Stock Market Battle Royale: Regime Change Or A Big, Bad Bubble? – Above the 40 (January 26, 2021)

Stock Market Commentary

After the stock market ended its last overbought period, I hesitated to drop my short-term trading call back to bearish. Three days later and the market has yet to snap back into overbought trading conditions. As the major indices levitate, my favorite breadth indicator, AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), dropped to the low point of my last bearish call. This mild bearish divergence makes me once more incrementally more sympathetic to the bearish case. In this post, I set up a battle royale between the new school of thinking which sees a regime change of individual investors taking over the stock market versus the traditional school which sees bubbles, mania, and over-confidence flowing in abundance.

But first, a review of stock market indices to set up the context of regime change versus a bubble.

The Stock Market Indices

The S&P 500 (SPY) faded from an intraday all-time high to close with a minor 0.2% loss. As a result, the index looks as strong as ever especially considering it rebounded from a sudden and abrupt sell-off the day before.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) lost 0.2% a day after a wild price swing.

The NASDAQ (COMPQX) rebounded from its sharp sell-off the day before and closed at an all-time high. Buyers could not quite follow-through and ended the day of trading with a 0.1% loss. Still, the NASDAQ looks even stronger than the S&P 500.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) lost just 0.1% a day after it survived a wild price swing with an all-time high.

The iShares Trust Russell 2000 Index ETF (IWM) faded from its intra-day high to close with a 0.7% loss. IWM has closed around the current price six of the last 7 trading days.

iShares Trust Russell 2000 Index ETF (IWM) is “struggling” upward. The current churn carries a slight upward basis.

Stock Market Volatility

The faders in the volatility index (VIX) showed up once again. The previous day, they pushed the VIX off a 21.5% gain to a mere 5.8% gain. The VIX tried to regain momentum. However, the fear gauge faded off its intraday high and closed with a 0.7% loss.

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: Regime Change versus A Big, Bad Bubble

  • AT40 = 63.5% of stocks are trading above their respective 40-day moving averages
  • AT200 = 89.1% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation).
  • Short-term Trading Call: neutral

In my last Above the 40 post, I wrote about how micro-bubbles are clouding interpretation of the overbought trading signal. The piece proved timely as Goldman Sachs (GS) released a list of 39 stocks in dangerous, bubble territory (I call the list the “Dirty 39” for short). In deference to the overall bullish sentiment in the stock market, Goldman only dared to shine a spotlight on a precious few micro-bubbles: “We expect modestly higher rates will be offset by a declining equity risk premium, leaving the S&P 500 P/E [ratio] effectively unchanged and allowing strong EPS growth to drive the market towards our end target of 4,300.”

While Goldman split hairs, Tom Lee of Fundstrat was crystal clear on his bullishness for the stock market. He agreed with the notion the stock market is experiencing a regime change. For example, individual investors are taking control of market momentum and bringing a deluge of money to the table. Collectively, this regime change is redefining the rules of valuing the market. Here are key highlights of his discussion on CNBC’s Fast Money:

  • Regime change: a class of retail investors armed with cash who will get yet more cash. They will drive P/Es higher.
  • Wisdom of the crowd means we have to understand price. Professional investors think they can tell the market what to do; they have a wake-up call coming and a bitter pill to swallow.
  • Operating leverage, pent-up demand, and a rerating in the stock market will expand multiples based on retail trading.
  • Six trillion dollars could come from households into equities. Households have $100 trillion. Investor flows since 2008 amounted to $3.1 trillion and 94% went into bonds. Much of that will transfer into stocks and $3 trillion more should be coming in the next 10 years.
  • The stock market is the new bond market – more secure, better protection against inflation

Old school Jeremy Grantham of CMO is completely unconvinced that “this time is different.” He lays the original blame for this liquidity-fueled market at the feet of Federal Reserve Chairman Alan Greenspan. Today, the market’s over-confidence will be its undoing as the fuel for euphoria and stock buying eventually runs out. Grantham sees a massive bubble and insists “every time” the stock market gets this over-valued and over-extended a crash comes in the next few months, not years. Grantham even thinks this bubble is more extreme than the ones in 1929 and 2000. Ironically, he uses a stock he owns, Quantumscape (QS), as Exhibit #1 of the bubble. Although this interview is long, it is worth every minute for ALL traders and investors.

