July 21, 2021 – Let The Selling Begin

10:52 am

The SKEW Index remains near all-time highs.

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.”


10:48 am

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.


7:30 am

Good Morning!

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.




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