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SPX futures are higher this morning, but not making new highs. Thursday’s high at 4429.97 remains the peak of this Cycle at day 262 but the breakdown has not occurred. In the options market, the calls prevail at 4400.00 and higher, while the puts open interest dominate bneath that with 4350.00 as a breakpoint that may induce forced selling. Today is day 266 of the old Master Cycle, should it revive. The Wave pattern apears incomplete.
ZeroHedge reports, “Any other day, especially with traders so on edge over anything to do with China, futures would be deep in the red after Beijing reported another sharp drop in the Caixin manufacturing PMI, which slumped from 51.3 in June to 50.3, missing expectations of 51.0 and on the verge of contraction while the new orders sub-index did contract, sliding to 49.2 from 51.6, the first time below 50 since last May….
The Shanghai Composite Index rose back to its Head & Shoulders neckline after plunging to Cycle Bottom support at 3304.40 on Wednesday. This constitutes a 50% retracement of the decline thus far. There may be a further move to 3480.82 to meet the neckline and mid-Cycle resistance. However, the retracement may be over or nearly so. Wall Street makes up chatter to explain the moves in a cause-and-effect pattern. The fact is that the social mood has changed and no amount of jawboning or stimulus will change the Cycle.
According to Bloomberg, the outbreak is now the broadest since the original outbreak in late 2019 as cases are being found in 14 of 32 provinces. The fact that delta has spread so widely across China – even if the case numbers, which are likely under-reporting (perhaps dramatically) the true levels of delta penetration, are still relatively low – is alarming government officials.”
NDX futures are back above 15000.00, but no new high here, either. The Wave pattern also appears incomplete, but time is running out for a Master Cycle extension. The trendline is at 14800.00 for a chart sell signal. The NDX Hi-Lo Index closed at 33.00 on Friday so there is not much gas left in this tank.
VIX futures are on the rise, but haven’t broken above Friday’s high at 19.72. The trend is solidly higher, but VIX must break the trendline just above 22.50 or the prior high at 25.09 to convince traders that it’s time to panic.
TNX is entering its final week of the current Master Cycle. Today is day 255 so the probability of an imminent new low and reversal is high.
ZeroHedge observes, “Citius, Altius,Fortius – the Olympic motto – which translates to Faster, Higher, Stronger, might as well be our current motto for Treasury yields. We think that the Treasury market will price in a faster pace of rate hikes, resulting in higher US 10-year yields, consistent with a stronger economy.
We think that 10-year yields are too low versus our fair value estimate at ~1.60%, in large part due to positioning unwinds in recent weeks that have magnified the impact of negative COVID-19 headlines. In our view, yields do not appropriately reflect the strong US economy, or the Fed’s stance. With cleaner market positioning, our economists’ expectations for strong labor market and inflation data, and our base case for a deficit-funded infrastructure package, we see yields rising in the coming weeks.”
I have been invited by my son to visit him and three grandsons at the lake. I may be gone until the end of the week. Short term suport is at 4350.00. Stay alert.
The Shanghai Composite Index fulfilled its Head & Shoulders target by declining to 3312.72 before the bounce back to close at 3361.59. Investors heaved a sigh of relief that the Chinese “National Team” arrived to bail out the markets. However, there is a potential new formation that suggests a further decline after the bounce. More on that when the chart information becomes available.
ZeroHedge reports, “Earlier today we said that with Chinese stocks suffering historic losses, HK’s tech sector imploding..
… and liquidation fears spreading to other, more serious products such as bonds and FX, it was only a matter of time before China’s “National Team”, i.e., the local plunge protection team, came out in full force to preserve confidence in centrally planned markets.
Well, just a few hours later, we learned that sure enough, the local Chinese bat signal summoning the plunge protectors has been activated with local press Securities Daily reporting that “the plunge is unsustainable” and will gradually stabilize. And since the media is merely a propaganda outlet to local state and central planners, it is telegraphing what will come next: a massive ramp in Chinese stocks.”
SPX futures flattened out after reaching the 61.8% Fibonacci retracement vale at 4403.66. While there is an oportunity to go higher, the SPX remains flat pending the Fed announcement this afternoon.
ZeroHedge reports, “With the rout in Chinese markets stabilizing after three days of mayhem following speculation that the Chinese “National Team” is set to start propping up the domestic market, on Wednesday stock-index futures rose along with European shares as investors digested a barrage of tech earnings earnings which saw Apple, Microsoft and Apple post $57 billion in combined profit, while Treasuries fell and the dollar was steady with traders reluctant to place large bets ahead of the outcome of the Federal Reserve meeting and Powell’s subsequent press conference at 2 p.m. EDT.
At 730 a.m. ET, S&P 500 e-minis were up 2.25 points, or 0.05% after falling as much as 0.3%, while Dow e-minis were down 54 points, or 0.18%. Contracts on the Nasdaq 100 led gains, rising 39.75 points, or 0.26%, as technology shares jumped in Europe, though Asian equities were weaker amid the market turbulence triggered by China’s regulatory clampdown.”
VIX futures pulled back to 18.56 this morning, remaining above the 50-day Moving Average at 17.74.
