The Practical Investor

8:45 am

Good Morning!

DJIA futures made a morning low of 34548.00 after making its retracement high on Friday.  It has not broken above the May 10 high, which puts it in a very dangerous position.  Should the decline start here, it may be quite strong as it begins Wave 3.  The DJIA is a destination for institutional money.  Retail investors are not buying the dip here.   But money flows are coming into the market…for the time being.

ZeroHedge observes, “Despite the hiccup last week, SPX has managed to print a new all time high. This last sell off lasted for less than a day, which is telling you a lot about the upside panic.

There are many reasons for the sell off last week, but we will leave that to pundits to debate.

What about flows?

Money market fund inflow since Jan 2019 stand at $1.707 trillion. Add to this the bonds inflow and what GS calls the “defensive buffer” equals some $3.2 trillion.”

SPX futures are narrowly lower as traders await the Fed, inflation and earnings season.  The new marginal all-time high on Friday came as a bit on a surprise, but it completes a 9-wave impulse.  Primary Wave [5] is 4 X Wave [1] at 4399.00,  so there is a possibility that the SPX may probe for the trading channel trendline.

ZeroHedge reports, “After hitting an all time high of 4,365 at the close on Friday, U.S. futures drifted lower to start the week as investors awaited the start of Q2 earnings season starting this week in order to gauge whether corporate profitability can support equity valuations. Treasury yields dropped, as an upsurge in new infections caused by the Delta coronavirus variant pushed some investors into the safety of bonds and capped commodity price gains on Monday. At 715am emini S&P futures were down 7.5pts or -0.17% to 4,352 , Dow Jones futures were down 150pts or down 0.42% and Nasdaq futures were up 30 pts or +0.20%.”

VIX futures rose to a morning high of 17.50.  Last Thursday’s breakout above the 50-day Moving Average may be our signal to accumulate VIX shares , futures or options.

TNX appears to be consolidating above the mid-Cycle support at 12.88.  The Cycles Model indicates a possible strong reaction to the news today that may indicate rising rates again.

9:05 am

It’s been a couple of weeks since I last reported on the GSCI Ag Index and it is due for an update.  It now appears that GKX may stretch its correction at least through options expiration next week and possibly through mid-August as well.  It is currently resting on a Head & Shoulder neckline at 384.00 and may break down in response to liquidity flight from the markets. While the consequences in the Ag Index may not be as dire as in the stock indexes, it would pay to know the “lay of the land.”

A standard 61.8% retracement would decline to 336.80, which falls inside the Cycle boundaries.  However, this decline may be much stronger, so be warned.

We are already seeing food inflation at the retail shelves, called shrinkflation.  I have noticed at Kroger that they have stacks of the old, larger cereal boxes at the end of the aisles on sale while the new, smaller cereal boxes are on the shelves at a shrinkage of more than 10%.  Most shoppers won’t notice the difference.

ZeroHedge reports, “World food prices fell in June for the first in 12 months, offering some relief for consumers and easing inflationary pressures.

According to a new Food and Agriculture Organization of the United Nations (FAO) report, the FAO Food Price Index, which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat, and sugar, dropped 2.5% in June, coming off a decade high, but still 33.9% higher than its level in the same month last year. The decline in the index was the first in 12 months.”

However, even higher prices due to supply and demand may be just around the corner.  ZeroHedge notes, “Kirk Hinz, a meteorologist with BAMWX, published an agriculture note Thursday which outlines “persisting rains” in some parts of the Southwest but “expanding dryness” in the north.

Hinz concentrates on the corn belt, which spans the Midwest. He said, “expanding drought into a crucial time of the year ahead of pollination.” This means that persistent dry conditions could affect pollination success – and if pollination is not successful this year because of drought and lack of water, then harvest yields this season could come under pressure.

“A lack of consistent rainfall across a big chunk of the US major corn production areas in the Midwest and northern Plains this year continues, with the expanding drought into a crucial time of the year ahead of pollination as well. Weather models have remained volatile recently in regards to how much of these major production areas will receive timely rainfall, but the trend recently has been to push previously forecast widespread nourishing rains further south that’s starting to be a growing concern (plus more heat building back in a mid-to-late month) ahead,” Hinz wrote. 

Here’s what happens to corn if pollination is unsuccessful. “

7:10 am

The Shanghai Composite Index made a new low this morning, setting off the Head & Shoulders formation (upper right).  This may be a short-term formation, but with long-term consequences.  It appears that it may also trigger the Cup with Handle formation while meeting the Head & shoulders target.

Chinese officials at the PBOC may be aware of the implications of this formation.  However, no amount of money can reverse a loss of confidence.

ZeroHedge reports, “Just two days after we said that “China Prepares To Cut Rates As Economy Stalls“, this morning China did just that when the PBOC announced it is cutting the Required Reserve Ratio by 0.5% for most banks, a move that will unleash about 1 trillion yuan ($154BN) of long-term liquidity into the economy and will be effective July 15.

The announcement reduces the amount of cash most banks must hold in reserve in order to boost lending to the economy as growth has sharply waned, and is expected to prop up China’s slowing economy, which as noted earlier this week saw its Caixin Service PMI drop to the lowest level since the covid crisis, badly missing expectations.

