10:53 am
A bounce may be in order here. The 38.2% Fib retracement is near 3800.00 and the 50% Retracement level is at 3820.00, just beneath Short-term resistance at 3828.94. Remember, Max Pain is at 3805.00. Dealers and hedge funds may be positioning the SPX for the smallest payout possible on their options. Thus far, they may have succeeded, but “accidents and miscalculations” do happen. The hourly Cycle may last until tomorrow afternoon. The daily Cycles Model still calls for another three weeks of decline.
9:56 am
BKX, our liquidity proxy, has slipped beneath the neckline of its Head & Shoulders formation this morning at 98.47. The Cycles Model gives about a week of additional decline in the current Master Cycle. A lot of damage may be done in that time. Note that the 2020 low was at 55.40. A decline beneath that number implies a banking disaster, since the long-forgotten stress tests only accounted for a 20% drop in stock prices. Earnings season has begun, as we may see below. My studies show the average target may be (beneath) the 2020 low.
Zerohedge observes, “Hot on the heels of JPMorgan’s disappointing results, Morgan Stanley shares are slumping after the bank reported worse-than-expected Q2 results missing top and bottom-lines and taking a large regulatory charge.
Q2 EPS disappointed (printing $1.44 vs $1.56 expected) but the big headline maker was that revenue of $13.1 billion fell short of expectations of $13.3 billion (with wealth-management revenue of $5.74 billion missed the average estimate of $5.81 billion).
While the bank missed on the top-line, it did manage to deliver better-than-expected results for both its equities and FICC sales and trading businesses. But on the debt capital markets side, revenue disappointed (coming in at $326 million, below the $374 million that analysts expected).”
7:40 am
Good Morning!
NDX futures declined to 11571.20 this morning. The next level of support is 11300.00. The Cycle Bottom offers further support at 11056.93. Tomorrow’s op-ex shows the last level of support for the long options (Max Pain) is at 11700.00. Options turn short at 11675.00. Short gamma kicks in with a vengeance at 11500.00.
ZeroHedge observes, “According to Goldman trader John Flood, this morning’s CPI print coming with a much higher than expected 9+ handle will keep institutional investors frozen and the bank expects very little offense to be played over the next few weeks. Furthermore, as discussed earlier, 75bps was thought of as a lock for July but now this: Raphael Bostic signaled the Fed could hike by 100 bps after June’s inflation report. “Everything is in play,” the Atlanta branch chief said. Asked if that included by raising rates by that amount, he replied, “it would mean everything.” Just an hour earlier Nomura made a 100bps rate hike its base case.
As Flood notes, there were “plenty of incomings on the “sharp reversal higher” in the mkt post CPI.” Here is his explanation why stocks ramped:
“We flagged that the level of pre-trading (shorting) into this print was quite noteworthy. Institutional positioning remains VERY light…L/Os running record high cash levels and HFs gross/nets in bottom percentiles on 1, 3 and 5 yr look backs. Does it makes sense for mkt to move higher after a 9.1% print and BOC hiking by 100bps…of course not…but that was max pain trade today and this market seeks max pain. Difficult to truly analyze intraday moves with liquidity stuck at the lowest levels we have seen in years (S&P futures top of book liquidity near $3mm again).”
SPX futures declined to 3746.40, deep into the short gamma zone. The final support for SPX is the Cycle Bottom support at 3759.61. Beneath this is free-fall zone. The SPX completed the 10th day of a 30-37 day decline. The Cycle may have shifted into higher gear, shortening the length of the Cycle, but not the intensity.
Today’s op-ex shows Max Pain at 3805.00. Calls prevail above 3810.00, but long gamma may not kick in until 3900.00. Puts dominate beneath 3775.00 with short gamma beginning at 3700.00.
ZeroHedge reports, “US futures were already sliding fast as the reality of the Fed’s upcoming 100bps rate hike was fully appreciated by the market, as even Goldman was shocked by the kneejerk move higher yesterday, saying “Does it makes sense for mkt to move higher after a 9.1% print and BOC hiking by 100bps…of course not…but that was max pain trade today and this market seeks max pain.”
Well, this morning the max pain was clearly lower, as US equity futures fell along with stocks in Europe and Asian, while the Bloomberg dollar index rose to a record Thursday, surpassing the record hit during the covid 2020 crash when the Fed launched unlimited swap lines to ease the global dollar crunch…
… after high US inflation hardened expectations for more aggressive Federal Reserve monetary tightening that could trigger a recession.”
