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    Volatility Reports 5/24/21

    May 24, 2021

May 24, 2021

Volatility Reports 5/24/21

Can the bulls grab victory from the jaws of defeat one more time?  Here is their chance.

From one of our event back testers pals, he mentioned in his latest sales ad, ”

“Once again, sellers failed to push the S&P 500 down even 5% from its peak. It got close last week but held above that threshold.”

Contrary Thinker’s %BB-VIX indicator reflects how fear maxed out with the slightest of sell-offs.

Jason Goepfert went on to point out that, “The index has now gone 134 trading days without a 5% pullback. That’s the 18th-longest streak since 1928, and it would take only a few more days to push it into 15th place.” 

I am not sure the relevancy of the ranking, but his inferences fit with Contrary Thinkers point of view when he suggests:  

“Once it got this extended, the S&P’s returns over the next month were poor. Even up to 3 months later, its risk outweighed its reward.” CT’s view is the S&P has a 5% potential reward from Friday’s close with a 9% risk based on the Long-Term resistance zone, to be conservative.

Here is the same %BB-VIX reflecting a similar pattern for the “shortest bear in history.” If the market does not make any progress this week and fear continue to dip and my Panic Index (100% price based ) as seen on the S&P chart pushes its high threshold as it did back in 2020, the market will be looking into the Abyss.

The point the market has made is that it grabs victory from the jaws of defeat at every given chance the bears have to bury its opposition. That is why they call it a bull market, it is bull-headed persistent and does not give up that easy.

However, to view this statistic in a vacuum and conclude that based on these rankings a few declines happened after such statistical events of more than 10% is not convincing.

Rather, what is visible based on 160 years of history are cycles cresting and the real-time seasonals going into their worse period.

Now that the month charts on all the major indices have peaked on panic buying, the weekly chart of the Dow has done the same by reaching a volatility extreme that reflects FOMO buying, not rational. Along with an inverted “V” high pivot, the reversal was a breakdown below I-T support where last week recovery is testing at 34,3111.

The S&P did the same thing with TEM reaching an extreme rul#3, call the trend old, feeble, persistent, and due for a change. It too failed to hold new support at 4,230, which is not resistance.

Here is the bull’s chance to save the market and keep the trend followers from jumping all over sell signals.

The Nasdaq and the Russell are leading the decline and the trend following sell signals have already taken effect. These signals are supported by TEM’s Intermediate-Term sets up of rule #2 and rule #4 both signaling carryover of the breaks and trend following signals.

I will draw a hard and fast rule here. If the bulls do not make a new closing high on the Dow this week next week – the first week of June – the market will go into meltdown.

Back Story on Liquidity 

Fed Drains $351 Billion in Liquidity from Market via Reverse Repos, as Banking System Creaks under Mountain of Reserves

This is the first time I’ve seen Wall Street banks clamor for the Fed to back off QE. The Fed is struggling to keep the liquidity it created from going haywire.Volatiloity Reports 5/24/21

In the fall of 2019, when the repo market blew out, the Fed stepped in and bought Treasury securities and MBS and handed out cash via repurchase agreements. When these repos matured, the Fed got its money back, and the counterparties got their securities back. The Fed also did this during the market rout in March 2020. But by July 2020, the last repos matured and were unwound.

Now the Fed is doing the opposite, with “reverse repos.” Repos are assets on the Fed’s balance sheet. Reverse repos are liabilities. With these reverse repos, the Fed is now massively selling Treasury securities to counterparties and taking their cash, thereby draining liquidity from the market – the opposite effect of QE.

This morning, the Fed sold $351 billion in Treasury securities via overnight reverse repos to 48 counter parties, thereby blowing past the brief spike at the end of March 2020, and more than replacing yesterday’s $294 billion in Treasury securities that it has sold via reverse repos to 43 counterparties and that matured and unwound this morning.

These reverse repos are a sign that the banking system is struggling to deal with the liquidity that the Fed has been injecting via its QE. And that’s in part why there is now some clamoring on Wall Street for the Fed to taper its QE purchases because the banking system is now drowning in liquidity that banks have as reserves on their balance sheet. By buying Treasuries in the repo market, the banks lower their reserves and increase their Treasury holdings.

Great and Many Thanks,

Jack F. Cahn, CMT

Contrary Thinker since 1989,
Copyright 1989-2021

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