In the end, both Lee and Grantham could turn out prescient. In the short-term, the stock market could indeed run out of fuel and implode on itself. Lee is focused on the next 10 years and beyond. If he is correct, the smart (or lucky) investors and traders who secure some profits before the music stops will be the same ones to pick up the pieces and the bargains in the wake of a major stock market sell-off. The next major bull market can launch from there including the kinds of investments Grantham prefers like commodities, alternative energy, and infrastructure.

This stock market battle royale is intensifying as micro-bubbles put on grander and grander displays of trading extremes. AT40 meanwhile slowly but surely erodes. These three days below overbought territory is the longest such stretch since early November when the stock market rallied sharply into overbought territory. Given the cloudy signals, I am content to wait to flip back to bullish only after sellers to prove their will in the major indices: breakdowns below uptrending 20DMAs.

Stock Chart Reviews – Below the 50DMA

Uber Technologies Inc (UBER)

Uber Technologies was one of many stocks that experienced sudden and sharp sell-offs on Monday. Bears seemed to be finally flexing. However, they were quickly overwhelmed. For example, UBER went from a 7% intraday loss to a flat close. I was tempted to close out my short position, but I sat given the 50DMA breakdown. I thought I missed my best chance for a while to cover. Instead, UBER turned around the next day and closed below its 50DMA on a 4.4% loss.

Uber Technologies Inc (UBER) finished erasing its last breakout with a 50DMA breakdown.

Stock Chart Reviews – Above the 50DMA

Clorox (CLX)

I got bearish on Clorox (CLX) back in August. I am now ready to get bullish. CLX showed some life last Friday with a small 50DMA breakout. It sprang to life on Monday with a 4.8% gain. CLX held a 200DMA breakout despite a big fade from intraday highs. Today, CLX mildly confirmed the 200DMA breakout with an additional point higher.

Clorox Co (CLX) sprang back to life over the last week.

Camping World Holdings (CWH)

Speaking of waking up, used RV seller Camping World Holdings, finally came alive this month. On January 12th, CWH confirmed a 50DMA breakout with a 9.3% surge. Buyers have barely rested since. CWH now sits at a near 6-month high. I am back to looking for dips to buy.

Camping World Holdings (CWH) regained its momentum this month.

Vulcan Materials (VMC)

The pullback I looked to buy in Vulcan Materials (VMC) is already here. VMC lost 4.0% as various commodity, industrial, and materials plays sold off. The stock has almost reversed its entire gap up and gain from the day of the insurrection in Washington D.C. which ironically marked a grand confirmation of the triumph of market liquidity. I am now looking for a test of 50DMA support (red line in the chart below).

Vulcan Materials (VMC) is rushing for a test of 50DMA support.

Materials Select Sector SPDR Fund (XLB)

I am bullish on the materials sector. However, the Materials Select Sector SPDR Fund (XLB) lost 1.4% and is close to a test of 50DMA support. So VMC is not alone in suffering selling pressure in the materials sector.

Materials Select Sector SPDR Fund (XLB) is also rushing toward a test of 50DMA support.

Industrial Select Sector SPDR Fund (XLI)

I am also bullish on the industrial sector. Yet, the Industrial Select Sector SPDR Fund (XLI) has gone nowhere in 2 1/2 months. Today, XLI confirmed a 50DMA breakdown with a 0.9% loss. I will get freshly bullish on industrials after XLI manages a fresh breakout to an all-time high.

Industrial Select Sector SPDR Fund (XLI) is stuck in a near 3-month trading range.


The move in the SPDR S&P Retail ETF (XRT) took me by surprise – that is, until I reviewed the components. Micro-bubble member Gamestop (GME) has rocketed to the top of the charts with a 5.3% share of XRT. The ETF hosts a collection of other heavily shorted names favorited with enthusiasm by members of “new regime.” Regime change indeed!

SPDR S&P Retail ETF (XRT) has accelerated to the upside in 2021.

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 #72 over 20%, Day #56 above 30%, Day #55 over 40%, Day #54 over 50%, Day #53 over 60%, Day #3 under 70%

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 (MMTH)

Source for charts unless otherwise noted:

Full disclosure: long UVXY shares and calls, long SPY put spread, short UBER

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*Charting notes: FreeStockCharts stock prices are not adjusted for dividends. charts for currencies use Tokyo time as the start of the forex trading day.

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