Liquidity may be boosted in China but it may be tightening here in the U.S., the largest market.  The BKX (proxy for liquidity) tested its Head & Shoulders neckline at 118.70 yesterday and bounced to 121.11, but closed only 104 ticks from triggering the formation.  Should it slip through at anytime today, the liquidity plug may be pulled for it and the stock market.   Next Wednesday may be the Master Cycle low for the BKX with 4 out of 6 momentum indicators at full strength next week.  The average Master Cycle low only needs 1-2 momentum indicators at strength.  This may be a doozy.

SPX futures ventured higher in the overnight market to 4336.88 early this morning after yesterday’s rout.  Dealer gamma is net positive, so it makes sense to keep the market in line for options expiration.  The net open interest in calls is positive from 4300.00 and up, with the largest number of net call contracts at 4325.00 (4269, to be exact).  Dealers walk a fine line to keep payouts on either side at a minimum, so pressure is on to close near 4300.00.

ZeroHedge reports, “After a mini-rout on Thursday which briefly pushed the S&P into negative-gamma territory below 4,300, European stocks and US equity futures rebounded on Friday as energy and banking shares rose from a sharp selloff that was triggered by growth worries and has put the indexes on track for their biggest weekly fall since mid-June. At 7:30 a.m. ET, Dow e-minis were up 216points, or 0.61%, S&P 500 e-minis were up 18.5 points, or 0.43%. Nasdaq e-minis were down 3.75 points, or 0.02% after a report that Joe Biden is taking aim at big tech by encouraging regulators to reinstate net-neutrality rules. The dollar weakened against a basket of major currencies.”

VIX futures declined beneath the 50-day Moving Average to 17.16 this morning and may be completing a corrective move.  Every effort is being made to “steer” the  market and the VIX applies the most leverage with the least outlay.  However, should the SPX close beneath 4300.00, the VIX may explode higher.

TNX futures rose to an overnight high of 13.48, opening the cash market at 13.38.  The new Master Cycle has nearly a month to go with its target near 19.71.  The short-term target is the 50-day Moving Average at 15.45.

ZeroHedge remarks, “While stocks have been a (mostly) one-way ticket higher, 2021 has been a rollercoaster for interest rates: after 10 year yields rose +83bps in Q1, they fell -27bps in Q2 and have started Q3 by already falling another -12bps.

So yesterday, when commenting on the latest violent move in yields lower which left a majority of rates traders (who have been blindsided by the move) dazed and confused, we quoted JPM’s rates strategist Jay Berry who said that “the 10+bps decline in 10-year yields since Friday morning seems outsized all considered” and added that 10-year Treasury yields was 25bps too low relative to model-implied fair value, a 3-standard deviation divergence, and the largest such deviation since the early fall 2020.”

USD futures appear to be consolidating in a narrow range.  There appears to be a 2-week correction just ahead.  The probable target may be the 50-day Moving Average at 90.88, a near-50% retracement.

2:15 pm

Here is the SPX chart with updates.  There is a new Head & Shoulders formation.  A bit lopsided, but a legitimate one.  Should it be triggered, we may se a decline beneath 4200.00.  There is yet another potential formation that may agree with “Point 6” to be discussed later.  The Cycles Model tells us the decline may become quite intense on Monday, throwing next week’s monthly options expiration into utter chaos.  The week following options expiration also shows a potentially intense decline into the end of the month.  Be prepared for some very large moves in both directions.

It does not appear that the smart money is waiting for 3:00 pm to sell.  They are probably front-running the mutual fund holders who cannot exit until the final half-hour.

1:15 pm

While the NDX has not yet crossed its Ending Diagonal trendline (see bottom entry) the NDX Hi-Low Index has plummeted  to -54.44 this morning before a slight recovery, but it remains beneath the opening price.  The signal occurs at 0.00, so we have a NDX sell signal from this indicator.  For those who want extra assurance, a plunge beneath the trendline at 14600.00 confirms this Hi-Lo signal.

1:05 pm

BKX tested the neckline of its Head & Shoulders formation at 118.70 this morning, but did not break through.  It is only a matter of time.  In the meantime, there are other indicators of shrinking liquidity.  Weaker banks are pulling in their lines of credit .  We may also see credit card companies lowering their lines as well.  The doors start slamming shut just as the need to answer margin calls arises.

ZeroHedge remarks, “Wells Fargo just announced that it’s shutting down all of its existing personal lines of credit – a popular product offered by the retail-focused Wall Street giant – a move that will likely infuriate legions of customers.

The revolving credit lines, which will be shut down in the coming weeks, typically allow users borrow $3K to $100K, were pitched as a way to consolidate higher-interest credit-card debt, pay for home renovations or avoid overdraft fees on checking accounts attached to the loan.

Customers have been given a 60-day notice that their accounts will be shuttered, and remaining balances will require regular minimum payments, according to the statement.

According to CNBC, it’s the latest “difficult decision” facing Wells CEO Charlie Scharf, who is being forced to make cutbacks to the banks’ business thanks to restrictions imposed by the Federal Reserve years ago as punishment for the bank’s criminal scandals like the now-infamous scandal whereby branch managers opened credit lines for customers without permission. a scandal that outraged the public.”

12:00 noon

SPX appears to be completing a 50% Fibonacci retracement (at 4325.14) while challenging gap resistance at 4321.07.  This may be “it” for the bounce.  If not already short, this may be an excellent entry point.

ZeroHedge remarks, “Stocks are trading just 1% below their all time high, yet judging by today’s open there was sheer capitulation panic.

