(Photo: Getty Royalty Free Images)

Wake up world, the Federal Reserve unwound $33 billion from its bloated balance sheet between October 25 and October 31.

The global rebound for stocks since October 29 has China’s Shanghai Composite close to a positive weekly chart.

Eight of the nine global major averages still have negative weekly charts; transports, Russell 2000, India’s Nifty 50 and German DAX are in correction territory. The Shanghai Composite remains deep into bear market territory.

Here’s Why the Fed Balance Sheet Matters

Every Wednesday the Federal Reserve time stamps the size of its balance sheet. However, this number usually does not appear on the Federal Reserve website until after the close on a Friday. I guess Fed Chair Powell does not want to have a negative market reaction before the weekend.

The Dow Jones Industrial Average set its all-time intraday high of 26,951.81 on October 3. As this happened the yield on the 10-year U.S. Treasury was on the rise from 3.05% on October 3 to 3.261% on October 9. Yields rose and stocks plunged as the Federal Reserve reported that for the week ending Oct. 3 they reduced their balance sheet by $18 billion.

For the next three weekly reports the balance sheet reduction was only $2 billion, and the 10-Year yield declined to 3.06% on Oct. 26. The Dow traded as low as 24,122.23 on Oct. 29 then rebounded to as high as 25,578.98 on Nov. 2.

Here’s the problem for stocks in November. Between October 26 and November 2, the yield on the 10-year note rose from 3.06% to 3.224% as the Federal Reserve drained a massive $33 billion off its balance sheet, bringing the total for October to $53 billion with another $50 billion scheduled for November.

This is a huge warning for stocks as the balance sheet drain of $33 billion did not show up on the Federal Reserve website until Saturday morning.

The balance sheet now totals $4.140 trillion, down a mammoth $360 billion over the last 13 months. Another $50 billion is scheduled to be the reduction each month through the year 2020. This risks a bear market for stocks around the globe.

This Week’s Scorecard

Scorecard For The Major Equity AveragesGlobal Market Consultants

The Dow Jones Industrial Average (25,270.83 on November 2) set its all-time intraday high of 26,951.81 on October 3 and is 6.2% below this high. The weekly chart is negative with the average below its five-week modified moving average of 25,540. My annual and semiannual pivots are 24,666 and 24,323 with a monthly pivot at 24,976 and weekly and quarterly risky levels of 25,599 and 28,401, respectively.

The S&P 500 Index (2,723.06 on November 2) set its all-time intraday high of 2,940.91 on September 21 and is 7.4% below this level. The weekly chart remains negative with the average below its five-week modified moving average at 2,787.47. My semiannual and annual pivots are 2,769.1 and 2,714.9, respectively, with a weekly pivot at 2,744.7, and monthly and quarterly risky levels of 2,790.1 and 3,032.9, respectively.

The Nasdaq Composite (7,356.56.99 on Nov. 2) set its all-time intraday high of 8,133.30 on August 30 and is 9.5% below it. The weekly chart remains negative with the index below its five-week modified moving average at 7,577.83. My annual value level is 6,928 with weekly and semiannual pivots at 7,355 and 7,374, respectively, and monthly and quarterly risky levels at 7,732 and 8,343, respectively.

Dow Jones Transportation Average (10,366.32 on November 2) set its all-time intraday high of 11,623.58 set on September 14 and it’s in correction territory, 10.8% below it. The weekly chart remains negative with the average below its five-week modified moving average of 10,696.98. My semiannual pivot is 10,050 with a weekly pivot at 10,278 and monthly, annual and quarterly risky levels at 10,964, 11,401 and 12,310, respectively.  

The Russell 2000 (1,547.98 on November 2) set its all-time intraday high of 1,742.09 on August 31 and is now in correction territory, 11.1% below the high. The weekly chart remains negative with the index below its five-week modified moving average of 1,594.82. My weekly value level is 1,493.76 with my annual, monthly and quarterly risky levels of 1,664.90, 1,705.10 and 1,804.00, respectively.

Japan’s Nikkei 225 (22,243.66 on November 2) has a negative weekly chart with the index below its five-week modified moving average at 22,569.21. Japan’s benchmark set its 2018 high of 24,448.07 on October 2 and its now 9% below this high. The index remains below its 50% Fibonacci Retracement at 22,967 of the huge decline since the end of 1989. My annual pivot is 22,009 with monthly, semiannual and quarterly risky levels of 22,778, 24,575 and 26,478, respectively.

China’s Shanghai Composite (2,676.47 on November 2) has a neutral weekly chart with the average just below its five-week modified moving average of 2,680.49. The 12x3x3 weekly slow stochastic ended last week at 33.59, up from 31.18 on October 26. My monthly and annual value levels are 2,479 and 2,475, respectively, with my quarterly and semiannual risky levels at 3,181 and 4,458, respectively. The Chinese index is well below its 200-week simple moving average of 3,247.63 and is in bear market territory, 25.4% below its 2018 high of 3,587.03 set on January 29.

India’s Nifty 50 (10,553.00 on November 2) has a negative weekly chart with the index below its five-week modified moving average of 10,644.95. India’s benchmark is in correction territory, 10.3% below its 2018 high of 11,760.20 set on August 28. My annual pivot is 10,009 with semiannual, monthly and quarterly risky levels of 10,733, 11,073 and 11,364, respectively.

Germany’s Deutsche Boerse DAX Index (11,518.99 on November 2) has a negative but oversold weekly chart with the average below its five-week modified moving average of 11,785.05 and set its 2018 low of 11,051.04 on October 26. This index has been trading back and forth around its 200-week simple moving average of 11,485.34. The DAX is in correction territory, 15.3% below its 2018 high of 13,596.89 set on January 23. My monthly, semiannual, annual and quarterly risky levels are 11,993, 12,947, 13.563 and 14,103, respectively.

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