Investing observes, “Some investors appeared increasingly nervous in recent weeks, reflecting the market’s fragility, even as major U.S. stock benchmarks rose to fresh new peaks in recent weeks, according to BofA Global Research.
The Cboe Volatility Index, known as the VIX, has been rising despite the S&P 500 index posting new highs, BofA analysts said in an equity derivatives report Tuesday. The S&P 500 SPX, -0.47%, Dow Jones Industrial Average DJIA, -0.24% and Nasdaq Composite COMP, -1.21% each posted record highs Monday, though they were trading down Tuesday afternoon.”
TNX has bounced this morning after yesterday’s pullback. The Cycles suggest the pullback may be over with another week or more of rally until the new Master Cycle is complete. The Model suggests a very strong move higher starting today/tomorrow and going into the first week of July.
ZeroHedge observes, “There’s an asymmetric risk of U.S rates rising in response to Wednesday’s Fed meeting, given the extremely low current bond yields.
A baseline assumption would be for modest curve steepening if Powell remains dovish. However, it’s hard to identify sources of surprise, given Powell’s clear guidance from his Congressional testimony.”
USD futures are rising again after a brief 1 week pullback. Normally pullbacks last up to 3 weeks, but the pattern may allow a breakout based on higher TNX rates causing the USD to strengthen. This pattern is called a “running correction” as the pullbacks may not break the rising trading zone.
SPX has broken beneath 4400.00 where this Friday’s puts edge out the calls by 400 contracts. A subsequent decline from here may tip the scales even further to the puts. Beneath 4350 the options market likely tips the scales toward the bears and could become a aelf-reinforcing mechanism.
The NYSE Hi-Lo is at 61.00 after opening at 10.00. Thus, it hasn’t given our sell signal confirmation. My observation is that the Hi-Lo may turn negative beneath 4350.00, which is also Short-term support.
Today is day 260 of the old Master Cycle. With that knowledge, we may begin taking aggressive positions with lower risk than usual. I will attempt to keep you informed of confirmations.
The Shanghai Composite Index fell to 3380.28 in the overnight session, leaving investors with a 5% loss in two days. Today comes the realization that this may not be a one-off stumble. It is likely that this decline may go further to the Cycle Bottom support at 3290.62 before bouncing, clearing the deck of all gains since the December low. This action may have serious consequences for the tech-heavy NASDAQ.
It’s all about China again today in markets – and what we are seeing in some corners is just a reflection of what we could potentially see in many others ahead.
Chinese and Hong Kong stocks tumbled yesterday, while the Nasdaq Golden Dragon sub-sector trading Chinese tech did too, now down 15% since Thursday, the most since 2008. CNY hardly moved, however. After all, why should a currency and the structure of its economy have any relationship? (Which says so much about said structure.) US 10-year yields dipped as low as 1.22% on the general red before remembering “This is ‘Murica!” and adding white and blue to close back at the merely depressing 1.28% level.”
NDX futures dipped to 15062.30 in the overnight session before returning to the flat line, as I write. It is clear that the decline was a knock-on reaction to the Shanghai decline, but it was quickly bought. Is this the action of buy-the-dippers or the PPT?
The Nasdaq Hi-Lo Index shows a singular lack of new highs. The NAHL is on a sell signal, waiting confirmation from the VIX/VXN.
SPX futures also took a dip to 4398.60 in the overnight markets, but have returned to green as I write. Its as if the PPT is saying, “Nothing to see here. We got you covered.” While retail investors may not be aware of what is going on in China, it is probable that the powers-that-be want to keep it that way.
Nevertheless, today is day 260 in the Master Cycle. The 21.5-year Super Cycle is complete. Now for the recognition.
ZeroHedge reports, “Futures swung from all time highs to losses during the European session and then rebounded again as Asian stocks hit their lowest this year on a third straight session of selling in Chinese internet giants, while real bond yields hit another record low ahead of earnings from the most valuable companies on Wall Street and in the run-up to the two-day Federal Reserve meeting. S&P 500 E-minis were down 5 points, or 0.11%, at 07:15 am ET. Dow E-minis were down 77 points, or 0.22%, while Nasdaq 100 E-minis were up 3 points, or 0.02%.”
VIX futures rose to a high of 19.40, above the 50-day Moving Average at 17.98. This puts VIX on a buy (SPX sell) signal. The NYSE Hi-Lo Index closed at 56.00 yesterday. At this point, we await the NYSE Hi-Lo to decline below zero.
USD futures continue to consolidate in a tight range this morning. There is good cause to believe that the rally in the US Dollar may be over. The Cycles Model now posits a probable decline through late September. Primary Wave  may be a flat correction.
TNX appears to be in correction mode. It may decline to round number support at 12.00. The Cycles Model suggests another week of correcting before the uptrend resumes.
Please read yesterday’s blog to get a feel for what is about to take place.
SPX futures declined to 4383.70 this morning, but ave nearly recovered by this writing. The urge to buy the dip is still strong, but the air is getting thiner, here. While the NYSE Hi-Lo Index made an intraday high at 196.00 onFriday, it closed at 97.00, a 2.9% participation in new 52-week highs. Today is day 259 of the Master Ccle, although I marked the high on Friday thus far.
