Updates for Monday 7/19/21

We trade 3x ETFs such as TQQQ TNA SOXL LABU using proprietary analysis of volatility.

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.
​
$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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