secondary in nature. Breach of the rising trendline would warn that the primary up-trend is losing momentum.

Seoul Composite Index

Japan’s Nikkei 225 Index is consolidating between 22000 and 23000. A Trend Index trough high above zero indicates strong buying pressure.

Nikkei 225 Index

China’s Shanghai Composite Index is undergoing a correction that should find support at 3200. Bearish divergence on the Trend Index, and a cross below zero for the first time since May 2016, warn of continued selling pressure.

Shanghai Composite Index

India’s NSE Nifty Index continues to test support at 10000 after a weak correction. Twiggs Trend Index respecting zero signals strong buying pressure. Recovery above 10500 is likely and would indicate another primary advance.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

Europe is weaker despite strong manufacturing signals. Dow Jones Euro Stoxx 50 found support at 3520 but the Trend Index is declining, warning of selling pressure. Breach of 3520 is likely and would warn of a test of primary support at 3400.

DJ Euro Stoxx 50

The Footsie remains volatile, with the index headed for another test of stubborn resistance at 7600. But Trend Index is declining and continues to warn of selling pressure.
FTSE 100

Moving to the US, the S&P 500 continues to shrug off concerns regarding high valuations and a flattening yield curve. The rising Trend Index, high above zero, indicates long-term buying pressure.

S&P 500

The Nasdaq 100 also continues a strong bull market, with the big five tech stocks (Apple, Amazon, Alphabet, Microsoft and Facebook) all recording solid gains.

Nasdaq 100

East to West: Europe steadies, S&P powers on

Dow Jones Euro Stoxx 600 found support at 380 and is now headed for a test of recent highs at 395. Bearish divergence on the Trend Index continues to warn of selling pressure but recovery above the declining trendline (on the Trend Index) would indicate that pressure has eased. Breakout above 395 would signal another primary advance, with a target of 425*.

DJ Euro Stoxx 600

Target 395 + ( 395 – 365 ) = 425

Conclusion of phase I of Brexit negotiations helped the Footsie find support at 7300. Trend Index continues to warn of selling pressure. Breach of 7200 is unlikely at present but would signal a primary down-trend. Breakout above 7600 would signal a primary advance, but is also unlikely. Expect further consolidation.

FTSE 100

In Asia, South Korea’s Seoul Composite Index is undergoing a correction but seems to have found support at 2450. Respect of the rising trendline would confirm the primary up-trend.

Seoul Composite Index

Japan’s Nikkei 225 Index found solid support at 22000, with long tails signaling buyer enthusiasm. The trend index trough high above zero indicates strong buying pressure.

Nikkei 225 Index

China’s Shanghai Composite Index is undergoing a correction. A long tail suggests support at 3250. Bearish divergence on the Trend Index warns of selling pressure but this appears to be secondary in nature.

Shanghai Composite Index

India’s NSE Nifty Index found support at 10000 after a weak correction. Recovery above 10500 is likely and would warn of another primary advance.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

In the US, the S&P 500 continues to shrug off concerns regarding high valuations and a flattening yield curve. The rising Trend Index indicates buying pressure.

S&P 500

The Nasdaq 100 continues its strong bull market, powered by the big five tech stocks (Apple, Amazon, Alphabet, Microsoft and Facebook). Corrections are mild and of short duration, typical of the latter stages of a bull market.

Nasdaq 100

East to West: European tremors

Complacency in Europe has been shaken, with Dow Jones Euro Stoxx 600 testing medium-term support at 380. Bearish divergence on the Trend Index, with intervening troughs below zero, warns of strong selling pressure. Breach of 380 is likely and would indicate a test of primary support at 366.

DJ Euro Stoxx 600

The UK’s Footsie broke medium-term support at 7350 and is headed for a test of primary support at 7200. Bearish divergence on the Trend Index again warns of strong selling pressure. Breach of 7200 would signal reversal to a primary down-trend.

FTSE 100

Asia was also affected, with Japan’s Nikkei 225 Index the only major index to end the week on a positive note, after finding solid support at 22000.

Nikkei 225 Index

South Korea’s Seoul Composite Index below 2500 warns of a correction, though nothing more.