ZeroHedge reports, “Futures started off the week on the wrong foot, sliding overnight from Friday’s record high before recovering some losses as Chinese stocks crashed on multiple parallel crackdowns by Beijing (more on this shortly), souring global bullish sentiment while cryptos exploded higher further kicking Keynesian apes in the groin. All of this is happening ahead of the busiest week of Q2 earnings season and Thursday’s FOMC meeting, while a majority of traders are rushing to catch some rays ahead of the next round of covid lockdowns/vote-purchasing stimmies. S&P 500 E-minis were down 11.00 points, or 0.25%, at 715 a.m. ET. Dow E-minis were down 131 points, or 0.37%, while Nasdaq 100 E-minis were down 21.75 points, or 0.14%. Treasuries pushed higher, with the 10-year real yield hitting a record-low -1.127%. The dollar fluctuated and oil declined below $72 a barrel.”
NDX futures declined to a low of 15049.70 before a partial recovery. It is simply too early to tell whether Friday’s high marks the top. Friday’s NDX Hi-Lo Index closed at 12.00, a mere .375% participation in new 52-week highs. It is hard to imagine that Friday’s high was made by so few stocks.
The Shanghai Composite Index declined to 3424.74, violating all the trendlines before closing just beneath the Head & Shoulders neckline at 3485.05. This massive “dump” in the tech heavy SSEC is likely to be the catalyst to the behavior in the NDX and US equities today. The Cycles Model suggests a possible three-week decline from here.
ZeroHedge observes, “The crash in China continues. It all started with the cancellation of the ANT IPO a few months ago. Since then we have gotten used to new regulatory crackdown news on a weekly basis, mainly in tech, but lately even in areas like “edtech” which has been brutally punished.
It’s just a Chinese local issue?
Yes, this is a Chinese tech issue, but the contagion is starting to spread to other parts of the Chinese market. We saw this accelerate overnight.
Limiting the power of the big Chinese tech firms is potentially a good thing, but the value lost since mid February is huge.
The stress we are seeing in Chinese tech is now spreading to other sectors. Sure, for now this is a local problem, but it could potentially become a global problem, and we are referring to risks in terms of P&L. The value loss is significant, and the pain is felt globally.”
VIX futures rose as high as 19.39 this morning before pulling back. The markets are now entering the most negative months of the year. The current Master Cycle may end up as a high in mid-August, according to the Cycles Model.
TNX futures pulled back to 12.26 before the cash open this morning. This is a normal retracement to absorbe the recent gains from th eMaster Cycle low. We may expect TNX to decline to 12.00 or possible a bit lower. This is a good time to accumulate shares in TNX or short UST.
USD futures appear to be sonsolidating within Friday’s trading range after Wednesday’s Master Cycle high There is likely to be a short correction back down to the support areas between 91.30 and 91.89.
Most of us that remember the 2000 peak remember the date – March 23, 2000. However, there is another peak that is not often recognized. The Industrials peaked on January 14, 2000 at 11750.20. 21.5 years ago last week. SPX also peaked on January 14, 2000 at 1473.00. The SPX subsequently peaked on March 23, 2000 as a one-day wonder at 1532.13, which the DJIA did not match at 11234.70. We are seeing interesting parallels here, with the DJIA first peaking on May 10, but making lower highs since then…until the final hour on Friday. 21.5 years is an important Cyclical juncture (4.3 X 5). The peak on July 16 at 35090.01 comes eerily close to a parallel match to the January-March 2000 peaks in the Industrials. That is why I have been banging the drum that a “slingshot move” may be imminent. The parallel got washed out in the final hour on Friday, but the turn is still imminent.
Two other points that may be mentioned. (1) The DJIA nearly tripled over that period of time (21.5 years). The compound annual rate of return was just a little under 5.25% during that period. (2) The 1987 trendline has given maximum resistance to the DJIA uptrend since 2018.
Last week, we discussed that as the market hit new highs and the index returned to more extended and overbought conditions, a correction was likely. To wit:
“Analysts have set a very high bar for the markets to hurdle, given already lofty valuations. With indices already well-stretched above their historical means, there is much room for disappointment. With the currently very overbought short-term market, a 3% to 10% correction this summer remains likely.”
Well, between Friday and Monday, the market did sell-off by 3% to touch the 50-dma. However, at that point, “dip buyers” emerged to chase the market back to new highs. While this does indeed negate any short-term bearish action, it is worth noting two things (shown below):
The volume of the rally was extremely light; and,
The sell-off was too shallow to reverse the underlying technical concerns.”
SPX ran up to test the Cycle Top resistance at 4415.00 before pulling back. From a Cyclical point of view, the decline took 25.8 hours and the rally will have taken 25.8 hours should it stop now. Today is an appropriate day for a Master Cycle high.
The DJIA made a triple top at 35087.52 today after reaching 35090.01 on July 16 and 35091.56 on May 10. This may be the major reason that those in the know are selling. The new Master Cycle doesn’t end until August 25, which allows plenty of time for a major decline.
The last time I showed this chart was near July 10. It is simply unbelievable how this market has been stretched. This may be a good place for this rally to end.
ZeroHedge remarks, “One can’t say that Goldman’s clients have too much faith in Goldman’s trade recos.
