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Updates 1:47 PM EST - Monday 7/19/21

Not a crash
In the 2:30 AM post, we alerted you that $VIX is going to spike up between today and Wednesday.   

So is the market crashing?   The answer is "No" based on the formation of $VIX chart pattern.   Take a look at our explanations for that below.

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Updates 2:30 AM EST - Monday 7/19/21

Key events coming up:  earnings and the Fed
The economic calendar for this coming week is light.   Market participants will be closely monitoring earnings and positioning themselves ahead of FOMC announcement on 7/28.   

Earnings:  very strong
On the earnings calendar for this week are big-name stalwarts such as Johnsons & Johnson, Coca-Cola, Verizon, Intel, AT&T, American Express, Honeywell, as well as Netflix.

So far earnings season is going very strong.   38 companies that have reported.  Of these, 87% are beating earnings estimates by a median of 13%. The projection for S&P stocks is that their earnings will be up more than 66% for this quarter.   

​Chill, baby, chill
Some analysts are projecting that this may be a peak earnings quarter for this year.  Most economists also agree that the growth surge in the US economy has peaked this past spring.  They are still expecting growth, but at a slower rate.  According to Morgan Stanley:  “We’re past the peak for growth, but that doesn’t mean something more sinister is going on here and that we’re poised to then drop off sharply.”

So what we have in terms of economic fundamentals is a pretty strong growth foundation.   The fact that growth is expected to moderate a bit is a good thing in the long run.

The Worry List:  Delta variant, inflation
Against this backdrop, we have two looming fears.  

The Delta variant is spreading quickly, but it seems so far to primarily affect the un-vaccinated population.   So the thinking on Wall Street is that instead of a total shutdown, the government will continue to push vaccination as the key in fighting COVID.   As we approach the fall and then winter though, we may see more bans in large crowd gatherings.   Even indoor dining remains iffy.   Both of these will have big effects on the earnings of certain companies.

The other huge worry is of course inflation.   Powell testified in Congress last week and continued to maintain that inflation is transitory for now.   He also assured Congress that the Fed is not planning to taper any time soon.   

The Fed also released the Beige Book last week.   This data is more telling in this report.  Most business surveyed expect prices for raw materials to rise in the coming months and feel therefore they have to hike selling prices as well.  They are also greatly concerned about finding workers.   Rising wages will also lead to rising prices in selling goods and services.

"Risk-on" is on but...
Equity investors are still strongly in the "risk-on" mode.   According to Financial Times, in the first half of 2021, inflows into global equity funds are the largest on record.  And according to Bloomberg, ETF inflows are set to smash record in 2021.  One could argue that the dumb herd is going to fall off the cliff at this rate, but so far the herd is winning.

One thing to keep watching is bond yield.  US10Y and US30Y resumed the down trend again.  This means that bond prices resumed their up trend.   So why are investors piling into Treasury bonds (TLT, IEF), especially the 20y+ ones, when they could be in equities, or if they are worried about inflation?

This is where the deflation argument comes back.   But for now, no one has the definitive answers.   

Market internals continue to weaken
Despite the fact that equity has seen record inflow in the first half of 2021, market internals continue to trend bearish.

NYSE A/D:  Since early June, NYSE cumulative A/D chart have been forming triple top pattern, diverging bearishly with $SPX.   This pattern dropped sharply last week.

Nasdaq A/D:  Since early February, Nasdaq cumulative A/D chart have been forming massive multi-top and lower high pattern, diverging bearishly with $NDX.  This pattern dropped sharply last week.

Percentage of NYSE stocks above 50 MA:   Only 35% on the weekly chart, a huge drop from 85% at the start of the year.

Percentage of Nasdaq stocks above 50 MA:   69% on the weekly chart, a big drop from 95% at the start of the year.
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$VIX  $VXN $RVX:  short-term peak coming up then...
Wednesday 7/21 is the expiration date for standard $VIX options.    Between now and then, we may see $VIX $VXN $RVX take a small dip, then spike up some more, before peaking around 7/21.   

After this short-term top forms, $VIX $VXN $RVX will most likely drop to anchor again near their 7/13 low.  This will most likely happen right before FOMC.   

What will happen after FOMC is not something we can project yet, but our hunch is $VIX $VXN $RVX will spike again, this time up to the green lines marked on their charts below.   

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Table of Support & Resistance Zones
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Signal Trades
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We trade 3x ETFs such as TQQQ TNA SOXL LABU using proprietary analysis of volatility.  For actual trades, click here.

Updates 12 AM EST - Tuesday 7/6/21

Economy:  Growing but not overheated yet
The following WSJ article summarizes the current state of the economy, and prepares you for what to expect in this coming week, in terms of economic news.

Liquidity:  Too much of a good thing
Wall Street is scrutinizing the current discomforting trend where money market funds and banks are parking a huge amount of cash (near a trillion dollars) each night in the Fed's Reverse Repo facility.  The Fed raised the interest rate for repo to 0.05% on 6/16, and since then market participants have been piling in.   

