AT40 = 4.2% of stocks are trading above their respective 40-day moving averages (DMAs) (9th oversold day)
AT200 = 11.4% of stocks are trading above their respective 200DMAs
VIX = 54.5
Short-term Trading Call: bullish
Stock Market Commentary
The Shake and Bake bottom completely collapsed on Monday in the face of massive second derivative selling. The stock market is officially in “anything can and will happen” territory as a rolling global crash began Sunday night. The extreme oversold conditions keep getting more extreme. The sellers completely dominated the trading action and have essentially pushed the stock market into bear market territory.
AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), hit new lows as the oversold period stretched into its 9th day. My favorite technical indicator was last this low at the end of the big 2018 sell-off that bottomed December 24th. I would like to think that history will soon repeat itself with a sharp rebound, but this time looks a lot different with so many negatives weighing down on the market and the global economy.
While AT40 is at extremes, AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, is the signature of a bear market. At 11.4%, AT200 says that the vast majority of stocks are suffering under their critical long-term trend lines. Anyone and everyone long the market is in some kind of pain. What makes this time so different is that the path to this point was nearly vertical whereas the last trip to these levels was more diagonal. In other words, this plunge is particularly violent, abrupt, and panicked.
At 9 days in duration, this oversold period is very likely to end with the S&P 500 (SPY) printing a net loss. The chart below shows that starting at 10 days in duration the index has left oversold territory with a loss. That projected loss gets worse the longer these oversold conditions last. The S&P 500 is now down 11.9% since going oversold on February 26th. The good news is that odds favor buying here for an eventual gain within 5-7 trading days. If the oversold period lasts even longer, then this oversold period will become truly historic. The last two points on the chart below come from the 1987 stock market crash and the financial crisis.
The Stock Market Indices
The S&P 500 (SPY) chart says it all. The 7.6% loss and close near the lows of the day decisively left behind a lot of churn. This move confirmed with a bang the 200DMA breakdown. The low from June, 2019 looks like no match as support against such heavy selling pressure. Circuit breakers which flipped after the first 3 minutes of trading probably prevented the index from losing a lot more on the day.
The NASDAQ (COMPQX) finally gave up its 200DMA support. An attempted rally was faded sharply going into the close. Like the S&P 500, the NASDAQ cleared up the signalling by leaving behind a lot of churn. Amazingly, the NASDAQ is just now reversing its October, 2019 breakout.
The iShares Russell 2000 Index Fund ETF (IWM) has behaved relatively poorly through much of the oversold period. Friday’s new low was the big signal of danger that I under-estimated. Today’s 9.7% loss was truly remarkable and almost erased all of the hard fought gains of the index of small caps since the bottom of the 2018 sell-off.
The SPDRS Select Sector Financial ETF (XLF) has also behaved poorly with Friday’s new low looking even worse than IWM. This plunge in financials highlights the bear market risk that I under-estimated for the short-term.
Friday’s divergence between the Invesco S&P 500 Low Volatility ETF (SPLV) and the Invesco S&P 500 High Beta ETF (SPHB) gave me fresh reason for concern. The collective action of these indices look more and more like key tells. Of course neither one escaped the broad-based selling in the market but performance diverged even further. SPLV lost 6.2% while SPHB lost 12.8%. Even more importantly, SPHB is back to the December, 2018 lows while SPLV is “only” at a 9-month low. The key question: is SPHB signalling a near bottom or is SPLV signalling the selling still has a ways to go? I will be throwing out yet another red flag if SPHB breaches its December, 2018 low.
The volatility index (VIX) keeps stair-stepping higher and defying all topping patterns. The VIX was last this high during the financial crisis and acts like it wants to set new all-time records. At these levels and with this kind of upward persistence, the market is saying that the range of possibilities for direction are exceptionally wide. That read means both opportunity and huge risk in the short-term.
The Short-Term Trading Call
This oversold period is reaching toward historic proportions. The near tests of the lows of the big 2018 sell-off combined with a VIX at financial crisis levels says a lot of potential upside lays ahead, but more pain may be sustained trying to tap that upside potential. Financial authorities and global governments will surely scramble even more to try to defend the lows from 2018.
I hit the reset button on the AT40 trading strategy. I slowed down the pace of buying and almost focused more on accumulating shares in the Pro Shares Ultra S&P 500 (SSO) and my rag-tag crew of housing-market plays. Once the VIX finally logs a definitive down day, especially a close below 39 (past the last big up bars), I will think of grabbing more individual shares, selling puts, and the like. The market’s response to inevitable interference from financial and government authorities will also be important for sizing my positions: the better the response, the more risk I will take.
Stock Chart Reviews – Below the 200DMA
I missed quite a few big opportunities this oversold period. Caterpillar (CAT) is perhaps the biggest. CAT is my favorite hedge against bullishness, and its amazing 14.3% loss on Monday would have delivered a tremendous cushion to my bullish positions. Alas, I flipped out of CAT puts TWICE last week to take profits ahead of what I thought would be resounding confirmation of a (even if not THE) bottom in the stock market. I relearned a lesson in holding onto hedges longer than I think I need them!
United States Oil Fund LP (USO)
Oil was at the epicenter of the sell-off and even shared the stage with the on-going coronavirus panic. The United States Oil Fund LP (USO) cratered 25.3% to an all-time low. The entire energy sector experience a tsunami of massive selling that promises to ripple far and wide through the sector and economy for some time to come. I would not even consider going long USO until it closed above Monday’s intraday high. My contrarian call for 2020 is pretty much dead in the water!
VanEck Vectors Russia (RSX)
Russian stocks paid a dear price for Russia’s game of chicken with Saudi Arabia on oil prices. VanEck Vectors Russia (RSX) lost 15% and closed at a near 4-year low.
Stock Chart Reviews – Above the 50DMA
I am pretty sure Autozone (AZO) was my only bullish position besides gold that produced a gain (I did not dare look and gave my eyes a break for the day). AZO may finally be doing what I have expected for several weeks…act like a defensive play in the face of potential economic troubles. If AZO manages to close above its 200DMA, I will add to my position.
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“Above the 40” uses the percentage of stocks trading above their respective 40-day moving averages (DMAs) to assess the technical health of the stock market and to identify extremes in market sentiment that are likely to reverse. Abbreviated as AT40, Above the 40 is an alternative label for “T2108” which was created by Worden. Learn more about T2108 on my T2108 Resource Page. AT200, or T2107, measures the percentage of stocks trading above their respective 200DMAs.
Active AT40 (T2108) periods: Day #8 under 20% (oversold day #8), Day #9 under 30%, Day #20 under 40%, Day #11 under 50%, Day #30 under 60%, Day #34 under 70%
Daily AT40 (T2108)
Black line: AT40 (T2108) (% measured on the right)
Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%)
Weekly AT40 (T2108)
*All charts created using FreeStockCharts unless otherwise stated
The T2108 charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.
Be careful out there!
Full disclosure: long IWM calls, long QQQ calls and shares, long SVXY call, long UVXY puts, long SSO, long USO calls, long AZO, short UVXY
*Charting notes: FreeStockCharts stock prices are not adjusted for dividends. TradingView.com charts for currencies use Tokyo time as the start of the forex trading day. FreeStockCharts currency charts are based on Eastern U.S. time to define the trading day.