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Weekly Market UpdateWeek of September 4-8, 2017

Bank and Financial Stocks Lead Dow Industrial Average, S&P 500 Index to Weekly DeclineTreasury Bond Yields “Break Out” to Downside

High Yield Bond ETF (JNK) Flashes Warning Signal for Stock Indices

Intermediate-term 10 and 20-week Moving Averages of NYSE Price Momentum Stats Favor More Price Decline---Next Week’s Market

Last Sunday the “Weekly Update” questioned whether or not the successful test by North Korea of what was apparently a hydrogen bomb and was most definitely the most powerful nuclear weapon that country has yet tested would make any impression upon the extremely short-term oriented (and short-sighted) speculative hedge funds that dominate day-to-day price movements in the U.S. stock markets. That question has now been answered in the affirmative. All major U.S. stock indices fell heavily last Tuesday, the first day of trading after the Labor Day Holiday on Monday. Subsequent attempts for the balance of the week to regain this lost ground failed for all but the Dow Transportation Average that managed to end the week with a very small rise of +27 points. Keeping the most widely followed Dow Industrial Average and S&P 500 Index pinned to the mat after Tuesday were the banking and financial stock sectors whose problems predate any news coming from North Korea and have little or nothing to do with nuclear weapons testing. “Weekly Update” has been making an argument for several weeks that the rather simplistic explanations coming from the U.S. financial media outlets for price movements both upward and downward by these two stock market barometers are completely detached from the actual data from which we make our own assessments and market forecasts. The “North Korea Nuke” explanation for this past week’s price declines again falls into the category of “Detached from Reality”.

The 5-year chart below compares the KBW Bank Stocks Index ($BKX; blue line) with the S&P 500 Index (green line) since September 2012. A visual inspection of the chart shows pretty clearly that over the past 5 years the $BKX Index and the S&P 500have been very closely correlated to each other in terms of price direction over both the longer-term of the 5-year upward trend by both since November 16, 2012 and also the shorter-term upward and downward price movements. The $BKX Index displays a downward trend of falling highs since March 1 of this year that the S&P 500 as of yet has not copied. The S&P price high on August 8 was made on the same date as was the $BKX “lower high” but was at a much higher intraday price level of 2,490 than was its March 1 intraday high of 2,400. The 5-year history of the comparison chart shows pretty convincingly that if the $BKX Index were to take out its low from April 17 at 87.80 the S&P 500 would follow it downward and likely conduct a re-test of its own April price low made on April 13 at 2,328. There are several conclusions that both short-term trading-oriented and longer-term investment-oriented accounts can take away from the comparison chart below. The first is that the factors that began to dissuade both types of accounts from buying the large capitalization banking company stocks contained in the $BKX Index made their appearances all the way back in March of this year. This was a long time before anybody expressed any concerns about the nuclear intentions of North Korean strongman Kim Jong-Un. The second is that the $BKX price behavior pattern since March 1 looks suspiciously like a price top under construction. Once again, the history on the chart strongly suggests that a price top for the $BKX will undoubtedly eventually become a price top for the S&P 500 as well. Finally, the chart below shows that should the $BKX Index decisively take out its low from April 17 at 87.80 at some point in the future the top it has constructed since March 1 will produce a “measured move” downward price projection to a target low at approximately the 76.00 level, returning the $BKX Index to its late October 2016 price level before its large upside “breakout” took place in November 2016. This potential downside price target is below the $BKX closing price this past Friday at 90.17 by -15.7%. Were the S&P 500 to fall by the same percentage amount it would drop all the way back down to re-test its November 4, 2016 “Election Day Low” at 2,083.

We should all reflect upon what combination of events and expectations it was in November 2016 that catapulted both the $BKX Index and the S&P 500 upward from November 4, 2016. It was the unexpected election of Donald J. Trump as President of the United States on November 7, 2016 that gave rise to the giddy expectations that U.S. economic growth would break out of its roughly +2.0% annual growth doldrums, that a massive infrastructure rebuilding program would quickly be initiated, that the onerous banking regulations of the Dodd-Frank legislation passed in 2009 would be substantially watered down and that the corporate tax rate in the U.S. would be swiftly reduced to 15% or 20% from its current 35% rate. It is now 10 months later and virtually none of these expectations have been fulfilled. Moreover, the political marriage of convenience between Trump and the Republican Party has shown itself to be a union that has been to this point incapable of governing either itself or the nation and is visibly fraying at the edges. “Weekly Update” will strongly suggest to its readers that they look for the reasons behind the stalling out of the so-called “Trump Rally” by the S&P 500 Index among this list of purely domestic political and economic concerns rather than among the completely false explanations centered on North Korea coming from the financial media.

