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.”
9:25 am – Don’t Buy This Dip
ZeroHedge remarks, “At the start of the month, Goldman trader John Flood correctly said that we are entering the best 2-week seasonal period of the year, with the first 18 days of the month traditionally the strongest period for markets…
… 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.