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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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