A New Low in Volatility Brought Fresh Promise to Overbought Stock Market – Above the 40 (February 12, 2021)

Stock Market Commentary

After sweeping away bearish signals, the stock market moved right into overbought territory last week. The week started with a small gap up to all-time highs, and the stock market never looked back. More importantly, the volatility index (VIX) hit a new low since the stock market broke down almost a year ago ahead of the coronavirus pandemic. So even after a string of all-time highs for over three months, an overbought stock market received fresh promise from further lows in volatility.

The Stock Market Indices

The S&P 500 (SPY) gained 1.6% for the week with a third of the gains coming on Friday. Ahead of a speech from Federal Reserve Chair Jerome Powell, the index took a sudden dive. Given I was on the edge of bearishness, I got trigger happy and bought SPY put options expiring next Friday. I watched as the puts quickly grew profitable and went back to flat. They ended the week with a small loss. Since I still do not quite understand what drove the “fat finger” whoosh downward, I am keeping the puts as another hedge to all the longs I am likely to buy in the coming week.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) ended the week with a 0.5% gain and new marginal all-time high.
On the way to closing the week at an all-time high, the S&P 500 abruptly faded from a strong open. The 15-minute chart shows the churn and its eventual resolution.

The NASDAQ (COMPQX) followed along with the S&P 500. The tech laden index gained 1.7% for the week on its way to a new marginal all-time high.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) gained 0.5% and closed the week with a new marginal all-time high.


The iShares Trust Russell 2000 Index ETF (IWM) experienced a strong open to the week as part of the fresh promise for bulls. However, IWM’s momentum ended there. I am looking for a base that forms the foundation for a fresh launch higher.

The iShares Trust Russell 2000 Index ETF (IWM) started the week with a gap up and 2.6% gain but churned the rest of the week.

Stock Market Volatility

The volatility index (VIX) gained 61.6% on January 27th. When I called the extreme move unsustainable, I did not anticipate a near immediate reversal. I definitely did not anticipate a near 52-week low in just over two weeks. The VIX managed to close the week right on top of the critical threshold of 20. This level is traditionally considered “elevated.” A breakdown here opens up the fresh promise of more bullish momentum because it signifies an increasing level of comfort with the market’s price levels. Once the 20 level breaks, I will next look for the bullish signals from extremely low volatility.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) lost 6.0% and closed near a 52-week low.

The Short-Term Trading Call: Contending With the Fresh Promise of Bullishness

Above the 40 (Animated Logo)
  • AT40 = 72.6% of stocks are trading above their respective 40-day moving averages (5th day overbought)
  • AT200 = 91.0% 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, crossed over into overbought territory (over 70%) on Monday. However, my favorite technical indicator failed to follow-through. AT40 even gapped below the 70% threshold on Friday. Once again, AT40’s hold on overbought conditions looks tenuous. The VIX stands as the potential deciding factor in the fresh promise of the overbought stock market.

AT40 (T2108) has been clinging to the 70% overbought threshold during the 5-day overbought period.
AT40 (T2108) has been clinging to the 70% overbought threshold during the 5-day overbought period.

The short-term trading call stays at neutral until/if the S&P 500 cracks its 20DMA support. Recall that I am braced for churn in the short-term trading call. I am anticipating that the stock market will soon enough make a decisive move: either to the downside or in a weeks-long run maintaining 20DMA support. I see zero reason to flip bullish until buyers work off more steam with a drop to or “close enough” to oversold conditions (AT40 below 20%).

Stock Chart Video Reviews

Stock Chart Reviews – Below the 50DMA

{Note I am trying some new formatting in the TradingView.com charts. I want to emphasize trends over daily price moves. Moreover, I changed the candle behavior to stay consistent with FreeStockCharts: a hollow body indicates a closing price higher than the opening price, and a closed/full body indicates a close lower than the open. Feedback welcome as always!}

iShares 20+ Year Treasury Bond ETF (TLT)

While the behavior of the iShares 20+ Year Treasury Bond ETF (TLT) remains choppy, the trend is clear. TLT drifted higher for the first three days of the week and suddenly dropped a relatively large 1.2% on Friday to a new 11-month low. Financial markets remain unfazed by the steady increase in long-term rates. The Federal government needs to hurry up and borrow all those additional trillions for its fresh spending ambitions!

iShares 20+ Year Treasury Bond ETF (TLT) dropped to new 11-month low with a gap down and 1.2% loss.

Qualys (QLYS)

The price action of Qualys (QLYS) is one more display of inefficiencies in the stock market. On December 18th, QLYS surged 18.7% as investors suddenly got fresh religion on cyber-security related stocks. It took almost another month of churn for buyers to follow through. Suddenly, QLYS tumbled 12.6% on February 3rd on no news I could find. QLYS fell another 9.5% just ahead of earnings. After announcing the departure of the CEO for health reasons and providing disappointing earnings results, QLYS plunged another 10.6%. On Friday, sellers confirmed the 200DMA breakdown. I do not see a fundamental change in the longer-term narrative. Indeed the CEO change likely exacerbated the trigger-itch to sell. As a result, I am not going to act on the bearish signal. Instead, I will start nibbling on QLYS if it manages to close above 200DMA resistance.

Qualys (QLYS) confirmed a post-earnings 200DMA breakdown with a 1.5% loss.

