Summer Drift

The market is currently in the state of Summer Drift. With hedge funds and institutions on vacation, there are few participants to sell and push markets down.This could be seen in the dwindling volume on the S&P 500 (SPY).

Using the Darvas Box Method we can see that the SPY broke above the June-July consolidation and then formed a smaller box around the R2 Pivot Point. It is trying to breakout now and the odds are favoring higher prices as the TTM Squeeze indicator shows strong bullish momentum and the RSI indicator does not show bearish divergence yet. As the 8 EMA (red) catches up with price, it bodes well for a continued uptrend.

Using the Elliott Wave framework, we can see that price could hit an upside target of $800 to $820.

The current Dumb Money Drive is not overbought yet so there is more gas in the tank for this Summer Drift uptrend.

The Fear and Greed Model confirms that there is more room to run before sentiment gets overly bullish.

However, we should stay mindful of key upcoming dates that could trigger market downdrafts or reverse the current trend.

Here are a few potentially bearish days:

• Aug 19 (Wed): August VIX Expiration — often brings sudden volatility.

• Aug 21 (Fri): August Options Expiration — market makers typically pin prices, often increasing volatility.

• Sep 16 (Wed): FOMC Decision & September VIX Expiration — a high-impact catalyst with potential for a major trend shift.

• Sep 18 (Fri): September Options Expiration.

Now let’s analyze my “Market Regime” setup.

We can see that:

• Dispersion (DSPX in purple) is declining rapidly. This means stocks are moving together in an increasingly correlated fashion.

• The VIX Curve (VXV/VIX in magenta) is at an extreme high of 1.29. Normally, institutions take profits when it hits 1.20x, but we know many are away on vacation. This suggests the rally is living on borrowed time.

• Nasdaq Stocks Above the 5 SMA (orange) is increasing and not yet overbought, signaling that the rally still has some short-term fuel left.

• The Advance/Decline Line (ADL in blue) shows breadth is on an upward trajectory, remaining supportive of this move.

• Net New Highs continue to expand, preserving a decent environment for single-stock selection.

In conclusion: The market is drifting higher for now, but given the extreme VIX Curve, it remains vulnerable to a sudden and violent downside reversal. Declining dispersion signals that the risk of a synchronized “sell-everything” waterfall drop is rising. An autumn decline could potentially trigger another round of de-leveraging, as both margin debt and Leveraged ETFs are high.

In the Premium Section we’ll go over some new opportunities that are starting to show their hand.

Disclaimer — All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.