Mid-Day Outlook – 7/6/2021

The morning sell-off this morning will wake you up after a three-day holiday weekend. Banks (KBE), Financials (XLF), Energy (XLE), and the like are taking the brunt of the damage. the NASDAQ 100 is diverging north on further strength in bonds. The liquidation break helped repair some structure underneath us, but not nearly enough.

This all reminds me a bit of early January 2020, when bonds were inexplicably rallying along with stocks as has been the case recently. We had similar momentum, breadth, and strength divergences. I said back then, one of these asset classes has to be wrong. This is eerily similar.

The behavior looks like an economy that might be slowing – just like it did before the first China virus arose from Wuhan. I worry a bit about the market already reacting to the Delta Covid-19 variant. The Phizer vaccine is said to be ineffective. Others are saying the Moderna vaccine caused the Delta variant. Then there is the new, Peruvian, Lambda variant. It is thought to be vaccine-resistant. Could this be driving more shutdown fears? Even Warren Buffett recently stated that a worse Pandemic is in our future. He says he is shocked at how complacent people still are about the risks.

As a side note, who chose the Greek alphabet for these new variants? Is it because I am in Greece? [Insert Twilight Zone Theme].

The market just managed to turn higher, but not until we got all the way down to the 5-day EMA around 4305, just above the WEM low around 4300. But the rest of the story now depends on where we close. The 5-day line has called all the turns in the bull microchannel. We shall see, but so far so good. The afternoon drive will tell the tale.

Remember, the most likely course for a breaking bull microchannel is a trading range for a bit.

A.F. Thornton