The Practical Investor

Good Afternoon!

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.

RealInvestmentAdvice comments, “Bulls Buy The Dip

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.”

2:55 pm

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.

11:15 am

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.

7:50 am

Good Morning!

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.

3:00 pm

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.”

8:00 am

Good Morning!

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)…

Source: Bloomberg

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.

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.

12:15 pm

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 [5] equal Wave [1], 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.”

10:35 am

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.”

8:00 am

Good Morning!

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.

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.

3:00 pm

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.

11:04 am

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.

10:28 am

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.

10:09 am

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.

8:00 am

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.

ZeroHedge observes, “Volatility is exploding.

We are seeing VIX and V2X move sharply to the upside today. Obviously not a shocker given the poor px action.

Regular readers of TME know our stance on hedges and protection; you basically do not chase it unless you think market is crashing.

On June 30, in our note, Protection – time to start planning…, we outlined our view on VIX and protection in general. We wrote;

“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.

Source; Refinitiv

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 population at 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).”

3:48 pm

VIX has produced a buy (SPX sell) signal.  This is not unexpected.  SPX may not recovery on such short notice,  so it is time to put in your short positions.  We may see abounce on Monday, but the damage appears to have been done.

1:52 pm

While SPX may still bounce back to 4370.00 as indicated this morning, there is also a risk of failure which may set off a firestorm of selling.  Short-term support lies at 4342.00, below which the bears may take over.   While the existing retracement has been quick, it has already made the 61.8% Fibonacci level.  Max Pain is at 4300.00 and there may not be enough time to rally a second time to end the day.

Hedge funds and dealers may be eyeing their exposure to the market.

ZeroHedge comments, “Last August, in the middle of the low-volume summer doldrums, tech names exploded higher for several weeks in a move which stumped traders only for it to be reveled (on this website first) that the action was due to an attempt by SoftBank’s brand new public equity trading desk to ramp gamma higher in tech names.

The start of July witnessed an almost identical move, as FAAMG names soared higher driven by a surge in call buying. And, while we doubt SoftBank is behind the latest move the sharp increase in options trading activity to start July – July 2nd recorded the highest day of single stock options trading in history – has driven month-to-date average daily notional traded to all-time-highs.”

7:20 am

Good Morning!

NDX futures are testing the 2-month trendline just above 14800.00.  Due to the shallow decline thus far and trendline resistance, NDX may decline to Short-term support at 14624.80 today before revisiting the trendline again.  NDX is on a chart formation sell signal.  However, it is short-term oversold with limited options to affect it either way.   The NDX hi-Lo Index closed at -132.00, suggesting more downside this morning before a significant bounce.

QQQ (360.52), on the other hand, has a massive number of puts expiring at 355.00, so this options expiration may be tightly controlled to inflict maximum pain.

.SPX futures are mildly positive, as options expiration approach.  SPX is net gamma positive at 4300.00 and above, with nearly 3000 more  calls than puts at 4370.00 and a massive 8600 net calls at 4400.00.  The dealers must keep SPX between 4300.00 and 4370 for maximum pain to both bulls and bears.  That implies a further decline to 4300.00 this morning with a possible end of day rally back to 4370.00.

Market breadth has been poor.  The NYSE Hi-Lo Index closed at 48.00 yesterday.  Normally, that would indicate a sell signal for the SPX, but the Hi-Lo has declined to zero in the recent past and subsequently gone to new highs.  It appears that we must see a negative close to confirm the sell signal for the NYSE/SPX.

ZeroHedge explains, “US equity futures rebounded from yesterday’s slide and losses of as much as -0.3% overnight on dismal volumes, as 10Y yields rose up to 1.335% and the dollar pushed higher. At 7:15 a.m. ET, Dow e-minis were up 51 points, or 0.14%, S&P 500 e-minis were up 7.75 points, or 0.17%, and Nasdaq 100 e-minis were up 34 points, or 0.23%.

Volatility shrank, but with today’s op-ex seeing a third of SPX gamma expiring, there is a chance volatility may spike, and with the vol trigger level just below spot, there may be some market turbulence today.”

VIX futures declined to 16.56 in the overnight session, keeping it beneath the 50-day trigger at 17.95 for the time being.  Should the SPX decline further today, we may see the VIX rise above the 50-day for the next buy signal.  Truth to tell, today would be a good day to accumulate VIX options, futures or ETFs at any level.

