Micro-Bubbles Slicing Through Overbought Trading Signals – Above the 40 (January 22, 2021)

Stock Market Commentary

The stock market gapped up and never looked back in the wake of the Presidential Inauguration. Subsequently, buyers produced mixed follow-through for two days. Big cap tech defied the narrative of a rotation into value and industrial names by delivering the most convincing follow-through. A third drop from overbought conditions in a month further muddied the waters. This tenuous hold on overbought conditions is a prime driver keeping me wary. Yet, “micro-bubbles” slicing and rippling through the stock market create plentiful buying setups.

The Stock Market Indices

The S&P 500 (SPY) gained a single point the day after the U.S. Presidential Inauguration. The index lost just 0.3% on Friday. Basically, the S&P 500 finished the week in an uneventful fashion.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) lost 0.7% after a picture-perfect bounce off 20DMA support but never looked back from there.

The NASDAQ (COMPQX) followed through on Wednesday’s excitement by managing to close two more times above its upper Bollinger Band (BB). Thursday delivered a 0.6% gain while Friday ended the day flat.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) lost 0.8% after stopping short of testing its uptrending 20DMA support. The NASDAQ never looked back from there and even accelerated.

The iShares Trust Russell 2000 Index ETF (IWM) wavered a bit in this post-Inauguration trade. On Thursday, IWM lost 0.9%, but on Friday the index of small caps recovered from a gap down to gain 1.2%. IWM closed at a (marginal) all-time high.

iShares Trust Russell 2000 Index ETF (IWM) wavered but pulled off a fresh all-time high.

Stock Market Volatility

The volatility index (VIX) gained 2.8% after fading from intraday highs. Recent support around 21 continues to hold.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) is banging on the floor of support again.

The Short-Term Trading Call: Reckoning with Micro-Bubbles

  • AT40 = 69.7% of stocks are trading above their respective 40-day moving averages (ending a 7-day overbought period)
  • AT200 = 88.6% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation).
  • Short-term Trading Call: neutral

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, gapped down at the open. AT40 managed to fight its way back to 69.7%. Still, the move brought the latest overbought period to a conclusion at 7 days. Unlike the last end to overbought conditions, I am not rushing to get bearish. The short-term trading call stays at neutral. Sellers need to break the primary uptrend at the 20DMA to convince me to get off the fence. I do not foresee getting bullish again until the next trip to or close to oversold conditions. In other words, I anticipate being “non-bullish” for a while to come.

The AT40 trading rules for overbought conditions face a new challenge: micro-bubbles. I heard this term used on the Animal Spirits podcast. Micro-bubbles are specific pockets of the market experiencing astronomical price gains both well ahead of the fundamentals and the expectations of technical price action (like sustained parabolic run-ups). I care less about the violations of fundamentals and more about the stretched technicals. Pushing past the technical expectations forces me to imagine the previously unimaginable and push past my own incredulity. Most importantly, micro-bubbles are slicing right through overbought trading signals.

These hyper-bullish conditions mean that plenty of money can be made going long even as the underpinnings of the market appear to weaken with these tenuous overbought conditions. Liquidity dominates all else. Here are some fascinating stats related to micro-bubbles quoted on the animal Spirits podcast:

  • Technology stocks were up 44% in 2020 while the top 5 performers were up over 400%
  • Energy was down 33% although the best performer was up 240%
  • A handful of penny stocks made up a fifth of U.S. trading volume
  • One trillion shares in penny stocks traded in December. Compare to “just” 200 billion shares in November
  • Micro-cap stocks have out-performed large caps 32% vs 15%
  • Last week, small trader options volume exceeded 9% of NYSE options volume for the first time
  • Chinese electric car maker Nio Inc (NIO): #nio has accumulated 35M views on Tik Tok, from 100 Twitter mentions in early 2020 to as many as 6800 mentions in November, second most actively traded stock in the U.S. over the past year

Micro-bubbles have been a theme of the podcast for 7 months, so there is no telling when/if this action ends…

Frenzied options trading adds to the speculative fervor in certain pockets of the market, enhancing the appeal of micro-bubbles. CNBC’s Options Action quoted data showing that 2020 was the biggest year for options trading in history: 21.22B total contracts traded, up 39.3% from 2019. According to Mandy Xu from Credit Suisse, options action was concentrated in tech names through November 2000. Since then, action has rotated into beaten down sectors like value names. Moreover, about half of options trading is in weekly options expiring in two weeks (guilty as charged!).

Stock Chart Reviews – Below the 50DMA

VMWare (VMW)

I check in from time-to-time on networking software company VMware (VMW) looking for a definitive breakdown or breakout. Still no luck. VMW has managed to remain stuck in a 9-month trading range. At its peak, VMW barely recovered its losses from the March collapse in the stock market. Something tells me VMW is under-valued and under-loved but maybe a good reason exists… The space is tough. Competitor Nutanix (NTNX) is just now recovering its losses from the March meltdown. Micro-bubbles are happily ignoring VMW.

VMware (VMW) just keeps churning around its 50 and 200DMAs.

Stock Chart Reviews – Above the 50DMA

Teucrium Commodity Trust Corn Fund (CORN)

The Teucrium Commodity Trust Corn Fund (CORN) plunged 4.1% on Friday. I happened to take profits two days prior. The prior week’s 1-day 6.3% surge put me on sell alert. Regular readers know I have a hard time trusting the sustainability of rapid and large upside moves. Still, as an ag-bull, I resisted the urge to sell immediately. I watched in growing relief as the price continued to stay elevated. However, a gap down and 1.3% loss on Wednesday delivered the sell signal.