Apr. 17 low at 87.80

Apr. 13 low at 2,328

Mar. 1 high at 99.77

$BKX “measured move” target at 76.00 if Apr. 17 low is taken out

Aug. 8 high at 98.36

While the comparison chart above showed the extremely strong historical correlation between the $BKX Index and the S&P 500 the comparison chart below over the same 5-year time period shows an equally strong correlation between the yield on the 10-year Treasury note (green line) and the $BKX Index (blue line). When the yield on the 10-year T-note has fallen so has the price of the $BKX Index. When the yield on the 10-year T-note has risen so has the price of the $BKX Index. The comparison chart below shows that the yield on the 10-year T-note has been in a consistent downward trend of falling highs and lows since March 10 of this year, a date that lines up quite well with the $BKX price high made on March 1. What is most important on the chart below is this past week’s downside “breakout” by the 10-year T-note yield through and below its previous yield low made on June 14 at 2.10%. The 10-year T-note yield ended the week at 2.06%. The comparison chart history tells us that if the yield on the 10-year Treasury note can be expected to continue to trend downward, and this past week’s downside “breakout” is telling us exactly that, then we should also expect that the price of the $BKX Index will also continue to trend downward. Our previous comparison chart told us that if the $BKX Index continues to trend downward in price that we should expect that the S&P 500 Index will eventually follow it down. This is all pretty clear-cut and backed up by 5 years of consistent correlative history. Readers may choose to believe the correlative history we have presented today or the ill-informed and detached from reality explanations offered by the mainstream financial media for daily stock market fluctuations. “Weekly Update” chooses to believe the correlative history presented in today’s newsletter. We therefore believe that the S&P 500 Index will continue trending downward in price for the balance of the month of September. We wish to point out that a “measured move” downward projection for the 10-year T-note yield that uses its trading range between its June 14 low yield at 2.10% and the subsequent July 7 high yield at 2.40% as the basis for its downside price target projection calls for the 10-year T-note yield to continue trending downward until it reaches the 1.80% yield level. Should the 10-year T-note yield fulfill this “measured move “projection then it will return to its November 4, 2016 yield level just the same as the $BKX Index will be projected to return to its November 4, 2016 price level if it breaks down through and below its April 13 low at 87.80. The two “measured move” projections are completely consistent with each other. The big difference between them today is that the 10-year T-note yield has already “broken out” to the downside below its most recently-made significant yield low. The $BKX Index has yet to “break out” down and through its similar significant price low from April 13.

High Yield Bond ETF (JNK) Flashes Warning Signal for Stock Indices

More bad news for the U.S. stock market was delivered this past week form the U.S. corporate bond market. The bearer of bad tidings was the high-yield junk bond market and the SPDR Barclay’s High-Yield Bond Fund ETF (ticker JNK) that turned down from a “lower high” on its 1-year chart shown below that it posted on August 31. The red down-trend line on the chart drawn from the JNK peak price high made on July 26 to its “lower high” just posted on August 31 shows this initial step by the JNK in establishing a downward trend of successively falling highs and lows. Yet to be established is a bottom down-trend channel line of as successively falling lows. As the chart shows, the JNK will have to take out its recently-made August 10 low at $36.68/share in order to establish a line of falling lows. That price level is down by just -0.68% from the Friday closing price of $36.93/share.

June 14 low at 2.10%

July 7 high at 2.40%

“Measured move” target at 1.80% = Nov. 4, 2016 yield level

Mar. 10 high at 2.62%

Mar. 1 high at 99.77

The chart below shows that the August 10 low is an important technical price support point. The JNK has made no less than three successive short-term lows in this same price area since May 4 of this year. Should it take out the August 10 low then a “measured move” downward price target projection using the trading range between the July 26 peak price high of $37.46/share and the subsequent August 10 short-term price low at $36.68/share provides a downside target at approximately $35.90/share as shown on the chart. A decline by the JNK to this “measured move” downside target would provide an accompanying bottom down-trend channel line of successively falling lows to match the already existing top line of falling highs made on July 26 and August 31. The S&P 500 Index and the Dow Industrial Average have both displayed a very consistent positive correlative history with the price trend of the JNK ETF. All have risen or fallen more or less simultaneously for 30 years. All three fell in price this past week. As the JNK and the high-yield bonds that comprise it fall in price their yields rise. Our previous chart showed that the yield on the 10-year Treasury note fell this past week. This in turn means that the yield spread between the 10-year T-note that carries no default risk and the low credit-quality corporate bonds contained by the JNK that most assuredly do carry default risk widened out. .A widening yield spread between Treasury bonds and low credit-quality “junk” bonds is always a signal that investor risk aversion is increasing. Increasing investor risk aversion is never a good omen for the future price directions of the Dow Industrial Average and S&P 500 Index