There is a reason for that: as noted last week, the market breadth has been collapsing similar to what we observed last summer when a handful of market “generals” did all the heavy lifting. Well, as Bloomberg’s Ye Xie shows market breadth has only 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.

Putting these numbers in context, Xie writes that “over the past three decades, there were only two periods when we saw this negative divergence (record stocks with breadth below 50): in 1998 and 1999.” Of note, the latter print took place just before the dot com bubble burst.”

9:45 am

Normally we would see a bounce at the trendline (which still may happen).  However, a further decline beneath Short-term support at 4282.31 confirms our sell signal.  This is one such signal that we may not wish to hesitate on.

ZeroHedge explains, “It’s already been a harrowing session for bulls who have forgotten what the color red looks like after 8 all time highs in the past 9 trading sessions, but it could get a whole lot worse because with spoos down 1.3% just under 4,300 as they rebounded from 4,280…

… as the VIX surges above 20…

And with the cash index set to open just  over the critical 4300 line, SpotGamma notes that this means that gamma levels will start near zero, which implies a larger 1% max move for today. But it is under 4300 where the gamma flip line rests (below 4300 a drop move become self-reinforcing), and so SpotGamma looks for a spike in volatility if that level is broken. To the upside 4330 remains major resistance, although it’s unlikely we will get there today. .”

9:40 am

The NYSE Hi-Lo Index gave a sell signal this morning, opening at 2.00 and last seen at 0.00.  That, combined with the VIX signal (above the 50-day Moving Average) gives us a clear go-ahead to pick our best entry in short positions.

7:45 am

As of yesterday’s close, the BKX (proxy for market liquidity) closed within four points of its Head & Shoulders neckline.  Once the neckline is crossed, this represents the potential removal of all new liquidity since the the year-end.  Breaking the Ending Diagonal trendline infers a complete retracement of the Diagonal.  There is yet another potential formation that suggests a decline to or beneath the March 2020 low.  The Cycles Model suggests this may happen by the end of August.

ZeroHedge observes that this agrees with the outlook of Zoltan Posar, “With the Fed’s overnight reverse repo facility hitting a record $992 billion on June 30 (a number which included a generous dose of quarter-end window dressing, having since shrank by about $200 billion)…

… earlier this week we reported that according to the now-institutionalized (following his extensive WSJ profile this past weekend) repo guru, Zoltan Pozsar, said that as part of the Fed’s ongoing reserve sterilization which was unleashed when the Fed hiked the repo facility rate to 0.05% or higher than most short-term bills, he expected that some $1.3 trillion in flows would shift away from bills and into the Fed’s RRP facility by the end of August.” (my emphasis)

SPX futures are currently testing Short-term support at 4280.27.   Normally, I would put an aggressive sell signal beneath this level.  However, by declining beneath the upper Diagonal trendline at 4300.00, SPX has effectively ended its throw-over and may now be in full reversal.

Tomorrow’s options expiration give the nod to the puts at 4295.00 and lower.  We may expect a bounce into the Max Pain zone between 4300.00 and 4325.00 to frustrate both the bulls and bears.  However, accidents may also happen to upend the apple cart in time for weekly options chaos.

ZeroHedge reports, “After S&P futures printed at new all time highs on 8 of the past 9 days, one can almost feel sorry for the euphoric bulls (and meme stock traders) who woke up this morning to headlines such as this:

• *S&P 500 INDEX FUTURES RETREAT 1.5%
• *NASDAQ FUTURES DROP 1.5%
• *STOXX EUROPE 600 INDEX DROPS 1.5% TO SESSION LOW

And sure enough, just one day after it appears that nothing could stop markets from exploding to recorder highs day by day by day, on Thursday morning both the reflation and growth trades were a dumpster fire, with Dow e-minis plunging 475 points, or 1.37%. S&P 500 e-minis were down 58 points, or 1.34% and Nasdaq 100 e-minis were down 190 points, or 1.3%, the VIX jumped above 20 after trading at 14 just a few days earlier and 10Y yields dropped as low as 1.25%. Bitcoin tumbled back down to $32,000.”

VIX futures rose to 21.229 this morning, possibly testing the mid-Cycle resistance at 221.95.  However, it did cross the 50-day Moving Average at 18.03, effecting a buy signal in the VIX.  We await the open to check the levels of the NYSE Hi-Lo Index for a possible confirmation of the SPX sell signal across the board.

TNX futures hit 12.50 at 6:45 this morning, but has since bounced, opening at 12.78.  The mid-Cycle support/resistance is at 12,80, leaving the status of TNX in limbo for the time being.  However, today is day 282 in the Master Cycle, which hardly seems able to be stretched even more.  Fortunately, Elliott Wave guidelines suggest this Wave structure may still be valid, unless TNX declines beneath the top of Wave 1 at 11.87.  The target remains at 19.71 (or higher) by mid-September.

ZeroHedge remarks, “It was a long time ago since we woke up with VIX printing +25% in early morning trading. Summer is here, liquidity is shitty and the crowd is feeling a huge p/l pain as consensus trades continue puking as the recovery seems to have suddenly died.

The US 10 year yield continues falling, currently at 1.26%. The trend line is broken, we are approaching the 200 day moving average and RSI has not been this oversold since March 2020, but recall yields have a slight mean reverting aspect to consider.

The crowd remains confused. JPM writes today:

“The continuous rally in USTs continues to surprise both ourselves and our clients…”

Bill Blain at ZeroHedge asks, ““How many impossible things can you believe before breakfast?”