Seoul Composite Index

China’s Shanghai Composite Index broke support at 3340 to warn of a correction. Bearish divergence on the Trend Index warns of selling pressure but this appears to be secondary in nature.

Shanghai Composite Index

India’s NSE Nifty Index is still bullish but reversal below 10000 would warn of a strong correction.

Nifty Index

Target 10000 + ( 10000 – 9000 ) = 11000

The S&P 500 is as bear-proof as you can get in the current climate, with the trend index reflecting strong buying pressure.

S&P 500

A bear market in Europe may not be sufficient to dent the animal spirits driving US markets but would certainly influence more cautious investors to change to a risk-off stance and shorten the time left for more adventurous souls.

How Will Tax Cuts Affect the US Economy and Corporate America?

Bob Doll at Nuveen Investments discusses the likely impact of tax cuts in the US:

Is it even a good idea to enact tax cuts at this point in the economic cycle? After all, growth has picked up, unemployment is at a 17-year low and capacity utilization is high. It’s reasonable to wonder whether tax cuts spur inflation higher rather than boost economic growth. We agree that inflation is likely to move modestly higher next year (more so if tax rates are reduced), but lower tax rates will likely improve productivity and benefit the economy.

Tax cuts are unlikely to have a significant impact on inflation or productivity other than through indirect stimulation of new investment and job creation.

…..If the corporate tax rate is reduced from 35% to 20%, we estimate this would increase S&P 500 earnings-per-share between $12 and $15 annually. Companies could also see an additional boost in the form of earnings repatriation. It’s possible (and even likely) that some companies would use these earnings benefits to lower prices to increase market share, so some gains may be “competed away.” But we think an overall boost in profits and earnings is likely.

That would amount to an annual increase of between 10 and 13 percent in S&P 500 earnings per share (based on a forecast $114.45 EPS for calendar 2017). Companies that invest in building market share would expect a return on that investment by way of increased growth which would still benefit future earnings streams.

Furthermore, if U.S. companies finally bring their overseas earnings home in a tax-effective manner, it’s fair to wonder what they would do with their cash windfalls. Should this happen, we expect increases in balance sheet improvements, more hiring, a rise in capital expenditures, dividend increases, higher levels of share buybacks and an increase in merger and acquisition activity. All of these actions would be a positive for corporate health and equity prices.

I would expect a big increase in stock buybacks as that will boost stock prices and have a direct impact on executive bonuses. Mergers and acquisitions have less certain outcomes and are likely to be secondary, while new investment and job creation will most likely get the short straw.

Felix Zulauf: China, the Fed and the evolution of markets

S&P 500 reaches 2600

The S&P 500 reached its medium-term target of 2600. This is stage 3 of a bull market; a short correction or consolidation followed by further gains is likely.

S&P 500

A sharp correction during stage 3 often warns of an impending top but is unlikely at this stage.

Bellwether transport stock Fedex found short-term support after a 3-week correction. Bearish divergence on Twiggs Money Flow so far suggests secondary selling pressure and not an alteration in the primary trend. Recovery above 220 would respect the rising trendline, indicating a healthy up-trend — a bullish sign for the broader economy.

Fedex

Elliot Clarke at Westpac raises concerns over low investment growth:

…the FOMC clearly sought to cement market expectations of a rate hike in December in their October/November meeting minutes. The economy was seen as continuing to enjoy above-trend growth thanks to robust gains for household consumption. Built on income gains as well as strong confidence, this trend is expected to persist. Inevitably though, an economy cannot be built on consumption alone. Investment is necessary, and this is an area of the growth outlook where we harbor doubts. Should, as we expect, investment growth remain tepid, then productivity and income growth will be held back. This is a key reason why we believe that this rate hike cycle is likely to top out around 1.875%, after the December decision and two further hikes in 2018.

I think he is right that the Fed will remain cautious about raising interest rates until investment growth strengthens. Low inflation is partly caused by low investment, but this is likely to fade as new job creation strengthens.