As Goldman’s flow trader John Flood was urging clients on Monday “not to buy this dip“, they did just that and on Monday Goldman’s Prime Brokerage service observed a surge in hedge fund dip buying as the S&P tumbled as low as 4,220. Those same hedge funds, however, clearly unsure what happens next, then proceeded to dump the rally and on Tuesday the GS Prime book saw the largest 1-day net selling since June 17 (-2.2 SDs vs. the average daily net flow of the past year) and the biggest net selling in single names since Nov 2019, driven by long-and-short sales (1.6 to 1), as all regions were net sold led in $ terms by North America and DM Asia, and driven by long-and-short sales (2.5 to 1). This defensive positioning has continued through much of the post-Monday rally.
SPX futures topped out at 4380.88, but have backed down. The all-time high was 4382.62 on July 14. Should the decline continue, the slingshot move mentioned yesterday may still prevail. The alternate would be a new all-time high in the cash market, as well as the futures. The Cycles Model in futures runs paralell to, but not identical with the cash market.
The July 14 top marked on the chart occurred on day 247 of the Master Cycle. Today is day 256. Either the top is made in the next two days or a six-day selloff may begin to complete the Master Cycle.
ZeroHedge reports, “The V-shaped recovery has officially concluded, with eminis hitting 4,383 this morning, touching reaching their all time high from the second week of July (technically that was 4,384) as markets propel higher on earnings optimism despite mixed economic data and worries over Covid variant. At 7:30 a.m. ET, Dow e-minis were up 170 points, or 0.49% and S&P 500 e-minis were up 21.5 points, or 0.49%.
Nasdaq 100 e-minis were up 72 points, or 0.48%, trading above 15,000 points for the first time. Nasdaq futures hit a record high on Friday, helped by megacap technology stocks and strong earnings from social media companies Twitter and Snap, with investors eyeing business activity data later in the day.”
NDX futures reached an all-time high at 15015.50 before coming back beneath the prior futures high. The thought occurred to me that the dealers may be harvesting some gains in the futures this morning before pulling the plug in the cash market. We are that close to the drop-off. The cash high to overcome is 15002.20.
The NDX Hi-Lo Index closed at 39 yyesterday. While not below zero, this closing value shows extremely poor breadth while the NDX is attempting new all-time highs.
ZeroHedge reports, “Two weeks ago, when stocks suffered a modest airpocket, we pointed to something ominous: market breadth has been collapsing similar to what we observed last summer when a handful of market “generals” did all the heavy lifting. And as the following Bloomberg chart showed, market breadth had recently gone from bad to abysmal, with the number of S&P stocks above their 50DMA at just about 50%, a very tiny increase from the 47% on June 29 when the S&P hit its first of many consecutive all time highs.”
VIX futures hit a low at 16.92 this morning. Since VIX options have already expired on Wednesday it may be reasonable to assume that the VIX is being pressured to ignite a short squeeze in the SPX.
TNX appears to be testing the mid-Cycle resistance at 13.12. A breakout may send TNX to new highs over the next two weeks while UST tumbles.
SPX may be ready for a sudden reversal as 47.3 hours have elapsed from the beginning of the downdraft on July 14. A 12.9 day crash scenario consists of a total of 90.3 market hours, leaving 43 hours to go, should this scenario play out. It will be totally unexpected. Tomorrow’s options expiration shows a mixed bag above 4300, but there are over 9000 net SPX puts at 4300.00. This may provide the power for a slingshot decline below point 6.
ZeroHedge informs us about how option gamma may provide this result. Watch the video .
““Gamma Squeeze” has been the word of the year so far for many freshly-minted equity-trading gurus (as they watched their AMC, GME, and other meme stocks momentum ignited “to the moon” time and again in the first half of 2021), but there is lot more to comprehending and using “Gamma” than simply understanding the chance for a squeeze (higher or lower).
Last June, long before anyone had heard of SoftBank’s public stock trading group, had seen the unbelievable and perhaps illegal gamma meltup in Tesla, and before even retail traders became experts in sparking gamma squeezes across illiquid names, we published what was arguably the best primers on gamma, op-ex and option-driven equity flows, straight from Goldman’s derivatives strategy team. Those who missed it can read it here, although there is certainly a bit of a learning curve.
Still since the topic of Greeks, Gamma, and option-driven flows will become increasingly important, we urge everyone to at least watch the following brief video, courtesy of our friends at SpotGamma, which provides an introductory overview of using Gamma to forecast market movements intraday.”
US 30 futures rose to 34789.00 in the overnight session before trailing off. The retracement may be complete, or nearly so as the DJIA approaches resistance for a third time. On May 10 the DJIA made its all-time intraday high at 35091.56, with a closing high the Friday before at 34777.76. On July 16, the Dow 30 made a secondary intraday high at 35090.01, with a closing high at 34987.02 the day prior. Do we go with closing or intraday?
The Elliott Wave structure claims the move since May 10 was Waves 1 and 2 and points to the near-miss on July 16 as confirmation. The Cycles Model observes that the July 16 high was too early to be a Master Cycle high. In fact, the end of the current Master Cycle may be still ahead, possibly in the next two weeks. Today is day 255 of the current Master Cycle. Should the turn occur today without making a new high, the SPX may be due for a very sharp, if short, decline.