US 10-year bonds and US equity are in full rally mode. They show contradictory expectations for a stalled recovery and future strong growth! How can that be? Because the market is about what participants collectively think – and how markets think has been utterly changed by 12 years of monetary experimentation, repression, and distortion. We’ve got to change the way we think about markets.

…and sometime during a discussion on markets my chum, CIO of a very large family office, spotted something interesting:

• The yield on the 10-year US Treasury Bond was exactly equal to the Dividend Yield on the S&P 500. Both were 1.34%.”

USD futures appear to consolidate yesterday’s Master Cycle high (day 259).  There may be a two-week correction back down to the 50-day Moving Average at 90.85 before moving higher.

The Shanghai Composite Index declined to its neckline at 3520.00 in the overnight session.  This threat of a breakdown has a potential knock-off effect on the NDX as you will see below.

NDX futures fell to an overnight low at 14544.62, just above the diagonal trendline.  There is no sell signal in the NDX yet.  However, any further weakness in the Shanghai Composite may  push the NDX into a sell signal as well.

7:45 am

Good Morning!

NDX futures continue to make all-time highs, although only by a few ticks.  Retail investors continue to buy the dips while institutional investors are absent.  The Fed is furiously pumping while the markets begin to sag.  Someone should tell Jay Powell that the markets rise (and fall) on confidence, no matter how much money is thrown at it.  As more big (smart) players leave the game, the realization that it isn’t the same trickles down to the retail end who are constantly searching for momentum plays until there are no more.

ZeroHedge comments, “Just a few days after Goldman trader Scott Rubner observed last week that the market is entering the best 2-week seasonal period of the year …

… he is out with a follow up note, in which he first points out a striking market statistic:

S&P 500 logged 7 straight trading days with a new ATH, this has only happened 5 other times since 1928. If today logs another all-time high, that has only happened 3 other times in history. No streak marked an immediate or significant top in the markets. Since 1928, if the S&P 500 is above >10% in 1H, then 2H performance is nearly 2x the median final 6 months for all years.

… but it was his observation on the rate of fund flows that was truly remarkable:

In 18 years of tracking flow of funds I could not imagine typing these large of numbers. I needed to check them twice. This was my busiest weekend and most incoming client questions of 2021 by far.”

On the opposite side of the spectrum DJIA futures remain flat after yesterday’s drubbing.  This is the (increasingly former) home of major institutions and hedge funds that insist on liquidity and safety.  The peak remains on May 10 and the tires on this buggy are slowly deflating.  The wheels may come off sooner than one can imagine as the DJIA crosses beneath the 50-day Moving Average at 34251.50.  The final destination in the next 90 days may be beneath 17485.00 .

SPX futures made an overnight high at 4345.00, unable to beat yesterday’s (futures) high of 4347.00.  The SPX still appears to be bullish, but the fervor may be gone after last week’s blow-off top.  Today is day 271 of the current Master Cycle, making it a very stretched affair should a new high be made.

ZeroHedge reports, “One day after the S&P broke its near-record winning streak of 7 consecutive all time highs, futures resumed their grind higher as world stocks steadied below recent record peaks, while the Nasdaq jumped to a fresh all time high as the continued drop in Treasury yields supported tech-heavy growth stocks, with investors eyeing today’s June FOMC minutes for clues on policy support going forward. At 730 a.m. ET, Dow e-minis were up 21 points, or 0.06%, S&P 500 e-minis were up 8.25 points, or 0.19%, and Nasdaq 100 e-minis were up 89.25 points, or 0.59%. 10Y yields slipped for the seventh straight session, amid concerns about the economic outlook and coronavirus variants, helping Nasdaq futures rise premarket.

The NYSE Hi-Lo Index tells us more about the waning confidence in the markets.  The majority of June was spent beneath the 50-day Moving Average at 215.38.  While not enough for a sell signal, it shows a quiet liquidation/distribution since the high on May 10.  I had mentioned that a close beneath 50.00 may be a sell signal.  Under the current outlook, a close beneath the June low at 0.00 may be a better indicator of a sell signal.

VIX futures are flat this morning after testing the 50-day Moving Average at 18.08 yesterday.  The VIX appears calm, but its declining wedge (pennant) formation suggests a rally at least as large as the one in 2020 from a higher base.

TNX may have (finally) made its Master Cycle low at an incredibly stretched 281 days this morning.  Treasury shorts are being pummeled.

ZeroHedge remarks, “After a modest stabilization overnight, the collapse in 10Y yields has resumed this morning tracking the latest drop in oil, which is down following a WSJ report that the UAE plans to “sell as much crude as possible before demand dries up” and aims to boost production and market share unilaterally amid high demand in threat to OPEC stability.

As a result of the latest deflationary gust, 10Y yields have dropped below 1.30%, sliding to the lowest since February 19…

… as the short squeeze discussed yesterday – as a reminder the latest JPM Treasury Client Survey found a near record number of shorts – accelerates.”

USD futures made an overnight high at 92.60 as it lingers near its Master Cycle high.  The Cycles Model calls for an approximate two week decline to the 50-day Moving Average at 90.87 before resuming its rally to 96.00.

10:35 am

The Dow Jones Industrials have declined over 300 points in the first full hour of the cash market.  It appears that the DJIA is leading the decline at twice the velocity of the SPX decline.  That is attributable to the nature of a Wave 3.  This decline also tells us that institutions are leading the wave of selling, as retail investors usually come in later in the day.  This may be an Uh-Oh moment for retail speculators.

