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Updates 12:30 AM EST -  Monday 8/16/21

This week's schedule 
There are not as many economics reports this week as last week.  (Click here for this week's schedule.)   But here are a few events that are likely to move the market.

Tuesday 8/17:   

• Powell speaks 1:30 PM EST

Wednesday 8/18:   

• FOMC Minutes 2 PM EST
• $VIX expiration

Friday 8/20:

• Equity options expiration

Bullish forces for stocks 
We discussed this last week, and this information is still relevant.

• Strong earnings; fat profit margins
• Robust job growth
• Growing GDP
• Business spending likely to rise
• Stock buybacks
• Crypto market signals "risk-on" mood

Bearish forces for stocks ​​
Fed tapering:  With Powell speaking on Tuesday, FOMC minutes on Wednesday, and Jackson Hole Symposium August 26-28, a lot of attention will be on the issues of Fed tapering:  when, how, and how much.  This is likely to trigger some knee-jerk responses along the way.

Treasury bond yields rising:   US10Y chart formed a short-term double bottom at 1.127, and is likely to test this level again this week. If it forms a multi-bottom, US10Y may climb back up towards 1.6 - 1.7.  When this happens, it can be bearish on $NDX.

Bond volatility is on the move:   The chart of $SRVIX (CBOE interest rate swap volatility index)  shot from 78 up to 110 for 3 days last week before dropping back down on Friday.   It's important to keep monitoring this.

Market internals still weak:   

• The charts of NYSE and Nasdaq A/D net issues are still showing bearish divergence, but they are also showing some traction.  That is they are no longer dropping and are forming a base.   
• The percentage of stocks above 200-day MA are still continuing to diverge bearishly from $SPX $NDX prices.

Big picture:  still bullish 
The bull market that started on 3/23/20 is still intact.   Our job is to look for low-risk dips this week to enter long.   With OPEX and $VIX expiration happening this week, we may see more volatility and a slightly bigger dip opportunity to take advantage of.  

$VIX  $VXN $RVX
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$SPX $NDX IWM
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​Updates 1:30 AM EST - Monday 8/9/21

There are a number of Fed officials speaking this week, and a whole lot of Treasury auctions happening.   Attention will be on Treasury bond yields (see more below).

Forces that provide bullish tailwinds for stocks
Strong earnings + fat profit margin:  

• S&P earnings projected to grow 90% from 2nd quarter 2020
• Operating margin for is expected to come in at 13%, almost a record. 
• According to WSJ: "At a time of increased attention to inflation, the results show that big U.S. companies have succeeded in growing their sales while managing their costs." 

Robust job growth: 

• US economy added 943,000 jobs in July.   
• Unemployment fell to 5.4% in July, a drop from 5.9% in June.  

Growing GDP: 

• US GDP grew at 6.5% annual rate in second quarter.
• US economy has exceeded pre-pandemic size.
• Growth is expected to slow down in the coming months.

Business spending likely to rise:   According to WSJ:  "Businesses are sitting on record amounts of unused credit from U.S. banks, another quirk in the economic recovery that bankers say could help unleash pent-up spending in the coming months."

Stock buybacks:  Companies are buying back stocks at pre-pandemic, which is a sign of economics optimism at the corporate level.   

Household spending rising:  Household spending increased by 1% in June.

Crypto market signal >> "risk-on":  Major crypto currencies such as BTC and ETH have been steadily climbing up since their lows on 7/20.   The mood in the crypto market has definitely turned bullish, reflecting a "risk-on" attitude.

Forces that generate bearish headwinds for stocks
Feds tapering:

• The robust job growth means the Fed is likely to begin tapering its $120 billion in monthly asset purchases later this year.
• Fed officials are beginning to speak about rate rises, maybe in 2023.​

Too much short-term cash - may be signaling stress:   Liquidity is a good thing for stocks, but too much liquidity can yield unexpected problems.   A prominent sign of perhaps too much liquidity is the fact that money market funds and banks are parking over $1 trillion of cash overnight at the Federal Reserve in exchange for securities.   

Analysts are warning that the markets for short-term funding appear to be vulnerable to disruption, given how much short-term cash is sloshing around.  Short-term cash market is highly important to the healthy functioning of the economy and all markets.

