Last week’s economic releases were predominantly bearish with all indicators missing consensus estimates. Yet the trend for markets continues to be up due to the influx of Fed driven liquidity. Crude oil and major equity indexes have been coupled since November of 2020. Crude oil has set an intermediate peak which we predicted accurately. WTIC topped at $76-$77 right near our key resistance zones. Significant profits were harvested at the end of quarter two in late June by The Forecast in all of our energy trades. We are expecting equity indexes to drop sharply into the second half of July following crude oil. Potential causes may range from increased infection rates from COVID variants to several trillion dollars worth of financial chaos caused by the reverse repo markets.
Currently the Dow, the S&P 500, and the Nasdaq are all above their 50-day moving averages 200-day moving averages. Small-caps got hit hardest this past week, and the Russell 2000 hit a new six-week low while temporarily plunging below its 50-day moving average. The Volatility Index (VIX) spiked higher following two choppy weeks, topping the key 20 level amid the global risk-off shift, but the fear gauge closed back below its 50-day moving average once again thanks to Friday’s rally.
Short interest ticked higher this week due to the increased safe-haven money flows – especially in the key cyclical sectors. But the total amount of bearish bets remains extremely low following the historic recovery rally and this year’s massive short squeezes. This sets the stage for a potential vacuum forming in the market that could cause a large sharp decline. With the lack of bids under the market from shorts, which provide key support when corrections do finally materialize, the market has potential to surprise to the downside.
We are in for another busy week of economic releases. The week will kick off with Monday’s highly-anticipated 10-year bond auction. Meanwhile, the Consumer Price Index (CPI) and the Producer Price Index (PPI) will highlight Tuesday’s and Wednesday’s sessions respectively. The Philly Fed index and industrial production will be on focus on Thursday while retail sales and the Michigan consumer sentiment numbers could have a major impact on Friday. Treasury yields will likely remain in the spotlight following this week’s bond market volatility.