I need to dedicate a future post to the play in agriculture. While CORN looks topped out for now, I think it will remain a bullish play for some time to come. I am looking for a test of 50DMA support.

Teucrium Commodity Trust Corn Fund (CORN) plunged 6.3% and closed right on top of uptrending 20DMA support.

Cryoport Inc (CYRX)

Cryoport Inc (CYRX) may have micro-bubble aspirations with last week’s trading action. Despite a secondary stock offering at $66, the stock ended the week at $82.11 – a move demonstrating extremely strong demand for CYRX. An 18.3% surge and breakout to an all-time high on January 14th was an affirmation of the bullish trading action. CYRX gained 32.4% on the week. The stock is already a near double year-to-date. The company “provides temperature-controlled logistics and biostorage services to the life sciences industry”, so it is part of the suite of solutions fighting the coronavirus pandemic.

Cryoport Inc (CYRX) is riding its upper Bollinger Band to higher heights.

Express Inc (EXPR)

I loved buying apparel from Express Inc (EXPR) back in the 1990s. I stopped shopping there after the company seemed to change its target audience to slim and trim, ultra style conscious consumers. The company was the 6th largest retail brand in the U.S. when it filed for an IPO in 2010. Ten years later, the company was descending into trouble ahead of the pandemic. Store closures continue as shopping malls struggle and the CEO attempts a turn-around strategy. This swirl is the perfect recipe for speculators who see a “cheap” stock (priced under $1) and who love the adrenaline rush of betting against bankruptcy.

A proliferation of micro-bubbles makes EXPR look like a potential rocketship. Indeed, the stock surged 53.0% on Friday on no news I could find….except it was a day that a select group of micro-bubble stocks surged insane amounts as well. Note that even with Friday’s gain, EXPR barely made a 7-month closing high. EXPR lost 26.0% post-earnings on December 3rd.

I love 200DMA breakout plays, so I am watching closely for EXPR developments closely. Closing the post-earnings gap down is a bonus bullish move. If I see at least a sliver of news confirming that EXPR is turning things around, I will likely join the speculators with a small position.

Express Inc (EXPR) burst through its 200DMA again. Is the third time a charm?

Intel (INTC)

The trading action in Intel (INTC) is getting wilder and wilder. INTC gained 14.0% (even after a strong fade from the gap open) on news of the highly criticized CEO’s exit. At its highs, INTC stopped just short of closing its gap from its disastrous July earnings report. INTC looked set to churn all the way into earnings until the accidental release of a slide from its earnings presentation forced the company to pre-release its entire earnings report. After the dust settled, INTC took a 6.5% 1-day gain into earnings. Reality hit like a brick the next day with a 9.3% loss and a new post-CEO closing low. I now wait for a new entry for the between earnings trade on INTC. I am eyeing a test of 200DMA support as a first try.

Intel (INTC) is still levitating well above its 200DMA despite some wild swings.

Jumia Technologies (JMIA)

At the end of November, I wrote about how to buy Jumia Technologies (JMIA) with limited risk. The trading action since then has turned out highly conducive to this strategy. I now have a covered call position with a $50 strike expiring next Friday. Given Friday’s 25.0% surge to an all-time high, I fully expect to get called away. I will look to reload after that event with the full position in place using a covered call AND a put option for protection against an extreme pullback.

Jumia Technologies (JMIA) jumped 25.0% to an all-time high.

Vuzix Corp (VUZI)

I had no idea smart glasses have made a comeback. Vuzix Corp (VUZI) “designs, manufactures, markets, and sells augmented reality (AR) wearable display and computing devices.” VUZI’s 13.5% gain on Friday caught my attention. Since reporting earnings in November, VUZI is up 261% – largely thanks to a 7-day run-up last month. While VUZI could be entering micro-bubble territory, at least the stock has been around since 2011 and the latest surge represents a fresh breakout to an all-time high. The last major peak was at a $10.80 close on January 24th. VUZI had a near-death experience trading at $0.92 after earnings at the bottom of the stock market crash in March. The stock is a buy on the next pullback with a tight stop below Friday’s intraday low.

The latest surge in Vuzik Corp (VUZI) created an upside resolution to a Bollinger Band squeeze.

Be careful out there!


“Above the 40” (AT40) uses the percentage of stocks trading above their respective 40-day moving averages (DMAs) to measure breadth in he stock market. Breadth indicates the distribution of participation in a rally or sell-off. As a result, AT40 can identify extremes in market sentiment that are likely to reverse. Above the 40 is my alternative name 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 #70 over 20%, Day #54 above 30%, Day #53 over 40%, Day #52 over 50%, Day #51 over 60%, Day #1 under 70% (ending 7 days overbought)

Black line: AT40 (T2108) (% measured on the right)
Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%). Source: FreestockCharts
Percentage of stocks trading above their respective 200-day moving averages (DMAs) according to TradingView.com (MMTH)

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long UVXY shares and calls, long SPY put spread, long JMIA covered call

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*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.

3 thoughts on “Micro-Bubbles Slicing Through Overbought Trading Signals – Above the 40 (January 22, 2021)

  1. Great Article… About a month ago I commented on SeekingAlpha about OBRC which at the time was at 6.70. I researched and determined that recasting of their old debt from 8% to Libor+, and a new Military contract(45 million 3 year) that the company would be profitable in first quarter. Just FYI. It’s got legs now with lots of new highs. I am hoping to re-enter at 6.70. They do mission critical monitoring but also trucks carrying their equipment are allowed to bypass state weighing stations. Think Covid. Multiple uses products.

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