Treasury bond yields rising:   US10Y chart formed a short-term double bottom last week at 1.127.   In the next few weeks, it may rise back up towards 1.6 - 1.7.   The last time US10Y rose like this was from early February to mid March.   And as a result, $NDX dropped during this period.   We may see similar market behaviors again, but it's not a guarantee.

Market internals still weak:   

• The charts of NYSE and Nasdaq A/D net issues are still showing bearish divergence, but they are also showing some traction.  That is they are no longer dropping and are forming a base.   
• The percentage of stocks above 200-day MA are still diverging bearishly from $SPX $NDX prices.

$VIX  $VXN $RVX
We show on $VIX $VXN $RVX charts below the levels to expect $VIX $VXN $RVX to reach by mid-August.
Charts and projections are available in full post for members.

$SPX $NDX IWM
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Updates 1:00 AM EST - Monday 8/2/21

This coming week the market will focus on employment data, with the job report coming out on Friday, and the earlier peak at the data coming on Wednesday (ADP report).

There was a lot of data that came in last week to process, and at times the data conflicts with each other.   We think it's helpful to sort the current economics and market data into two buckets:  forces that provide bullish tailwinds for stocks, and forces that generate bearish headwinds for stocks.

Forces that provide bullish tailwinds for stocks
Liquidity:   Despite the Fed inching towards tapering, liquidity is still plentiful.  This is most evident in the amount of cash being parked overnight in the Fed reverse repo market.   It has reached over $ 1 trillion on Friday.  

Strong earnings:   Q2 earnings has been eye-popping.   The S&P growth rate for this quarter is 85%.   This is likely to be peak earnings growth for this year.  Still, analysts are projecting 27% rise for 3rd quarter, and 20% rise for 4th quarter (compared to a year earlier).   

Money flow:   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. 

Corporate buybacks:   Companies are buying back stocks at pre-pandemic, which is a sign of economics optimism at the corporate level.    

Negative real yields:   According to WSJ:  "Yields on government bonds in the US and Europe have dropped to records when adjusted for inflation...  Analysts say that the decline in real yields is one sign that investors around the world are paring bets on rapid recovery...At current levels, they imply investors will lose money holding 10-year government bonds to maturity after factoring for inflation.  That prospect can push investors to buy riskier assets such as stocks..."

Strong consumer demands:  Consumer demand is still rising strongly, according to the latest PCE report.

Vaccination instead of lockdown:    Increasingly, the official view is that COVID is something the world will have to learn to live with, and do so with the aid of vaccination instead of drastic lockdown.   While we may see certain events and places close up due to a Delta breakout, we are unlikely to see across-the-board shutdown of everything.

Forces that generate bearish headwinds for stocks
Delta variant scare:   As the summer winds down, autumn and winter mean more time spent indoor.   And with a large percentage of kids going back to school unvaccinated, we may see more Delta outbreaks.   These outbreaks may cause knee-jerk responses in the market, 

Fed tapering sooner than promised:   While the probability of this happening is low, any sudden move by the Fed is likely to freak out the market, at least in the first 24 hours.   If the Fed suddenly steps on the brakes, we may see rapid exits out of stocks, followed by taper tantrums.

New Fed chairman:   In coming months, Biden will have major opportunities to influence the makeup of the Federal Reserve, including whether to renominate Jerome H. Powell to another term as chair.  New FOMC members may bring new monetary policy and direction.

Weakening market internals:   

• The charts of NYSE and Nasdaq A/D net issues are still showing bearish divergence from $SPX $NDX prices.
• S&P 500 and Nasdaq charts showing percentages of stocks above the 200-day EMA have been forming lower high tops, and are continuing to do so.

$VIX  $VXN $RVX
We show on $VIX $VXN $RVX charts below the levels to expect $VIX $VXN $RVX to reach by mid-August.
Charts and projections are available in full post for members.

$SPX $NDX IWM
Charts and projections are available in full post for members.

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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.

Charts are available in full post for members.

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.   

Charts are available in full post for members.

Table of Support & Resistance Zones
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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.
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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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