BKX continues to hover above its Head & Shoulders neckline at 118.70 despite the less than stellar earnings reports.  While unable to move to new highs, the BKX still controls the narrative thus far.

USD futures rose to 92.74 this morning as it consolidates its gains.  The Cycles Model suggests a week-long decline to follow options expiration.  The probable target appears to be mid-Cycle support at 91.30.

TNX rose to a morning high of 13.36 after bouncing yesterday from mid-Cycle support at 12.98.  The Cycles Model calls for approximately three weeks of rally into strength starting this weekend.  .

11:48 am

While SPX navigates the neutral gamma zone, NDX is challenging its 2-month trendline at 14800.00 for a possible aggressive sell signal.  Additional confirmation lies at Short-term support at 14607.00.  While the NYSE Hi-Lo is above 70.00, the NDX Hi-Lo is on a sell signal at -66.00, down from an open at -14.00.  I suspect that further negative movement in the NDX may trigger the VIX 50-day MA as well.  at 17.94 where it is at present.  Look for the VIX to rise above 18.00 to confirm.

ZeroHedge reports, “Last month, stocks tumbled in the days immediately following the Fed’s unexpectedly hawkish tilt, a move that was exacerbated by June’s Quad witching option expiration which followed just two days after the FOMC, and which we warned at the time would spike volatility due to a substantial rolloff in existing market gamma. It’s time to brace for another vol spike.

But first, a quick look at the market’s technical positioning courtesy of SpotGamma, which in its morning note today writes that while the S&P is falling into typical pre-OPEX lull, there is an interesting “tilt” to the QQQ position. As shown below, the SPX vanna model has a right skew which according to SG infers that there is resistance above “not surprising given the high gamma in the 4350-4400 area. However the QQQ has a subtle left skew which shows less resistance at higher prices but that also means heavier selling if markets decline. This is something that we saw back in March when there were large QQQ put positions in place.”

SpotGamma also note the accelerating weakness in the RUT/IWM landscape, which, along with tumbling meme stocks, has been hit hard as of late. There are likely macro-based reasons for this divergence, but regardless its something to flag (similar to the QQQ skew above).”

8:25 am

Good Morning!

SPX futures declined to test Short–term support at 4331.75 this morning.  This does not give us a chart sell signal, as we await the VIX and Hi-Lo Index to give further guidance.  Friday options are positive all the way down to 4250.00, so gamma remains net positive for now.  An aggressive sell signal lies at the mid-Cycle support at 4268.44.   A confirmed chart sell signal lies at the trendline at 4250.00, with the 50-day Moving Average at 4230.21, unless otherwise noted by the combination VIX and Hi-Lo.

ZeroHedge reports, “S&P futures dropped, trading near session lows and sliding along Europe shares and Treasury yields, as investors assessed a growth slowdown in China and dovish comments from Federal Reserve Chair Jerome Powell. The drop in yields helped push the Nasdaq higher with mega-cap technology stocks leading gains ahead of today’s initial unemployment claims report that will allow investors to gauge the strength of the labor market. At 7:00 a.m. ET, Dow e-minis were down 189 points, or 0.54% and S&P 500 e-minis were down 141.00 points, or 0.32%, and Nasdaq 100 e-minis were up 12.5 points, or 0.08%, with FAAMG heavyweights all gaining between 0.1% and 0.4%. The dollar weakened against haven currencies and bitcoin slumped back under $32,000; the British pound rose after a Bank of England policy maker said withdrawing stimulus may be appropriate soon.”

NDX futures remain positive this morning, but beneath Tuesday’s high at 15002.30.  A chart sell signal lies at the trendline at 14800.00.

DJIA futures are down this morning, but no sell signal after having made a secondary high at 35069.18 at yesterday’s open.  The all-time high remains on May 10 at 35091.56.  This market is too easy to misread.  The fact is, unless the INDU cracks that high, this is a most bearish setup..

VIX futures challenged the 50-day Moving Average this morning at 17.98, but settled back beneath it.  As you can see, a signal may be imminent..  However, due to the low 50-day, we will wait for the Hi-Lo for additional confirmation.

The NYSE Hi-Lo Index closed at 70.00 yesterday, showing poor breadth in the market action.  However, it does not yet constitute a sell signal.  A close beneath 0.00 would confirm the sell signal, since that would be our breakdown point.