East to West: Still mostly bullish apart from EU & China

South Korea’s Seoul Composite Index continues in a strong up-trend despite the nuclear threat from its northern neighbor. The latest retracement appears mild and likely to test the rising trendline around 2450.

Seoul Composite Index

Japan’s Nikkei 225 Index also retraced but the long tail on this week’s candle indicates solid support at 22000.

Nikkei 225 Index

Hong Kong’s Hang Seng continues in a strong bull trend, with the Trend Index respecting the zero line.

Shanghai Composite Index

China’s Shanghai Composite Index is consolidating above support at 3340. Bearish divergence on the Trend Index warns of selling pressure but this appears to be secondary in nature, warning of no more than a correction.

Shanghai Composite Index

India’s NSE Nifty Index is also in a bull trend, with the Trend Index respecting zero. Respect of the rising trendline is likely and would signal a fresh advance.

Nifty Index

Target 10000 + ( 10000 – 9000 ) = 11000

Moving to Europe, Dow Jones Euro Stoxx 600 shows a stronger correction, with bearish divergence on the Trend Index warning of selling pressure.

DJ Euro Stoxx 600

The UK’s Footsie displays a stronger bearish divergence and the index is likely to test primary support at 7200.

FTSE 100

The S&P 500 displays a strong bull trend but penetration of the rising trendline is likely to lead to a correction to 2500.

S&P 500

The bull market in equities is aging | Bob Doll

Great summary of market conditions by Bob Doll:

Weekly Top Themes

  1. Last week’s elections signal possible trouble for Republicans in 2018. We caution against reading too much into the results. But Democratic gains in Virginia and elsewhere confirm signals from national polling that suggest the GOP will struggle to hold the House next year.
  2. We expect a tax bill to be passed in 2018, which should help the economy and equity markets. While there are significant differences between the two plans, the simple reality is that it would be political suicide for Republicans if they don’t pass tax reform before next year’s elections. Depending on the details of the final bill, we expect individual tax cuts to be a plus for consumption, while repatriation and corporate tax cuts should contribute to corporate revenues and earnings.
  3. Despite some views to the contrary, we believe the global economy should continue to improve. Some argue the world is in a period of secular stagnation. After all, growth remains very slow despite years of low or even negative interest rates. In our view, the world economy is enjoying a period of reflation and should experience more synchronized growth in 2018.
  4. Stronger global growth is benefiting multinational companies. These companies have reported stronger revenue and earnings results than domestically oriented companies this quarter.
  5. The bull market in equities is aging but remains very much intact. The current bull market is closing in on nine years, which makes it natural to ask how much longer it can continue. In our experience, there are several reasons for a bull market to end, including advanced Federal Reserve tightening, the flattening of the yield curve, slower levels of money growth, widening credit spreads and rising inflation. We are watching these factors closely, and don’t see signals yet that would point to the end of the current run.

In a nutshell: the bull market will continue until the Fed tightens monetary policy in response to rising inflation. When this will happen, no one is sure.

Read the rest of his report here: Nuveen Weekly Investment Commentary

East to West: S&P 500 leads the bulls

Let us start in the East, with the canary in the coal mine. The Seoul Composite Index completely ignored the nuclear threat from its northern neighbor, surging in a strong primary up-trend.

Seoul Composite Index

Japan’s Nikkei 225 Index likewise ignored the threat of a nuclear DPRK, advancing strongly since breaking resistance at 21000.

Nikkei 225 Index

China’s Shanghai Composite Index is also advancing, albeit at a more modest pace.

Shanghai Composite Index

India’s NSE Nifty Index displays strong buying pressure, with Twiggs Trend Index oscillating above the zero line.

Nifty Index

Target 10000 + ( 10000 – 9000 ) = 11000

Moving to Europe, Dow Jones Euro Stoxx 600 broke resistance at 395 and is likely to test its 2015 high.

DJ Euro Stoxx 600

Despite BREXIT fears, the UK’s Footsie has recovered to test resistance at 7600. Breakout would offer a target of 8000*.

FTSE 100

* Target calculation: 7600 + ( 7600 – 7200 ) = 8000

The S&P 500 leads the pack. With Trend Index troughs above zero and barely a correction in sight, the index displays exceptional buying pressure. At some point the Fed will take the punch bowl away but the party is likely to continue in full swing until then.