SPX futures topped out at 4361.38 this morning before it rolled over. It is currently in the red, but no one seems to notice. This Cycle pattern has consumed 43 hours (6.14 days) as of 10:00 am. The standard time for a crash is 12.9 market days, so we may be at the half-way point (time-wise) of that potential Cycle. The minimum decline is targeted to point 6. This is known as a slingshot move.
ZeroHedge reports, “US futures, European bourses and Asian markets extended on recent sharp gains on Thursday, the 10Y yields rose above 1.30% after hitting 1.13% just two days earlier and oil held onto sharp gains as investors seemed to set aside virus jitters for now and looked ahead to the European Central Bank for reassurance that policy support will continue; the dollar was steady. Japanese markets were closed for a holiday. At 7:15 a.m. ET, Dow e-minis were up 71 points, or 0.20%, S&P 500 e-minis were up 8 points, or 0.19%, and Nasdaq 100 e-minis were up 24.50 points, or 0.16%. Futures traded less than 1% from their record highs, completing a definitive V-shaped recovery from the recent slide.
The turnaround from the Monday selloff shows “corporations have been very resilient through all this,” David Mazza, Direxion head of product, said on Bloomberg Television. “Earnings estimates are quite remarkable, probably some of the best on record. Even through all this, we have central-bank liquidity remaining very abundant, economic growth being robust.”
VIX futures have come off their overnight low at 17.52 and are approaching the50-day Moving Average at 17.91. The NYSE Hi-Lo Index is cautionary this morning, closing at 95.00 yesterday.
ZeroHedge observes, “In a stark reversal to its bullish sentiment at the start of the month, when the bank first noted – correctly – that the S&P was entering its best 2-week seasonal period of the year which it did between July 1 and 15 when it posted a series of new all time highs (before dumping on the 16th and the 19th)…
… followed by a lengthy rationalization why “the shorts will have to cover“, Goldman has been turning surprisingly bearish in recent days, and two days after Goldman flow trader John Flood urged Goldman clients “not to buy this dip” on Monday (spoiler alert: they did) his trading desk colleague Scott Rubner has published a report previewing why he anticipates a correction in the coming days and continuing through the Jackson Hole symposium at the end of August.”
TNX continues challenging the mid-Cycle resistance at 13.09 as futures reached 13.17 overnight. While I have tagged Tuesday’s low as the end of the Master Cycle, it may not be over, yet. We may see a very fast rally to 20.00 in the next two weeks in what is known as a “slingshot” move.
ZeroHedge reports, “Initial jobless claims jumped significantly last week as 419,000 Americans filed for jobless benefits for the first time (well above the prior week’s 368k and expectations of a 350k print)…
Michigan and Texas saw the biggest jump in claims while New York and Oklahoma saw the best improvement…”
USD futures appear to be consolidating in the overnight market. It appears to be terminating its current Master Cycle in the next week or two with the highest probability of a low at the cluster of supports between 91.10 and 91.74. However, there is the possibility of a runaway dollar as TNX blasts higher.
ZeroHedge informs, “At the end of June, when the S&P was making new all time highs day after day, and when the VIX was touching fresh 2021 lows, we cautioned that the skew index just hit a new all time high – meaning that put options have been unusually expensive relative to at-the-money options, helping support the put-heavy VIX index. As we further added, high skew, which compares put option prices with at-the-money option prices, has reached new all-time high, and reflected investor perception that high volatility would return should markets sell off.
Commenting on this unusual move, we said that it shows that while on one hand traders seem complacent, they have never been more nervous that even a modest wobble in the market could start a crash. By extension, “they have also never been more protected against a full-blown market crash.”
SPX has hit the 69% retracement level and the correction stands at 10 hours. While some institutions may have bought this dip, the institutional trading desks are relatively quiet. Many professional traders use this place to establish their short positions.
SPX futures were up in the overnight market, but have since come down near closing levels. They are not in the red as I write, but have lost a considerable elevation from the overnight high. Yesterday’s rally took the SPX just above the 61.8 Fibonacci retracement level at 4330.36.
I was a little optimistic with my observation that the rally might be over by noon yesterday, not knowing exactly how the Cycle would play out. 4.3 days was a good guess, but now we have a more accurate picture. The final measure of the Cycle was 25.8 hours of decline followed by 8.6 hours of rally into the final hour yesterday. This gives me some confidence moving forward, since the the Cycle followed a precise pattern. This happens in impulsive Waves, while the Cycles are often distorted in corrective Waves.
ZeroHedge reports, “US equity futures, European bourses and Treasury yields rose for a second day clawing back much of the week’s losses that were sparked by fears over spiking COVID-19 cases, as well as the “peak growth” and “peak inflation” narratives, as bargain hunters helped the S&P 500 to all but erase Monday’s slide in a rally led by cyclicals such as industrial stocks even though the dollar notched further gains on concerns over the impact of a fast-spreading coronavirus variant.
“The correction we had is healthy to clear some of the excess out of the market and to get better balancing between growth and value,” Katie Koch, Goldman Sachs Asset Management’s co-head of fundamental equity, said on Bloomberg Television. “From a long-term perspective we are really still very constructive on equity markets, so we’d encourage clients to be overweight risk assets.”