Amicus Therapeutics (FOLD)

I caught the story of Amicus Therapeutics (FOLD) on CNBC’s Fast Money. The CEO told a credible story of eventual success for the company’s treatment for Pompe disease. Crowley even explained why “today is a great day for people with Pompe disease.” FOLD is now what I call a “bio-wreck.” The sell-off is attractive because sellers burned off a lot of downside risk in the stock. Now is the time to make a bet on potential. FOLD closed at an 8-month low and closed as low as $6.64 last March.

Amicus Therapeutics (FOLD) plunged 32.9% as the market expressed disappointment in the company’s Phase 3 results.

Stock Chart Reviews – Above the 50DMA

Advanced Micro Devices (AMD)

My trade in Advanced Micro Devices (AMD) ended on Friday with the stock nearly closing its post-earnings gap down. I got through two cycles of selling calls against the position. For last week, I sold a weekly $90 call, so my position was called away. Now I just wait for the next entry opportunity.

Advanced Micro Devices (AMD) rebounded to recover from a post-earnings 50DMA breakdown.

Spotify Technology (SPOT)

Speaking of rebounds, the bearish 50DMA breakdown for Spotify Technology (SPOT) lasted just 4 trading days. SPOT looks like it is back to pivoting around its 20DMA in a trading range. I have no interest in buying SPOT, only shorting it (put options) on the right setup.

Spotify (SPOT) rebounded from a post-earnings 50DMA breakdown and now trades right back in the middle of its trading range..

Apple (AAPL)

Another week and another failure in the weekly call option trade in Apple (AAPL). The position actually fought close to flat on Monday and then Tuesday, but I decided to hold. Friday’s intraday low gave me the more typical entry for buying a ‘low ball” position for next week. I bought weekly calls at the $137 strike and a calendar spread at the $139 strike to position for the following week.

While I was on the edge of suspending this strategy altogether, I decided to stick with it. As long as the stock market has buying strength, I fully expect AAPL to make catch-up moves. I need to take more conservative positions while I wait for the strategy to bloom again.

Apple (AAPL) slid by drips and drabs all week.

Teucrium Corn Fund (CORN)

The Teucrium Corn Fund (CORN) rebounded quickly from a sharp sell-off last month. I am not yet ready to buy back in as I need to do a fresh assessment of the fundamentals. From a technical perspective, CORN should at best consolidate here until a new and strong catalyst.

Teucrium Corn Fund (CORN) rebounded from a big loss and is now following its 20DMA

Martin Marietta Materials (MLM)

My stubbornness in Martin Marietta Materials (MLM) paid off big last week. MLM surged all week and closed at a new all-time high. MLM even sailed through earnings. I plan to hold this position through thick and thin for at least the next few years. If the economy is on the comeback trail, then MLM will continue to benefit tremendously. I find more rationale and sense in these kinds of plays than highly speculative and expensive high-tech plays, for example.

Martin Marietta Materials (MLM) surged 3.9% to an all-time high as post-earnings momentum continued.

Twitter (TWTR)

I should have stayed stubborn in Twitter (TWTR)! In December, 2016 I declared TWTR a bullish Trump trade. I stuck by TWTR and took advantage of skepticism and sell-offs. A month ago, dusk seemed to descend on the investment thesis. I acknowledged my position at that time was likely my last. I sold a call against my last position and let the market carry away my position. Dan Nathan (of CNBC Fast Money fame) convinced me to jump back in one more time with a February $48/54 call spread. Nathan made the case on January 20th with Fidelity’s “In the Money” program on options trading. I took profits on Friday with the position deep in the money.

Needless to say, I was astounded by TWTR’s 13.2% post-earnings gain and 25% surge for the week. Regardless, I am staying on the sidelines. These latest moves look like a late acknowledgement of the value of Twitter’s platform. Going forward, I will try to stay open to re-evaluating my conclusion that an eventual move to open-sourced, decentralized social media platforms will undermine Twitter.

Twitter (TWTR) maintained strong post-earnings momentum to close near an all-time high

iShares MSCI Emerging Markets ETF (EEM)

The monthly chart below shows a major multi-year breakout for the iShares MSCI Emerging Markets ETF (EEM). Simply put, I am buying the dips from here as a firmly bullish secular move is likely underway. On-going weakness in the U.S. dollar supports the emerging market trade with commodities surging and the increased buying power of foreign currencies.

The iShares MSCI Emerging Markets ETF (EEM) broke out from a 13-year trading range to get these all-time highs.

Resolute Forest Products

Speaking of commodities, Resolute Forest Products (RFP) pulled off a turnaround from initial post-earnings weakness. RFP gained 30.1% for the week. Excluding newsprint, RFP sits in a sweet spot of the need for paper and wood-based materials. The Canadian company could also benefit if the Biden administration reverses Trump administration tariffs on our friends north of the border. I am buying dips from here. As a reminder, I am generally bullish on materials and commodities given global debasement of major currencies to fund pandemic relief efforts.

Resolute Forest Products (RFP) gained 30.1% on the week as it quickly rebounded from a post-earnings hiccup.

Be careful out there!

Footnotes

“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 #85 over 20%, Day #69 above 30%, Day #68 over 40%, Day #10 over 50%, Day #7 over 60%, Day #5 over 70% (overbought)

DAILY AT40 (T2108) chart
WEEKLY AT40 (T2108) chart
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 puts, long AAPL calls and calendar call spread, long MLM, long FOLD

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*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close. TradingView.com charts for currencies use Tokyo time as the start of the forex trading day.

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