China’s Shanghai Composite rose to 3565.03 this morning, testing Intermediate-term resistance at 3568.72.  A Head & Shoulder neckline awaits at 3485.00 which confirms our sell signal.  It remains on an aggressive sell signal beneath Intermediate-term resistance.  The tech-heavy index offers a strong influence on the NDX, which is still positive.

ZeroHedge observes, “Following Q1’s record-breaking surge in China’s YoY GDP (thanks to base-effect malarkey and a massive credit impulse), tonight’s Q2 GDP was expected to slow drastically (especially given the crackdown on investment/real estate deleveraging and the collapse in the credit impulse)…

Source: Bloomberg

The question is how much? Consensus estimates called for an 8.0% YoY GDP rise, but whisper numbers were notably lower with Bloomberg Economics’ Shu noting that various early indicators are consistent in pointing to some weakening in consumption in June.

“On balance, these indicators suggest production growth – after base effects are taken into account – may have slowed, but only a touch.”

The official services PMI fell to 52.3 in June from 54.3 in May, while its Caixin counterpart showed a much steeper slide from a strong reading to just slightly above 50 – the line between expansion and contraction.

The headline GDP growth figure printed a very slightly disappointing +7.9% YoY”

BKX remains on a sell signal beneath the 50-day Moving Average at 127.35, but frustrates the bears by remaining above the Head & Shoulders neckline at 118.70.  After a respectable second quarter, banks face a bleak future.

ZeroHedge reports, “Morgan Stanley shares dropped as much as 2% after the bank – which otherwise reported a solid set of numbers beating on the top and bottom line – became the latest to report disappointing second-quarter fixed-income trading revenue of $1.7 billion came in below analyst expectations for $1.9 billion, and tumbled 45% from a year ago even as the bank’s dealmakers generated the second-most profitable quarter ever thanks to $2.38 billion in investment banking revenue.

TNX may be retesting mid-Cycle support at 12.97 today as it declined to 13.20.  This retest offers an aggressive buy signal (sell signal for UST) as it may regain its strength through the weekend.

7:10 am

Good Morning!

I have an 8:00 am meeting, so this blog will be brief.

SPX futures declined to 4250.12 before bouncing back to positive (above 4370.00 cash) this morning.  Yesterday’s cash market came awfully close to the 4399.00 mentioned as a major Wave relationship target.  This may have allowed the decline to begin.  Major bearish gamma strikes lie at 4370 and at various levels beneath that., so this may cause the reversal to gain momentum.

VIX futures dropped to a low of 16.66 this morning on the monthly options expiration day.  There are 700 more calls than puts at 17.00, so the VIX levels must be “controlled” to prevent a runaway VIX.  The picture I get this morning is that everyone appears to have their finger on the trigger.  Today may be a very interesting day.

TNX futures have made a shallow retracement to 13.88 after reaching 14.23 in the overnight session.  The Cycles Model suggest further strength by the end of the week, so further strength today may be problematic for the equity bulls.

3:30 pm

I had been warning since yesterday that trending strength was on the increase.  It appears that the increase in strength will continue through the weekend.  A breakout above the 50-day Moving Average at 15.37 may be in order…

ZeroHedge reports, “After two mediocre coupon auctions were staggered on Monday ahead of today’s sale of 30Y paper in the form of a 29-Y 10-Month reopening, the bond market seemed content that there would be no fireworks. Alas, the bond market was wrong again, because moments ago the Treasury sold $24BN in what can only be called an ugly auction, if nowhere near as ugly as the infamous February 7Y auction.

With the When Issued trading at 1.976%, the market was expecting the first sub-2% high yield since February. It wouldn’t get it because the auction priced at exactly 2.000%, tailing the When Issued by 2.4bps, the biggest tail since last August.

The Bid to Cover of 2.193 was also quite ugly, down from 2.29% last month and the lowest since February. It was also below the six-auction average of 2.32.

The internals likewise were disappointing, with Indirects taking down 61.1%, down from 64.0% in June and below the 62.4% average. And with Directs taking down just 16.6%, the lowest since November, Dealers were left with 22.3% of the allotment, the most since October.”