RealInvestmentAdvice comments, “Is the retail investor rampage over?

Since the crash in March 2020, the “retail investor army” marched propelled by chat rooms and social media channels. As discussed previously in “Blind Leading The Blind:”

• In all, 46% have used social media for investing information in the past month.
• 22% of Gen Z investors say they were younger than 18 when they started investing, versus 8% of millennial investors. 
• Only 36% of young investors plan to use that money for retirement. 35% will make additional investments, while 19% will use the funds to pay for a major purchase.”

7:45 am

Good Morning!

SPX futures are lower this morning after making a new all-time high in the futures.  We shouldn’t be surprised by either.  SPX hit several relationships last Friday.  First, it was day 266 of the Master Cycle.  Second, Wave 5 is equal to Wave 1 at 4322.00, so it overshot that relationship.  Third, the DJIA, which is the most liquid index containing the largest companies failed again to make a new high on Friday and is also declining this morning along with the Transports.  Fourth, the indices are approaching 60 days from peak-to-peak (May 7 in the SPX and NDX, May 10 in the DJIA and Transports), which is one of the most basic Trading Cycles.

ZeroHedge reports, “Stock futures were steady, if drifting lower from overnight highs in muted trading as traders were watching whether Monday’s surge in oil which pushed WTI to the highest price since the November 2014 OPEC Thanksgiving massacre would depress stock sentiment after yesterday’s breakdown in OPEC+ talks. As of 730am, Emini S&P futures were down 2 points ot -0.05%, Dow jones futs were down 28 points ot -0.08% and Nasdaq minis were up 16.75 or +0.12%.”

NDX futures are modestly higher, having reached a new all-time high in the futures at 14743.38.  This index seems to be the most reluctant to reverse course.  However, it too appears complete.

ZeroHedge observes, “Stocks around the world continue to smash one record after another, and some of the world’s biggest money managers have a simple message: Get used to it.

The likes of BlackRock Inc., State Street Global Markets, UBS Asset Management and JPMorgan Asset Management expect equity markets to keep rising in the second half of the year, with many investors increasingly looking outside the U.S. for more returns. They cite reasons such as the economic recovery, continuing central-bank accommodation and a lack of alternatives amid low rates and the tightest credit spreads in a decade.

“Many indicators suggest there is still overwhelming liquidity in the system that is looking for a home,” says Carsten Roemheld, capital markets strategist at Fidelity International. Flows will continue to go into equities, though return expectations should be much lower from here, he says.”

The Fly in the Ointment for the NDX appears to be the tech-heavy Shanghai Composite Index, which is sitting on the neckline of a credible Head & Shoulders formation after making its all-time high on February 18.  A decline beneath the neckline is certain to have a knock-on effect to the NDX.  We should be seeing more reporting on Chinese stocks as the SSEC loses its grip.

VIX futures rose to a high at 15.89 over the holiday weekend.  The 50-day Moving Average is at 18.10 where a buy signal may be given.

TNX appears to be continuing  its Wave 4 low to 13.52 on a very stretched day 280 of its Master Cycle.  This may be typical Wave 4 pattern.  The Cycles Model also labels this as a “triple” Trading Cycle low.  A single Trading Cycle calls for a 5-10% move out of that reversal.  However The “triple” indicator suggests a potential rally over 30%.

ZeroHedge reports, “As stagflationary signals grow louder (after this morning’s ugly Services survey data), Treasury yields are plunging with 10Y back below 1.50% (testing the post-Fed/Bullad/Quad-Witch chaos puke lows)…

Source: Bloomberg

And 30Y yields have plunged back below 2.00%

Source: Bloomberg

Happy Independence Day!

Since the ongoing market commentaries (see below) insist that the market has further to rise, let me take the opposite view.  As reported on Friday, the DJIA has reached its target of 34800.00.  That was the round number.  The actual target is the top of Wave [a] at 34849.30.  This completes an Expanded Flat correction, where [b] is deeper than [a] with Wave [c] bouncing back to the top of Wave [a].

I had announced that the Wave pattern was complete on Friday.  Here are a couple of rules that will help.  While the Wave pattern has all the elements necessary, it may still expand simply to reach the top of Wave [a].  The final top of an Expanded Flat correction does not have to be precise, suggesting Friday’s high may already be enough.

The bailout number is 34876.00 beyond which the third Wave of [c] becomes the smallest, which violates one of the few Elliott Wave Rules and opens the door for a new all-time high in the DJIA (which is what virtually everyone is predicting).

Why am I sticking to my guns?  First, we know where this pattern fails (34876.00).  Second, Wave [iv] of 5 is a triangle, which indicates “one and done.”  A Triangle in that position announces that the final Wave higher before a trend change follows.  That is why the DJIA has not been able to make new all-time highs, while the SPX and NDX had no Triangles and therefore could expand further to new highs.

The DJIA consists of the largest and most liquid stocks in the world.  Large international investors and institutions invest there.  This suggests there is liquidation among the largest and best known companies by the largest players.  It also means that retail investors may be holding the bag at this point.

Tomorrow is a market holiday, but overseas investors will still have access to the DJIA through overseas markets and futures.  The pattern could easily be finished in the futures market while we celebrate.  Tuesday’s market might be dancing to a different tune.

RealInvestmentAdvice comments, “Market Rallies To All-Time Highs

With the 4th of July weekend upon us, this week’s newsletter will be slightly shorter than usual. Such will ensure you “pitmasters” can get to work doing what you do best.