To some analysts, this is a sign that there is a glut of cash in the system.   From WSJ:  Ultralow rates and central bank bond buying have kept the yield on the 10-year Treasury note hovering around 1.5%, below the rate of inflation. The three-month Treasury pays less than the reverse repo facility.

Too much easy money in the system can lead to unpredictable volatility.  Too much easy money in the end led to the housing crash of 2008.  And it could eventually bring the current bull market to an end.   But it is too soon to jump in front of this bull right now.   Keep an eye on it, but don't bet against it yet.

Housing:  Too hot to handle
Average home prices in major metro areas shot up to an annual rate of 14.6% in April, surpassing 13.3% in March. Low mortgage interest rate and a continued shortage of homes for sale contribute to the demand increase and the price jump.

Fed officials are starting to discuss scaling back their purchase of mortgage-backed securities in a effort to reduce the froth in the housing market.   But "debate" is the operative word here.   They have not come to an agreement yet, and it can drag on for quite a while.   Meanwhile, memories of 2008 housing crash loom.
​
Risk Appetite:  Still on
All in all, none of the dark clouds on the horizon seem to faze retail investors.  In June, retail investors bought nearly $28 billion of stocks and ETF, an even higher number than the frenzy buy mode of January.

So all in all, despite growing dark clouds, conditions remain bullish right now for the stock market.   No recession and no market crash any time soon.

Market internals are weakening
On the surface, the appetite for risk is still on.  But under the hood, market internals are weakening.  On Friday 7/1, Nasdaq Advance Decline net issues dropped intraday to -1500 before closing at -832 shares.  Meanwhile $NDX rose sharply, which is clearly a bearish divergence.   $SPX rose sharply too, while NYSE A/D dropped to -700 before closing.   

Meanwhile on the chart of the CBOE equity put/call ratio, its EMA lines are now anchoring to rise.   

$VIX $VXN $RVX suggest July topping process 
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Updates 1:15 AM EST- Monday 6/21/21

The week ahead
There was much excitement last week with the big FOMC announcement on Wednesday 6/16 and quad witching on Friday 6/18.  This week won't be quite as big, but there are a number of important economics reports being released.  Attention will continue to focus on the key topics: inflation, yields and the US dollar.

While the stock market had a knee-jerk reaction to FOMC announcement, the bond market gave a very clear signal on Thursday and Friday.  Bond traders were not selling.  Instead, they were buying 10-year and 30-year Treasurys (IEF, TLT), sending 10-year and 30-year yields down sharply, not up.   

If you look at TradingView US10Y AND US30Y weekly charts, you will see that they have been down since 3/15.  And they are dropping right now as we write this.

This tells us that bond traders are not that worried about inflation, or an overheated economy.   Us stock traders should take our cue from that, instead of the fretting headlines.

However, we cannot trade based on macro economic conditions alone.   Good old $VIX $VXN $RVX charts tell us that there may be a few days of volatility and selling still.   But then conditions will likely turn bullish for $SPX $NDX IWM to resume their climbs.

Finally, we want to mention a couple observations about the US dollar.   It is definitely climbing as an asset, bolstered by the fact that the US economy is probably stronger than many others right now.   But what impact does the rising dollar have on Treasury yield?   Well, it's an interesting circle of effects.

According to WSJ in early June:
The cheapest dollars in years are spurring a rise in foreign investment in U.S. government bonds at the same time that pension funds are boosting their holdings—and that demand pickup could weigh on Treasury rates even as the economy strengthens....

According to WSJ last week:
Higher interest rates in the U.S. make investing in American bonds more attractive to foreigners, and can increase demand for the dollar from overseas. Treasury yields rallied their most in three months after the Fed’s disclosures Wednesday, helping bolster appetite for the dollar.

So there you have it.   The demand for Treasury bonds is unlikely to drop because even though the dollar is rising, rates are expected to rise and will stimulate demand.   
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​Read the rest of this analysis, and get the latest entry/exit signals for SPY QQQ TQQQ IWM SPX NDX based on VIX here.

We trade 3x ETFs such as TQQQ TNA SOXL LABU using proprietary analysis of volatility.   For actual trades, click here.

​Updates 1:00 AM EST- Wednesday 6/16/21
FOMC announcement may trigger sell-off
It's hard to predict what the Fed will say, but the last three FOMC announcements (1/27, 3/17, and 4/28) have been followed by substantial multi-day sell-off for $SPX $NDX IWM.    So we think it is prudent to go flat ahead of the Fed.

$USD building a base to rise 
We discussed in Monday post about the impact of US dollars on bond prices, where cheap dollars have been spurring the demands for Treasury bonds by foreign buyers.   Rising demands for Treasurys means lower yields, and that's favorable for growth stocks.

At this point however, it seems that the US dollar is building a W bottom to rise in the short term.  (See UUP DXY charts.)   Correspondingly, 30-year and 10-year Treasury bonds (TLT, IEF) are forming short-term tops, and 10-year US yield is steadily marching up, pivoting from the recent low of 1.43.   It is currently almost 1.5.

This is not favorable for growth stocks such as $NDX.   ​US dollar movement  does not correspond tick by tick with $SPX $NDX IWM market movement.   But it is important to understand and monitor the macroeconomic perspective, because it is the underlying force.