VIX futures rose to 28.21 thus far, testing the 50-day at 28.41. Next week’s op-ex shows Max Pain at 29.00. Short gamma begins at 26.00. Long gamma immediately starts at 30.00.
Bloomberg reports, “Perceptions of risk are diverging in perplexing ways among asset classes.
Volatility in bonds is whipping up just as it trails off in stocks. The ICE BofA MOVE Index, a gauge of costs for Treasury options, rose in four of the last five weeks. A similar measure for equities, the Cboe Volatility Index, or VIX, fell for three straight weeks. The MOVE’s premium over the VIX has widened this month to the most since 2009. ”
TNX futures rose to 29.85. testing the 50-day moving average at 30.05. The Cycles Model shows TNX rising fore two more weeks. The likely target may be the Cycle Top resistance at 34.56.
ZeroHedge reports, “After a subpar 10Y auction which followed a mediocre sales of 3Y paper, moments ago the Treasury concluded the week’s debt issuance with the sale of $19 billion in 30Y paper in the form of a reopening of the 29Y 10Month TG3 cusip.
The auction was, in a word, spectacular, and not just because of solid top-line results but much more importantly, because the record Indirect demand suggests foreign central banks called the top in long-term yields (i.e., what comes next is deflation).”
On the other hand, ZeroHedge notes, “Earlier today, Fed trial balloon intermediary and Powell’s preferred leaker, WSJ reporter Nick Timiraos was seen as taking a 100bps rate hike off the table – despite today’s scorching, red hot CPI print – in an article titled “Inflation Report Likely to Seal Case for Fed’s 0.75-Point Rate Rise in July” in which he said that “another big increase in consumer prices last month keeps the Federal Reserve on track to raise its benchmark interest rate by 0.75 percentage point at its meeting later this month.”
However, that’s not enough for Nomura which in addition to being the first bank to call for a H2 2022 recession (followed duly by BofA this morning and all other banks soon), moments ago also announced that it now sees a 100bps rate hike as its base case. Impossible? Nope: Nomura was also the first bank to correctly call last month’s 75bps rate hike (which was initially seen as a ludicrous call, only to have Timiraos confirm the outcome during the Fed’s blackout period).
USD futures made a new high at 108.61 this morning, creeping higher toward the 2001. high at 121.21. I stand corrected (thank you, Seb) that the 2001 high was not the all-time high. The attached chart shows the all-time high at 164.22 in 1983. Estimates for this Cycle high range from 111.50 to 120.00.
Gold futures declined to 1705.50, preserving yesterday’s low as the Master Cycle low on day 272. The bounce may only last until the end of July before the decline resumes. The immediate target for the bounce may be the Lip of the Cup with Handle formation near 1785.00. Normal retracement may go to 1850.00, depending how the Cycles play out.
Crude Oil futures are nearing their Master Cycle low as they declined to 92.48 thus far. There is likely to be a 4-week bounce to the 50-day Moving Average at 109.67 in that time. On the other hand, should WTIC decline below 86.00, there may be an acceleration of the decline.
ZeroHedge observes, “In this climate of rising inflation, particularly of energy and food, and global central banks in tightening mode, a (political) crisis never is very far away. Sri Lanka has been one of the most prominent examples with its recent default on foreign debt and its President Gotabaya Rajapaksa fleeing the country yesterday has been one of the most prominent examples. Bad economic policy, the Covid-19 shock and, ultimately the global food and energy crisis resulting in serious shortages, tipped the country over the edge. Protests also broke out in Libya earlier this month, where rising ‘cost of living’ problems were cited as one reason. According to FAO statistics, a staggering 29.4% of the world’s population was facing moderate or severe food insecurity in 2020 (up from 25% in 2015) a figure which probably did not improve in recent years.
But the crisis in Sri Lanka also points to broader risks stemming from currency volatility. For one, the strong dollar has its mirror image in a sharp depreciation of many currencies around the world. There is hardly any developing/emerging market currency that has escaped the stronger dollar. Bear in mind also that dollar-claims (loans and debt securities) on the non-financial sector in emerging markets and developing countries reached a record of nearly USD 4 trillion last year, after more than a decade of easy monetary policy. As such currency volatility in developing markets is something is unlikely to disappear in the foreseeable future.”