S&P 500

The Kindleberger Trap

From Joseph S. Nye, Professor, Harvard University:

As US President-elect Donald Trump prepares his administration’s policy toward China, he should be wary of …. the “Kindleberger Trap”: a China that seems too weak rather than too strong.

Charles Kindleberger, an intellectual architect of the Marshall Plan who later taught at MIT, argued that the disastrous decade of the 1930s was caused when the US replaced Britain as the largest global power but failed to take on Britain’s role in providing global public goods. The result was the collapse of the global system into depression, genocide, and world war.

Today, as China’s power grows, will it help provide global public goods?

In domestic politics, governments produce public goods such as policing or a clean environment, from which all citizens can benefit and none are excluded. At the global level, public goods – such as a stable climate, financial stability, or freedom of the seas – are provided by coalitions led by the largest powers.

Small countries have little incentive to pay for such global public goods. Because their small contributions make little difference to whether they benefit or not, it is rational for them to ride for free. But the largest powers can see the effect and feel the benefit of their contributions. So it is rational for the largest countries to lead. When they do not, global public goods are under-produced. When Britain became too weak to play that role after World War I, an isolationist US continued to be a free rider, with disastrous results.

Some observers worry that as China’s power grows, it will free ride rather than contribute to an international order that it did not create.

So far, the record is mixed. China benefits from the United Nations system, where it has a veto in the Security Council. It is now the second-largest funder of UN peacekeeping forces, and it participated in UN programs related to Ebola and climate change.

China has also benefited greatly from multilateral economic institutions like the World Trade Organization, the World Bank, and the International Monetary Fund. In 2015, China launched the Asian Infrastructure Investment Bank, which some saw as an alternative to the World Bank; but the new institution adheres to international rules and cooperates with the World Bank.

On the other hand, China’s rejection of a Permanent Court of Arbitration judgment last year against its territorial claims in the South China Sea raises troublesome questions. Thus far, however, Chinese behavior has sought not to overthrow the liberal world order from which it benefits, but to increase its influence within it.

If pressed and isolated by Trump’s policy, however, will China become a disruptive free rider that pushes the world into a Kindleberger Trap?

Basically what Kindleburger described is a power vacuum, where previous hegemons — such as Britain before WWI or the US post WWII — grow too weak to enforce global standards under which the system operates. That could be trade, respect of international borders, the financial system, international law, or freedom of the seas. There is no smooth transition. When the old order breaks down, the system is likely descend into chaos for a time until a new order, with new players, is established.

Source: The Kindleberger Trap – CHINA US Focus

Trump to Tap Jerome Powell as Next Fed Chairman – WSJ

WASHINGTON—The White House has notified Federal Reserve governor Jerome Powell that President Donald Trump intends to nominate him as the next chairman of the central bank, according to a person familiar with the matter….

Source: Trump to Tap Jerome Powell as Next Fed Chairman – WSJ

Australia’s world record housing boom is ‘officially’ over, UBS says

A global investment bank has called the end of Australia’s world record housing boom, saying the golden years are “officially” over after home prices fell in Sydney for the second month in a row.”

There is now a persistent and sharp slowdown unfolding”, ending 55 years of unprecedented growth that has seen home values soar by more than 6500 per cent, UBS economists wrote in a note to clients on Thursday.

….recent weakness in auction clearance rates and anaemic price growth over the past five months suggested “the cooling may be happening a bit more quickly than even we expected”, economists George Tharenou and Carlos Cacho wrote in their note, downgrading their growth forecast for 2017 to just 5 per cent.

Not quite a Minsky moment but something to watch closely if you hold bank stocks.

Wikipedia gives a good summary of a Minsky moment:

A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money.

The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets is no longer sufficient to pay off the debt they took on to acquire them.

Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values.

Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted.

This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.

