Overbought equities took it on the chin last week, with the S&P 500 producing a bearish candle on the weekly. But before the bears could hang their hat on this, the ratio of VIX to VXV may not fully cooperate just yet.
 

The July jobs report threw a curve ball. Job creation was not only much fewer than expected last month, but May and June were substantially revised lower. Just 73,000 non-farm jobs were added in July – versus expectations of 115,000. June’s 147,000 was revised lower to merely 14,000, while May’s 144,000 was reduced to 19,000. The three-month average is now a scary looking 35,000.

Job growth essentially stalled the last three months. This coincides with the start of tariff uncertainty, owing to which employers cannot be blamed for sitting on their hands with respect to hiring and capital plans.

If the May-July slowdown in hiring is the beginning of a trend, then it is just a matter of time before the unemployment rate firmly heads higher. In July, it ticked up 13 basis points to 4.25 percent, which was the highest print since October 2021. In April 2023, the unemployment rate reached 3.45 percent, which set a 54-year-old low. Thus far, the rise in unemployment is slow and steady, but it is surely trending higher (Chart 1).
 

Small-caps simply abhor a slowing job market. They have a reason to, as these companies inherently have significant exposure to the domestic economy – larger than their large-cap peers which also have overseas exposure.

Last week, the Russell 2000 declined 4.2 percent to 2167. The small cap index for weeks was already having trouble reclaiming 2300; on 23 July, it ticked 2283, and that was it. Earlier, the index bottomed at 1733 on 9 April, so it has come a long way.

That said, the Russell 2000 remains 300 points below its all-time high of 2466 from last November, when the index just edged past the prior high of 2459 from November 2021.

Last week’s decline has resulted in a breach of a rising trendline from the April bottom (Chart 2). Odds favor a test of 2100 in the sessions/weeks ahead.
 

Large-caps fared better than their small-cap cousins last week, but they too had their share of pain; the Nasdaq 100 dropped 2.2 percent. Unlike the Russell 2000, both the Nasdaq 100 and the S&P 500 just reached new highs; in fact, this occurred last Thursday before reversing lower, with the Nasdaq 100 ticking an intraday high of 23589 in that session and ending the week at 22763.

Last week’s decline was the second weekly drop in six weeks. Earlier, the Nasdaq 100 bottomed at 16542 on 7 April. The tech-heavy index not surprisingly remains way overbought. In the right circumstances for the bears, it can go a lot lower – if nothing else just to unwind the overbought condition it is in. The bears should like last week’s weekly bearish engulfing candle, but they also have to be able to build on it. Last week, nearest support at 22900s was breached. Ahead lies a crucial test of 22100s, which the index broke out of six weeks ago (Chart 3); just above lies the 50-day at 22307.
 

The S&P 500 large cap index acts like the Nasdaq 100. It, too, posted a new intraday high of 6427 last Thursday and reversed lower to finish the week at 6238. By Friday, it was down 2.4 percent for the week – a second down week in six. And, it, too, formed a bearish engulfing candle on the weekly (Chart 4).

Bears have an opening here. Horizontal support at 6200 is intact, as Friday’s low of 6213 drew some bids. It this gives way in the sessions ahead – odds are it will – the next layer of crucial support lies at 6100s, which the index broke out of in late June. The 50-day at 6130 lies right there. A decisive breach will open the door to a test of the 200-day (5901).
 

Last week’s decline comes at a time when June-quarter earnings are coming in better than what the sell-side was expecting when the quarter ended. When the second quarter ended, they had penciled in $62.02. As of last Wednesday, which was a day before July ended, these numbers had gone up to $63.40.

Before one gets too excited by this, the sell-side does have a propensity to start out very optimistic and then lower their numbers as time progresses. Last September, these analysts were expecting $68.51, before they brought out the scissors. They kept cutting until the estimates hit $61.69 as of July 10^th. Then, the trend went the other way (Chart 5).
 

This perhaps suggests the bears may have difficulty right here and now in meaningfully building on last week’s bearish candle on the S&P 500/Nasdaq 100.

Then, there is also VIX:VXV, which finished last week at 0.96, which is elevated. VIX measures market’s expectation of 30-day volatility on the S&P 500. VXV does the same, except it goes out to three months.

During a risk-on investing environment, as has been the case in recent weeks, demand for VIX-derived securities is lower than VXV. The opposite is true when sentiment turns to risk-off, which is what happened in the last two sessions last week. VIX went from Thursday’s low of 14.74 to Friday’s high of 21.90; this pushed the ratio meaningfully higher – from the prior week’s 0.815 (Chart 6).

Ideally for the bulls, the S&P 500 heads toward its support at 6100s – and the Nasdaq 100 toward 22100s – and the supports hold, then leading to lower volatility and a lower ratio of VIX to VXV.

More By This Author:

Using CoT: Peek Into Future Through Futures, How Hedge Funds Are Positioned
With NYSE, Nasdaq Short Interest Near Record, Bulls Pine For Squeeze
CoT's Peek Into Future Via Hedge Fund, Noncommercials Positions