At 7:00am, emini S&P futures were up 11.50 points or 0.26% to 4,326; Dow Jones futures rose 176 or 0.51% and Nasdaq futures were up 4.5% or 0.03%. Bitcoin recovered from its drop below 30,000 jumping back over $31,000 ahead of a conference that sees Elon Musk, Jack Dorsey and Cathie Wood speak on cryptos.”
A word of warning, however. ZeroHedge observes, “Overnight, Goldman trader John Flood had some advice for its institutional clients: “don’t buy this dip.”
I am a consistent buyer of dips but this wobble feels different and I am bracing for a weaker tape this week. Negative Covid headlines are picking up in velocity. Issuance spigots are fully turned on and this paper is getting harder to place from my seat (after some choppy px action related to issuance last week).
Well, judging by today’s furious bounce in the market which was the biggest one-day gain in the S&P following three days of losses, few followed his advice. Or maybe not – according to Goldman’s flow desk, despite all the sound and fury of today’s gain, virtually no institutions took part. Here is Flood again after the close:
I was surprised by the velocity of today’s rebound but dont think we can scream all clear just yet (i am still bracing for choppiness over the next week or so due to various positioning dynamics I flagged pre mkt yesterday).
Our desk during the drawdown yesterday was active but today eerily quiet and not seeing institutions add to risk on our desk…feels like short hedge band aids being ripped off at the moment…ETFs represent 32% of total tape (down from 35% yesterday but up from 24% ytd avg) Consumer Discretionary shorts a focal point of pain today….(GSCBMSDS INDEX) +437bps.
Earlier today we showed that the biggest highlight of today’s move was the face-ripping short squeeze that started yesterday and ended almost where it started one week ago.”
VIX futures bottomed out at 18.52 in the overnight session, but have bounced back near closing value. VIX is still in the accumulation phase of the Cycle, but a breakout above the trendline near 24.00 will make buying the VIX more difficult.
The NYSE Hi-Lo Index closed at 66.00 yesterday. It bears watching near the close of the day.
TNX continues to gain elevation. The Cycles Model infers that strength will continue with maximum energy during the week of August 2. I have put the Master Cycle at yesterday’s low (day 242). However, the Cycles Model suggests a slingshot move that may peak out on or near August 6 for the actual end-of-Cycle.
USD futures rose to 93.19, a tick above yesterday’s high, as it continues probing for the Cycle Top at 93.50. The Cycles Model implies an end to the current Master Cycle early next week. Should we see a reversal later this week, it implies a Master Cycle low may be arriving next week.
West Texas Intermediate Crude is on a bounce to retest the 50-day Moving Average at 69.59 today. It is on a sell signal, but the Cycles Model calls for a bottom early next week. It may be wise to short on the bounce which may take up to three weeks.
Gold futures are on the decline again, having broken support at 1800.00. It has less than a week to its Master Cycle low, according to the Cycles Model. However, the Master Cycle high was on July 6, suggesting the low may not come in until the end of the month.
TNX has reversed from its potential Master Cycle low this morning. It should be fair warning that the rebound in stocks is treading on thin ice. This low is on day 242 of the current (red) Master Cycle. There has been a revision so that the blue Cycle topped out on day 260 on June 16. I had been expecting a rally out of the blue Master Cycle (low), but it became too stretched. The red Master Cycle may actually have a “double tap” where it makes its low today, but still has two to three weeks to make a new high as well.
The fascinating item is that, should Wave  equal Wave , we may see TNX rally to a potential target of 19.96 in the next 2-3 weeks! Not far off my earlier target of 19.71. In the meantime, the move in bonds is sending a false signal in stocks. Read on…
ZeroHedge opines, “In a notable turn of events, the overnight session saw an initial attempt at a modest reversal in the recent Treasury rally only to be met with further buying interest. The net result was a tick lower in 10-year yields that brought the benchmark to levels not seen since mid-February.
With the next technical target sill 5 bps away, we’ll be watching the interplay between risk assets and US rates as the delta-inspired repricing continues. We’re cognizant that the severity of the recent move has led to stretched momentum measures, implying incremental gains will be more difficult to achieve. This isn’t to suggest the floor for rates is evident at the moment, rather that it should be anticipated that the pace of the rally will slow. There has been plenty of chatter surrounding the possibility 10- year yields dip below 1.0%; an eventuality that would be a short-lived endeavor, but not one that’s off the table. More immediately however, will be gauging the extent to which rising case counts can carry yields even lower from here.”
Within the hour SPX may complete a 4.3-day Cycle (30.1 hours). The next decline may be multiples in length of the first. This pattern may be a Leading Diagonal, a series of A-B-C declines. It is probable that in the next week or two the SPX may reach or exceed “Point 6” listed on the chart.
ZeroHedge opines, “A few months ago, Morgan Stanley’s chief equity strategist Michael Wilson, who also recently emerged as the biggest Wall Street bear warning that the “rolling corrections” in the market presage a 10-20% drop in stocks, summarized the current economic state simply as “mid cycle“…
… which of course is the best place to be, as the initial euphoric surge higher in stocks tapers to a slow and steady grind as the economy chugs along at a modest pace.