Source: Australia’s world record housing boom is ‘officially’ over, UBS says

Seven Weeks of Gains, Seven Equity Themes | Bob Doll

Great market summary from Bob Doll at Nuveen Asset Management:

  1. Economic data remains strong and hurricane effects have been surprisingly muted. Real third quarter gross domestic product was reported to be 3.0%, with nominal growth hitting 5.2%. Both numbers came in higher than expected, with nominal growth reaching its strongest pace since 2006.
  2. Home sales are increasing, demonstrating that economic growth remains broad. New home sales hit their highest level since 2007.
  3. The Federal Reserve is on track to increase rates again in December. We expect the central bank will enact its third hike of the year, while continuing to reduce its balance sheet. Fed policy remains accommodative, but is clearly normalizing.
  4. Corporate earnings are on track for another strong quarter. We are past the halfway point of reporting season, and the vast majority of companies have beaten expectations. On average, companies are ahead of earnings growth expectations by 4.9%.
  5. Stock buybacks appear to have slowed, but companies are still deploying cash in shareholder-friendly ways. From our vantage point, we are seeing companies pour more resources into hiring and modest amounts of capital expenditures.
  6. Tax reform prospects still appear uncertain, but we have seen progress on the regulatory front. While President Trump has struggled to enact his pro-growth legislative agenda, he has had success in rolling back regulatory enforcement. The financial and energy sectors in particular appear to be benefiting from less scrutiny.
  7. It is possible that tax reform will focus on corporate rather than individual rates. The most controversial aspects of tax reform are focused on possible changes to individual tax rates (such as arguments over the deductibility of state and local taxes). In contrast, corporate tax reform appears less controversial, as Congress seems to have broad agreement on the need to reduce corporate taxes and solve the issue of overseas profits. While still a small probability, Republicans may choose to separate the two issues and proceed solely on a corporate tax bill.

Economic growth remains muted but earnings are exceeding expectations. High levels of stock buybacks in the last few years must be playing a part.

Rising home sales are a bullish sign.

The Fed remains accommodative for the present but I expect increasing inflationary pressure to temper this next year.

Slow rates of investment remain a cause for concern and could hamper future growth — buybacks are cosmetic and won’t solve the low growth problem in the long-term.

Corporate tax reform would be a smart move, creating a more level playing field, while avoiding the acrimony surrounding individual tax rates.

Stage 3 of the bull market continues…..

Source: Weekly Investment Commentary from Bob Doll | Nuveen

GDP slow growth as stocks power on

GDP growth for the third quarter is out and I can see little to indicate that growth is improving despite tweets to the contrary from the White House.

Nominal GDP is growing at just over 4 percent per year, continuing the narrow band established since late 2010. Growth closely follows our monthly estimate: total weekly hours worked multiplied by the average wage rate.

Nominal GDP

Real GDP, beset by problems in accurately measuring inflation, grew by 2.3 percent over the last 4 quarters. But growth remains relatively soft and our latest monthly estimate (growth in total weekly hours worked) slowed to 1.2 percent in September.

Real GDP

The S&P 500 powers on, climbing to a new high of 2581, while rising Twiggs Money Flow signals buying pressure.

S&P 500

Retracement of the Nasdaq 100 successfully tested its new support level at 6000, confirming a fresh advance.

Nasdaq 100

Bellwether transport stock Fedex is advancing strongly while a Twiggs Money Flow trough above zero suggests strong buying pressure. A bullish sign for broad economic activity.

Fedex

Stage 3 of the bull market continues.

It was never my thinking that made big money for me. It was my sitting…Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.

~ Jesse Livermore

Dow Hits Another Milestone, But Signs of Caution Loom – WSJ

By Corrie Driebusch and Michael Wursthorn Updated Oct. 18, 2017 9:04 p.m. ET

The Dow Jones Industrial Average powered past 23000 on Wednesday, but the latest milestone masks a potentially worrisome trend: investors keep yanking money out of stock funds.

Investors pulled roughly a net $36 billion out of U.S. stock mutual and exchange-traded funds in the third quarter, according to EPFR Global. Overall in 2017, more money has flowed out of such funds than has flowed in, EPFR data show, even as the Dow has climbed to 51 fresh highs this year….

Source: Dow Hits Another Milestone, But Signs of Caution Loom – WSJ