As we discussed last week, the market not only got off the mat and rallied back to new highs. That action continued through this week.

The technical backdrop is not great. With the market back to 2-standard deviations above the 50-dma, conviction weak, and investors extremely bullish, the market remains set up for additional weakness.

However, we are in the first two weeks of July which tends to be bullishly biased. After increasing our equity exposure previously, we will give the market the benefit of seasonality for now.” 

2:12 pm

BKX, the proxy for market liquidity remains beneath its 50-day Moving Average.  Perhaps this is also an indicator that the market may be exhausted.

ZeroHedge observes, “While today’s jobs report came in a bit on the weak side despite its impressive headline beat of 850K jobs created in June (a majority of which were teachers and bartenders) with wage growth slowing and the unemployment rate rising, we expect the Fed to look at today’s jobs data and try to again kick the can although whether this month or next, the inevitable taper announcement is coming not too long ater, the first rate hike as well. The only question is when.

Meanwhile, until that happens, Bank of America’s CIO Michael Hartnett reminds us that every day for the foreseeable future, as has been the case every day for the past 6 months, central banks bought $10 billion of bonds every day, the US federal government spent $20 billion every day, global stock market cap grew $73 billlion every day, and US bond & stock issuance averaged $20 billion every day.

The result: the just completed first half of 2021 was the 7th best for global stocks in the past 100 years…”

2:02 pm

SPX is finally giving us a blow-off top at 4350.00 today.  This is a top to sell into.  By the way, Primary Wave [5] is almost exactly 38.2% the length of Primary Wave [1].   This supports the probability of this rally being a huge Ending Diagonal since 2009.

1:25 pm

The DJIA has hit its target at multiple levels and may be ready for its reversal.  The transports have also stayed beneath their May 10 high in a Dow Theory confirmation.  This turn will whip the other indices (currently in blow-off tops) around in what may be a flash crash with multiple gaps down and investors trapped with ever growing losses.

ZeroHedge comments, “Michael Burry caused a stir on twitter (and subsequently in the financial press) late last month when he tweeted (and quickly deleted) that he expected “the mother of all crashes” would soon “spell doom” for crypto.

While he’s gone quiet again on Twitter, on Thursday, Barron’s published an interview with the infamous Scion Asset Management founder (whose story was featured in “the Big Short”) where Burry shared his skepticism of the “meme stock” craze, including GameStop, a company whose shares he correctly identified as undervalued back in 2019 (though he sold his position shortly after the price started trending higher in late 2020, missing out on the late-January surge in the company’s shares).”

7:20 am

Good Morning!

Those of you who love the outdoors will understand why it is so hard for me to tear myself away from our family lakefront property in northern Michigan.  We did renovations during the day, so the evenings were a favorite time to unwind and enjoy the campfire and the view.

SPX futures reached an all-time high of 4318.12 and may be finishing up its extended performance.  In the cash market Wave [v] equals 1.25 X Wave [i] at 4323.00, so there may be another push higher today.  The two things keeping the markets higher are the end of quarter window dressing (now over) and options expiration ending today.

In today’s options expiration, the calls outnumber the puts starting at 4375.00 and above, while the puts dominate below that level.  If I were a dealer, I would want to see the SPX decline to that level, since buying the index for only a day would be very costly if I were caught short.

The non-farm payroll report may spark a move in either direction, so we may know sooner than later today.

8:30 am

The non-farm payroll number came in at 850, missing the Fed’s bogey of 1 million, but above the 720,000 minimum.  ZeroHedge says, “After several months of major payroll disappointments, the BLS finally realized it has to come up with a strong number and it did just that moments ago when it reported that in June the US added 850K jobs, well above the 720K expected, and almost 50% more than last month’s 583K, in a welcome sign that the chronic labor shortages may finally be ending.”

ZeroHedge reports, “Another day, another record high for US stocks which have not hit a new all time high virtually every single day since the post-FOMC mini tantrum when Biden met with Yellen and Powell. At 7:30 a.m. ET, Dow e-minis were up 15.50 points, or 0.05%, S&P 500 e-minis were up 4.50 points or 0.1% to a new record high of 4,315, and now above Goldman’s year end price target of 4,300 and Nasdaq 100 e-minis were up 29.5 points, or 0.2%.”

Tuesday’s Master Cycle low in the VIX came early as the futures hover above that level, so we withhold judgement until after options expiration whether it is in or not.  The Ending Diagonal appears complete, so it won’t be long to discover whether the new trend has begun.

NDX futures made another all-time high at 14613.00 as it rallies to its Cycle top at 14660.91.  Open interest in puts dominate at 14550.00 and below, leaving little room for error should the market hit an air pocket during expiration.

TNX futures are still hovering just beneath a triple resistance at 15.41 to 15.56 (the 50-day Moving Average).  Wednesday’s low at 14.38 is not the Master Cycle low since it was made on June 19 at the same level.  That suggests Waves [i] and [ii] may have been made with TNX coiled for a breakout.

USD futures reached a new high at 92.74 this morning as it rallies toward its intended target at 96.00.  It is due for a Master Cycle high by mid-week, possibly reaching its Cycle Top resistance at 93.70.

8:30 am

We are attending a family gathering at a northern lake for the next two days.  I will not be available for the blog tomorrow and possibly Thursday.