But what if he is wrong? After all, yesterday the NBER determined that the covid recession – at just 2 months – was the fastest on record (even as 14 million Americans are out of a job and still collect unemployment benefits) and we are already well into the mid cycle, if not approaching the end.”
… and followed up with a prediction that shorts will have to cover, which they did during a period in which we saw 13 out of 16 trading days hit new all time highs.
Of course, it all came crashing down in the last 3 days when the S&P slide accelerated, culminating with a scary rout on Monday when tumbling yields sparked a panic that the US economy is headed straight into a stagflationary crash.
And yet, with futures rebounding and traders clearly showing a desire to catch what has been the fastest falling knife in months, we were surprised to read that the same John Flood who correctly predicted the market ramp in the first half of July, has now flipped completely and in a note published overnight writes “don’t buy this dip.” He explains why:
I am a consistent buyer of dips but this wobble feels different and I am bracing for a weaker tape this week. Negative Covid headlines are picking up in velocity. Issuance spigots are fully turned on and this paper is getting harder to place from my seat (after some choppy px action related to issuance last week).
99% of S&P500 companies are in buyback blackout period into next week and quant flows remain asymmetric on the supply side (AKA CTA sellers will win this tug of war). Earnings last week were great but were not rewarded (banks)…this week and next are the 2 busiest weeks of the earnings period.”
SPX futures reached an overnight high of 4279.12, equivalent to 4290.00 cash after bouncing off the 50-day Moving Average. Investors are buying the dip. However, the Cycles Model suggests a possible down draft this morning to the Cycle Bottom at 4160.12 before a meaningful retracement is possible. The Cycles Model suggests the decline may last until mid-to-late August with much higher volatility.
ZeroHedge reports, “U.S. stock-index futures rebounded from Monday’s rout and European stocks were modestly in the green as investors weighing corporate earnings against the uncertain outlook for global growth, or as Bloombnerg put it, “as buy the dip outweighs fears.” But in a continuation of yesterday’s moves, treasury yields edged lower sliding to 1.16% while the dollar hit a fresh three month high while bitcoin tumbled below the key support level of $30,000. At 730 a.m. ET, Dow e-minis were up 200 points, or 0.6%, S&P 500 e-minis were up 23.00 points, or 0.54%, and Nasdaq 100 e-minis were up 70 points, or 0.48%.”
VIX futures pulled back to 20.50, still above the 50-day Moving Average at 18.01. The Elliott Wave structure is incomplete and begs completion above the Ending Diagonal trendline. Should the SPX decline to its Cycle Bottom at 4160.00, then the VIX may rally to its Cycle Top at 30.80 in the near term.
The NYSE Hi-Lo Index closed at -78.00 yesterday, firmly in the sell zone. That should warn the buy-the-dippers that they have acted too quickly. The NDX Hi-Lo Index closed even lower, at -217.00. The Cycles Model doesn’t see an end to this decline until early September.
Institutional and dealer selling pressure must be monstrous, as retail investors and hedge funds are “all in.”
RealInvestmentAdvice remarks, “The “Fear Of Missing Out” has infected retail and hedge funds alike as they ramp up exposure to chase performance.
We have previously discussed the near “mania” of retail investors taking on exceptional risk in various manners. From increasing leverage, engaging in speculative options trading, and taking out personal loans to invest, it’s all evidence of overconfident investors.
However, that “risk appetite” is not relegated to retail investors alone. Professional managers, institutions, and hedge funds are “all in” as well.”
TNX futures made a new low at 11.64, but have risen since then. This is yet another indicator that the selling pressure in the SPX may have only paused, but not stopped.
ZeroHedge reports, “In the days following the quarter-end burst to almost $1 trillion, usage of the Fed’s infamous overnight reverse repo facility had shrunk by roughly $200BN, gravitating in the $750BN – $800BN range, until today when 71 counterparties parked $860.5BN worth of reserves at the Fed, the second highest amount on record.
But despite renewed expectations that this latest push will finally send total RRP activity above $1 trillion as banks seek to park excess reserves/deposits anywhere but in the economy and/or markets, Curvature’s Scott Skyrm disagrees, pointing to one notable change: the surge in yields.
As Skyrm writes in his latest Repo Market Commentary “with the stock market sell-off and the bond market rally, it only means one thing! A flight-to-quality.” This matters because traditionally “a flight-to-quality will affect the Repo market by removing securities from the market.”
BKX gapped down through its Head & Shoulders neckline at 118.70 yesterday, confirming its sell signal. While it may attempt to retrace the gap, the more likely outcome is a further decline through the end of August.
USD future rose to 93.10 this morning, on its way to the Cycle Top resistance at 93.50. It may make its next Master cycle high in the next week or so. The Rally structure still has a way to go, so it may extend through mid-September.
SPX has been challenging the 50-day Moving Average at 4237.73 and appears to be breaking through. This opens the probability of a further sell-off to the Cycle Bottom at 4159.81. This could last into the morning open as support may take another hour or so to be established. In the meantime, it is possible that the Wave pattern is not yet complete.
In the meantime, the NYSE Hi-Lo Index remains near zero and The VIX continues to challenge its Ending Diagonal trendline at 24.00.