Intermediate-term 10 and 20-week Moving Averages of NYSE Price Momentum Stats Favor More Price Decline---Next Week’s Market

The chart below is from our extensive in-house library. It compares the S&P 500 Index since June 2008 with two intermediate-term 10-week and 20-week moving averages of the weekly ratio of new52-week highs on the NYSE divided by that week’s total of both new highs and new lows. A visual inspection of the chart history shows that it has been extremely rare that the S&P 500 has not expected a sustained price decline when both new high/new low ratios have fallen simultaneously. In the current market environment this means that we should take note of their simultaneous decline since both posted intermediate-term high son July 28 as shown on the chart. Since we know with 100% certainty the weekly new high/new low ratios due to drop and be “replaced” in both moving average calculations over the near term we can make a very highly-educated guess as to their likely future direction for the balance of the month of September. Both moving averages will have weekly new high/new low ratios due to be “replaced” between today and Friday, September 29 that will average 80.0%/week for the next three weeks. This fact gives rise to one mathematical certainty. It is mathematically certain that both moving averages will move in the same direction simultaneously through September 29 regardless of what direction that turns out to be. The fact that the 3-week average of ratios due to be “replaced” by both of 80.0%/week is a higher figure than the current levels of all moving averages from 5-week through 40-week time periods, is higher than the current 3-week average (at 65.8%) and is higher than the average if the most recent two weeks (73.5%/week) tilts the odds heavily in the direction of the two moving averages continuing to simultaneously decline through September 29. The S&P 500 portion of the chart below shows that this stock index has established a sideways trading range on a weekly-close basis since posting a short-term weekly-close price low at 2,425 on June 30. The top boundary of this sideways range is formed by its weekly-close “twin highs” made on August 4 and September 1 at 2,476 and 2,475. The lower boundary is formed by the weekly-close “twin lows” made on June 30 and August 18 at 2,425 and 2,423. With the two moving averages of weekly new high/new low ratios highly likely to continue to fall through September 29 the odd are prohibitively high that the S&P 500 will at the minimum re-test the lower boundary line during September and could conceivably “break out” to the downside through and below it. We wish to emphasize that the chart below is using weekly-close prices. It would be possible for the S&P 500 to fall far below the 2,423 price level of the lower boundary line on a daily-close and intraday basis without breaking down through the lower boundary line on a weekly-closing price basis. We will therefore add that the daily-close low for the S&P since June 30 was made on July 6 at 2,407 and the daily-close high was made on August 7 at 2,480. Using these daily-close price extremes for a “measured move” downward price projection gives a possible downside target as low at 2,334 on a daily-close price basis. As long as this daily-close price was recorded on any day of the week but the final day of the week and the S&P 500 subsequently rallied to end the week at the lower boundary line on the chart the weekly-close sideways trading range pictured on the chart would not have been violated to the downside.

6/6/2008

8/8/2008

10/10/2008

12/12/2008

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4/17/2009

6/19/2009

8/21/2009

10/23/2009

12/25/2009

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1/7/2011

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1/20/2012

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7/27/2012

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2/14/2014

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10-Wk, 20-Wk. M.A. Weekly New H/L Ratios vs. S&P

20-Wk. M.A. New H/L/ Ratios x 10 S&P 500

June 30, Aug. 18 weekly-close "twin lows" at 2,425 and 2,423

Sept. 9, 2016 = 94.0%

Mar. 3, 2017 = 88.0%

July 28, 2017 = 78.0%

July 25, 2014 = 87.5%

Apr. 24, 2015 = 80.5%

Nov. 18, 2016 low at 65.5%

Aug. 4, Sept. 1 weekly-close "twin highs" at 2,475 and 2,476

Our call for the S&P 500 for the upcoming week is that it is likely to begin the week once again attempting to regain its bullish short-term price momentum. Our expectation is that any such attempt, if it is tried at all, will be doomed to fail before it gets started. We would be very surprised to see the S&P rise higher than the 2,475 price level at any point during the week. We expect efforts to rise will exhaust themselves by Tuesday’s close of trading. The balance of the week is likely to be downward in price. By week’s end we expect that the S&P will have declined on a

weekly-close basis... Our initial downside target remains the June 29 and July 6 intraday lows at 2,405 and 2,407. We still maintain that the S&P will fall to re-test its May 18 intraday low of 2,352 before the end of the first week of October on Friday, October 6.

Thomas J. DruittFinancial Markets Research and AnalysisStonehenge Analytics