NDX futures made a new all-time (futures) high at 14512.38 at 6:45 am and has since retreated to the negative.   The Pattern is complete and Wave [v] is equal to 1.5 X Wave [i] at 14537.50.  NDX takes on a sell signal beneath the double trendlines at 14250.00.

ZeroHedge reports, “Global stocks were mixed and US futures edged to new all time highs as concerns over the Delta strain of Covid-19 spurred caution among investors. At 7:00 a.m. ET, Dow e-minis were up 46 points, or 0.13%, S&P 500 e-minis were down 1 points, or 0.02% after topping a new all time high of 4,283 earlier, and Nasdaq 100 e-minis were down 13 points, or 0.09%. The dollar strengthened and treasuries were steady while oil slipped and gold headed for the biggest monthly drop in more than four years.

While sentiment remains buoyant, investors are growing concerned by the latest evolution of the Delta variant, which is increasingly seen as a growing threat to the ongoing economic recovery in many areas, said Pierre Veyret, a technical analyst at ActivTrades. Even if the economic impact is “unlikely to be significant” in developed countries, “the inconsistency in vaccination campaigns in other parts of the world is likely to lead to an uneven recovery,” he said.”

SPX futures also made a new all-time high at 4282.88.  The cash market has made its target of 4291.00 yesterday, but the influence of the Industrials may keep it pegged near the top for another day or so as the DJIA has a target near 34800.00 (see yesterday’s final commentary).

VIX futures made a new low at 14.10 this morning, raising the probability of a new Master Cycle low today on day 243 of the current VIX Master Cycle.  The Ending Diagonal has been prolonged.  This is likely due to the fact that it is easily manipulated and has knock-on effects on the equity indexes.   The appearance of calm in the VIX gives a false sense of security as this formation acts like a coiled spring with a target of a complete retracement of the Diagonal.

TNX has pulled back to 14.90 as it chips away at the 50-day resistance at 15.33.  Additional resistance lies at the Intermediate=term level at 15.60.  A breakout may have dire consequences for the Fed, who appear to have control over rates.  That is simply not the case.  Once the breakout occurs, the Cycles Model foretells a month-long rally that may match or exceed its November 2019 high at 19.71.

ZeroHedge observes, “As in the stagflationary 1970s, the US Federal Reserve is once again denying that its own policies are the reason for a recent surge of inflation, even though there is good reason to think that they are. It is not too late to learn from past mistakes and reverse course – but the clock is quickly ticking down.

Fifty years ago, on June 22, 1971, US Federal Reserve Chair Arthur Burns wrote a memorandum to President Richard Nixon that will long live in infamy.

Inflation was picking up, and Burns wanted the White House to understand that the price surge was not due to monetary policy or to any action that the Fed had taken under his leadership. The issue, rather, was that “the structure of the economy [had] changed profoundly.” Accordingly, Burns was writing to recommend “a strong wage and price policy”:

“I have already outlined to you a possible path for such a policy – emphatic and pointed jawboning, followed by a wage and price review board (preferably through the instrumentality of the Cabinet Committee on Economic Policy); and in the event of insufficient success (which is now more probable than it would have been a year or two ago), followed – perhaps no later than next January – by a six-month wage and price freeze.”

Perhaps owing to Burns’s reputation as a renowned scholar (he was Milton Friedman’s teacher) and his long experience as a policymaker, the memo convinced Nixon to proceed with a wage and price freeze, and to follow that up with a policy of wage and price controls and guidelines for the entire economy.

For a time after the freeze was implemented, the controls and guidelines seemed to be working. They were even politically popular for a brief period. Inflation inched down, and the freeze was followed by more compulsory controls requiring firms to get permission from a commission to change wages and prices.

But the intrusive nature of the system began to wear on people and the economy because every price increase had to be approved by a federal government bureaucracy.

Moreover, it soon became obvious that the government controls and interventions were making matters worse.

USD futures are on the rise again in a probable rise to the Cycle Top at 93.78 in strength over the next week.  However, that may not be the extent of the rally, as it is due to resume through the end of July.

Gold futures plummeted to 1750.15 in the overnight market as it makes its way to test the Broadening Wedge trendline at 1725.00.  The Cycles Model just posted the sign, “Abandon all hope ye who enter here.”   Should the decline cross the trendline, the decline may continue through mid-August.

6:30 pm

During the week of May 10 I was looking for the all-time high in the equities markets.  Sure enough, the DJIA made its all-time high that very day (day 250 of that Master Cycle).  However, 5 weeks later, the SPX and NDX were again making new highs.  The Industrials have not.  The DJIA has one more attempt to make a new all-time high in the next few days. My calculation is that it may end in failure with a top near 34800.00.  Both the Cycle Top and the top of Wave [a] may provide maximum resistance.  Nobody has mentioned this, so it’s time to bring this out.

What this means is that the downtrend may already be in place.  The Fed and all the hopium-filled investors thought they can extend the rally without end.  This chart argues otherwise.  In fact, it the DJIA is poised at the top of Wave 3, it means that the other indexes reversal may be swift and strong.

8:00 am

Good Morning!

My wife and I handed off our eldest daughter to her new husband last week and, after the ceremony and celebration, heaved a sigh of relief.  The stress is gone, at least for now.

SPX futures remained flat over the  weekend, leaving open the possibility of yet another squiggle higher to match up Wave [i] with Wave [v] at 4291.00.  Another possibility is that Wave [5] equals Wave [1] X 4.25 at 4308.00.  Round number resistance at 4300.00 may also come into play.  Today is day 262 of the current Master Cycle, so the pressure for a reversal is on.