BKX has finally broken is Head & Shoulders neckline, confirming the market sell signals across the board. Liquidity is draining out of the economy and this signal formalizes that process. Good luck and good selling.
There is some major recognition of a trend change as the VIX rises above its Ending Diagonal trendline at 24.00. Analysts who don’t do charting still look at 25.00 as the breakpoint for a significant rally in the VIX as downside in the SPX.
The NYSE Hi-Lo Index has gone negative for the first time since May 10. This confirms the sell signal in the VIX. While there may be a bounce, cracking the zero line is significant.
SPX futures have broken their 9-month Ending Diagonal formation this morning, challenging Intermediate-term support at 4274.43 and threatening the 50-day Moving Average at 4236.36. It is on an aggressive sell signal as of Friday afternoon when the VIX gave its buy (SPX sell) signal. The Hi-Lo Index, which closed at 78.0 on Friday appears to be poised to give its signal at the open, confirming the sell signal.
ZeroHedge reports, “The Friday selloff sparked by a huge op-ex expiration which saw up to a third of market gamma rolling off, has accelerated on Monday morning with the narrative goalseeking today’s rout to concerns that the covid resurgence and elevated inflation will weigh on global demand. To help validate this on Friday, US infections surged last week, topping a 16% global increase. At 730 a.m. ET, Dow E-minis were down 357 points, or 1.02%, S&P 500 e-minis were down 48 points, or 1.12%, and Nasdaq 100 e-minis were down 91 points, or 0.63%. The rally in Treasuries continued, sending 10-year yields tumbling below 1.23%. The dollar strengthened, oil dropped and gold and bitcoin was also lower.
“The peak of economic growth rates is behind us and growth worries are back. The good news is that even if the peak of some economic indicators is behind us, equities should continue to perform positively in the medium term in a positive economic environment,” Berenberg strategists said in a note. “However, high valuations, COVID-19 fears, low trading volumes over the summer and high investor equity allocations argue against significantly rising markets for the time being.”
ZeroHedge further notes, “Futures are down (relatively) hard ahead of today’s open with Small Caps leading the charge to the downside…
Notably, SpotGamma points out that we start the session in a negative gamma position.
The official gamma flip points are coming in at 4335 but we suggest using 4300 as the key “risk off” level. This is due to fairly large open interest at that strike, which also makes it first resistance this morning. Key levels today are 4300, 4335 (gamma flip) to the upside, with 4240 downside support.
We certainly see the setup for weakness today… and another call to The PPT imminent…”
VIX futures rose to a morning high of 21.90, testing the upper Ending Diagonal trendline near 22.00. A break in trendline resistance may bring recognition to a trend change in the markets and a flood of short sellers.
“We would actively be looking to start using depressed vols for protection. You will probably need to endure some more short term theta pain, obviously depending when you get involved, but this boring market will eventually find the new narrative, and things will get dynamic again.
The 2010-2019 seasonality is with you…and we have earnings coming up as well so time for a gentle reminder;”
TNX has hit a new retracement low on day 265 of its Master Cycle. The money flow from stocks to bonds may persist for a few days, but be warned that the Cycle is ripe for the turning.
USD futures hit a new high at 93.04 this morning as the narrowing Cycle Tope resistance comes into view. The Chart pattern and Cycles Model both infer that this rally may be short, but strong. The initial target appears to be the Broadening Wedge trendline at 96.00.
NDX futures are in decline after testing the daily Cycle Top resistance on Friday. The NDX Hi-Lo Index closed on Friday at -52.00, confirming its sell signal along with the VIX (VXN).
ZeroHedge comments, “The world’s financial graveyards are covered with the career tombstones of those who, over the past decade, have called the end to a tech bubble that not only has yet to pop but has culminated with just 5 tech names – the FAAMGs – comprising 23% of the S&P’s market cap vastly surpassing the lofty dot com days, with a combined valuation of over $7 trillion.
Among those who were steamrolled by the tech juggernaut is Ned David Research, traditionally known for its accurate market timing calls if certainly not this time: two months ago it slapped a sell reco on tech right before it ripped the bears’ faces off and embarked on a 14% rally. And then, just as the FAAMGs fell out of bed late last week, the firm’s strategists pulled a Gartman, and abandoned their underweight stance, expecting that the rotation out of reflation and into growth, coupled with a plunge in yields, will lead to more tech buying when we may well be facing the first market rout since March considering last week’s coordinate selloff.”
BKX has been a tease all last week as it remained above the Head & Shoulder neckline at 18.70. While the BKX is already on a sell signal beneath the 50-day Moving Average, it may have the ultimate confirmation through the Head & Shoulders formation.
ZeroHedge notes, “There was a remarkable disclosure in the latest JPMorgan earnings report: the largest US bank – an entity historically best been known for making loans to the broader populationat least until the Fed nationalized the bond market – reported that in Q2 its total deposits rose by a whopping 23% Y/Y and up 4% from Q1, to $2.3 trillion, while the total amount of loans issued by the bank was flat both sequentially and Y/Y at $1.04 trillion.
In other words, only for the second time in its history – Q1 2021 being the first one – JPM had 100% more deposits than loans, or inversely, the ratio of loans to deposits is now 50% (it did post a modest rebound from an all time low in Q1).”