3:15 pm

SPX had declined beneath its Cycle top resistance at 4377.00.  This puts us on alert that the probability of a reversal is at hand.  For tomorrow’s SPX option expiration, there are 1000 more puts than call contracts at 4370.00!  Should the SPX continue down, we may see an acceleration to the downside.  I had been commenting that there was evidence of substantial distribution by institutional investors.  See the comment below.  Is Goldman Sachs pulling out the rug from under us?

ZeroHedge remarks, “While most analysts and traders were digging through Goldman’s investment banking and trading results – of which the former came in stellar while trading, especially in FICC, was mediocore…

… when the bank reported its second best quarter on record, there was some more notable slide in the bank’s Q2 earnings presentation, and it had to do with what Goldman is doing for its own prop, or “asset management” book.

As shown in the table below, Goldman’s Asset Management (F/K/A “prop”) also had a stellar quarter, generating a record $5.1BN in net revenue, more than double the year ago quarter.”

8:15 am

Good Morning!

Earnings Season is kicked off with two Major banks, Goldman and JPM.  SPX futures made yet another all-time high at 4378.62.  Futures currently trade about 12 points beneath the cash market, suggesting a morning high near 4390.00.  The Cycles Model suggests another Master Cycle high may be due.  Notice that the last two Master Cycles ended during options week.  This one may be due either this week or early next.

ZeroHedge reports, “The dollar spiked after the much hotter than expected CPI print…

Source: Bloomberg

Stocks were slammed…

…and bond yields rose…

VIX futures made a low of 15.96 last night, but spiked higher this morning.  Note the coiling action of this year-long pennant formation.  This pennant infers a move as great or greater than last year’s rally (approximately 75 points).

Yesterday, NorthmanTrader observed, “Last week in “Crushed” we talked about a coming volatility spike and sure enough $VIX spiked to over 20 from the 15 handle in a matter of days only to be crushed again. Thursday’s one hour 1.7% dip on $SPX was once again ferociously bought and new highs have once again ensued, no matter what the internal picture of the market may be, which continues to rally irrespective of the lack of participation underneath the surface.

Just this morning we got a taste of this:”

NDX futures also made a new all-time high, but switched direction at 7:00 am and are clearly in the red as I write.  What has triggered this is unknown, but it appears to be serious.  Is this the Master Cycle High?

US 30 futures turned down at 7:45 am after a flat overnight session.  Note that a new all-time high has not been accomplished.  This has serious implications going forward , not only due to a Master Cycle change, but because a lower high infers that the most violent of declines may be straight ahead in Wave 3.

BKX, our proxy for market liquidity is sitting on the neckline of a Head & Shoulders formation that implies an approximate 25% decline, or greater.  A breakthrough at 118.70 appears to “pull the plug” on market liquidity.

ZeroHedge reports, “”Transitory” or not? That’s the question today as all eyes dives into the details behind the surge in Consumer Prices for signs that Powell’s plan is failing. BofA forecast headline and core CPI prints to come in hotter than expected (and they’ve nailed every print this year) and they were right again with a massive beat – Headline CPI rose 0.9% MoM (against expectations of +0.5%), the biggest MoM jump since June 2008. This sent YoY headline CPI soaring to +5.4%,”

TNX is trading on strength this morning and may be due for stronger moves in the next week or so.  This is especially ironic, since a 10-year auction was held yesterday.

ZeroHedge reports, “inety minutes after today’s first auction, when the Treasury sold $58 billion in a somewhat subpar sale, moments ago the Treasury followed up the 2nd coupon auction of the day when it sold $38 billion in benchmark 10Y paper in today’s 9-year 10-month reopening which also could have gone better.

The high yield of 1.371% – which stopped through the 1.374% when issued courtesy of a substantial concession throughout the day – was well below last month’s 1.497% and was in fact the lowest high yield for the tenor going back to February when it priced at 1.155%. However, the Fed’s hawkish pivot which spooked the bond market with traders fearing about the plunge in r* has pushed yields sharply lower in recent days and sure enough today’s 10Y auction yield was the lowest in 5 months.

Besides the dip in the high yield, the auction also saw the bid to cover slide to 2.39 from last month’s 2.58 and the lowest since April’s 2.36.”

USD futures leaped to a high of 92.71 this morning.  The Cycles Model suggests a strong follow-through for the next week or two.  A new Master Cycle high maybe due by the end of the month.