This week’s options expiration shows calls dominating at 4275.00 and higher, while puts are moving up to domination 4245.00 and lower.  This is the narrowest I have seen the neutral range of only 30 points.  Equity shorts have expanded since the FOMC meeting.

ZeroHedge reports, “S&P500 futures paused at fresh all time highs in a subdued session as traders eyed central bank support and awaited the June jobs report due Friday. European stocks dipped as new travel restrictions prompted by the Covid-19 Delta strain spurred a re-think of the reflation trade. The dollar and oil posted modest gains.

Contracts on the Nasdaq 100 led gains while the S&P 500 fluctuated following the best week for the underlying gauge since February following an agreement on President Joe Biden’s $1.2 trillion infrastructure spending deal (which however may prove to be a total dud) and waning concerns about a sooner-than-expected policy tightening from the Federal Reserve. At 730 a.m. ET, Dow e-minis were down 17 points, or 0.05% S&P 500 e-minis were up 3 points, or 0.08% and Nasdaq futs were up 42.50 ot 0.29% as FAAMG megacaps edged higher in premarket trading despite higher bond yields.”

NDX futures rose to a weekend high of 14388.75, testing the June 24 high.  It may require yet another probe higher to meet or exceed 14431.00 to meet its target where Wave [v] equals Wave [i].  This weeks open interest in call options dominate at 14300.00 and higher, while put options outnumber calls at 14260.00 and lower, leaving the NDX in a positive range, but subject to bearish pressure beneath the trendline at 14250.00.

VIX futures are rising to a weekend high of 16.37, suggesting a rally out of last week’s Master Cycle low may be imminent.  The 50-day Moving Average at 18.24 marks the buy signal.

This morning TNX rose to 15.12 while futures rose to 15.34, challenging the 50-day Moving Average at 15.12.  A rally above that level gives a buy signal.

USD futures rose to 92.02, indicating that the next move higher may be underway.  The next two weeks appear to have considerable strength of momentum behind them.

8:00 pm

SPX nearly reached the Wave relationship where [v] equals [i] at 4291.00.  The topping formation is clearly an ending Diagonal, with overlapping Waves of (a)-(b)-(c).  It is interesting that the positive gamma generated by this week’s options expiration brought the final Wave up to the very last hour on Friday.  The market is very fragile as the influence of options expiration wears off.  As it turns out, next week’s options are heavily weighted toward the puts at 4240.00 and below, barely 1% beneath tonight’s close, keeping a tight “collar” on the SPX movements.

ZeroHedge observes, “With last week’s post-Fed tantrum seemingly a distant memory, spoos just hit a new all time high at 4,275 as low realized volatility helped push the VIX near new Covid-era lows…

… if not the lowest level. Indeed, with the VIX at 16.0, and volatility risk premium elevated, Goldman notes that short-dated hedges are not cheap – especially relative to historically low implied volatility for other key markets (1M SPX implied vol is 43rd percentile vs. the last 5 years, vs. HYG, EEM, and HSCEI all below 15th percentile). As a result, Goldman also sees “heightened potential for realized volatility to approach June’s lows, leaving the VIX with moderate downside.”

The reason why VIX has so far failed to hit new lows despite , as Goldman’s Rocky Fishman explains, is because the skew index just hit a new all time high: this means that put options have been unusually expensive relative to at-the-money options, helping support the put-heavy VIX index. High skew, which compares put option prices with at-the-money option prices, has reached new all-time high, and reflects investor perception that high volatility would return should markets sell off.”

8:25 am

Good Morning!

NDX futures reached an overnight high at 14382.00 and has eased down, leaving yesterday’s 12:00 noon high as the top.  I have pointed out that the NDX often leads the rest of the market and this puts us on the alert for the rest of the market to follow.

ZeroHedge reports, “S&P futures traded at record highs, tracking strong gains in Asian markets, as investors braced for the Fed’s preferred inflation data following a tentative bipartisan agreement on infrastructure spending, while U.S. lenders rose after clearing stress tests. At 7am ET S&P futures were up 5.75pts or 0.14%, Dow Jones futs were +110 or 0.32% and Nasdaq futs were up 29.25 or +0.2%. Global stocks are poised for their biggest weekly advance since April, extending their fifth monthly gain.”

SPX futures rallied to 4265.12, just beneath yesterday’s cash high at 4271.28 on day 259 of the Master Cycle.  4265.00 is where Primary Wave [5] is 3.75 times the length of Primary Wave [1].  The normal Wave relationship is that Wave [5] equals Wave [1], so you can see how stretched this relationship is…

Charles Hugh Smith opines, “Risk has not been extinguished, it is expanding geometrically beneath the false stability of a monstrously manipulated market.

One of the most under-appreciated investment insights is courtesy of Mike Tyson: “Everybody has a plan until they get punched in the mouth.” At this moment in history, the plan of most market participants is to place their full faith and trust in the status quo’s ability to keep asset prices lofting ever higher, essentially forever.

In other words, the vast majority of punters are convinced they will never suffer the indignity of getting punched in the mouth by a market crash. What makes this confidence so interesting is massively distorted markets always end the same way: crisis, crash and collapse.”

VIX futures rose to 16.17 in the overnight market after yesterday’s low  at 14.19.  Another stretched Cycle at 281 days thus far.  The snap-back may be atrocious.