A Split Personality Market Emerges from the End of Overbought Conditions – Above the 40 (February 19, 2021)

Stock Market Commentary

The week ended with a split personality. While the S&P 500 meandered and the NASDAQ flattened, small caps rebounded convincingly. Financials also forged ahead. As a result, the recent end to overbought conditions may only signal (mild) bearish conditions for a portion of the stock market.

The Stock Market Indices

The S&P 500 (SPY) was on the unhappy side of the split personality. Still, the index lost just 0.2%. The on-going drift continues to make the S&P 500 look reluctant to depart with all-time highs.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) ended the week drifting to its lowest close in a week.

The NASDAQ (COMPQX) could not decide which side of the split personality looked most attractive. The tech-laden index essentially closed the day flat with a 0.1% gain. The NASDAQ faded from intraday highs. As a result, it did not quite confirm success with the previous day’s test of support at the 20-day moving average (DMA) (the dotted black line in the chart below).

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) maintained 20DMA support but did not confirm a successful test.


The iShares Trust Russell 2000 Index ETF (IWM) firmly landed on the happy side of the split personality. The index of small caps gained 2.1% and confirmed a successful test of the uptrending 20DMA. IWM already looks prepared to resume its upward push. This bullish behavior motivated me to buy a weekly calendar spread at the $230 strike.

The iShares Trust Russell 2000 Index ETF (IWM) surged to a successful test of 20DMA support.

Financials also landed on the happy side of the split personality market. The Select Sector SPDR Trust Financial (XLF) gapped up and gained 1.2%. The all-time high firmly maintains a bullish setup for XLF.

Select Sector SPDR Trust Financial (XLF) is back in all-time high territory.

Stock Market Volatility

The volatility index (VIX) failed to maintain the previous day’s momentum. The volatility faders succeeded in erasing an initial gap higher. The VIX closed with a 2.0% loss.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) continued its struggles to generate fresh momentum.

The Short-Term Trading Call: A Drift Back to Bearishness

  • AT40 = 68.0% of stocks are trading above their respective 40-day moving averages (ending 6 days overbought)
  • AT200 = 89.8% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation)
  • Short-term Trading Call: cautiously bearish

The split personality trading action is forcing me to take on a split personality.

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, rebounded to close the week at 68.0%. My favorite indicator faded perfectly from the 70% overbought threshold and seemingly confirmed my (cautiously) bearish short-term trading call. However, the split personality behavior in the stock market means that a general trading call is more blunt than usual. Indeed, as I mentioned above, IWM enticed me to dabble on the bullish side of the split personality. Moreover, the fundamentals for bullishness beyond the next pullback (whenever it happens) are strengthening.

Dr. Marty Makary, a professor at the Johns Hopkins School of Medicine and Bloomberg School of Public Health, wrote an opinion piece in the Wall Street Journal with the enticing title “We’ll Have Herd Immunity by April.” The article made some compelling, even if hotly debated, arguments based on observational data. Makary’s assessment relies on the estimate that about 55% of Americans have natural immunity, some of which cannot be detected by anti-body tests. If Makary is correct, the stock market’s persistent rise makes plenty of sense, and my short-term bearish trading call will be one more short-lived change.

Imminent herd immunity also helps create a split personality stock market. Small caps have the most to gain from a reopened economy. Both small caps and financials could gain big from a deluge of stimulus coming just as people can finally spend money broadly across the economy. Think less Amazon deliveries and more shopping at local and small businesses.

The currency market added its smiles for the split personality market. As I suspected could happen, the Australian dollar versus the Japanese yen (AUD/JPY) pushed to a fresh 2+ year high. As a result of the 1.0% gain, AUD/JPY signaled “risk-on” sentiment is alive and well.

The Australian dollar versus the Japanese yen (AUD/JPY) broke out to a new 26-month high.

Stock Chart Video Review

Stock Chart Reviews – Below the 50DMA

Emergent Biosolutions (EBS)

My trade in vaccine manufacturer Emergent Biosolutions (EBS) ended ahead of earnings as the stock pushed towards critical resistance from last summer. The trade turned out to be timely as EBS lost 12.0% on Friday after reporting earnings. Apparently, the company guided below analyst consensus and is now too expensive. EBS closed just under 50DMA support (the red line in the chart below). I am keeping an eye out for signs of a rebound, especially from 200DMA support (the blue line in the chart below). A break of the 200DMA makes the stock a short.

Emergent Biosolutions (EBS) plunged 12.0% post-earnings

PDF Solutions (PDFS)

PDF Solutions (PDFS) provides software to the semiconductor industry. PDFS disappointed analysts and suffered a 13.8% post-earnings loss. The sharp 200DMA breakdown put the stock in a bearish position. PDFS last traded below 200DMA support last April. Indeed, very few stocks in the stock market are trading below this critical long-term support. Accordingly, the stock is a short candidate on a fade from 200DMA resistance.

PDF Solutions (PDFS) printed a bottoming hammer after selling pressure finally pushed the stock over the edge of 50DMA support.

Unity Software (U)

I have kept an eye on Unity Software (U) since missing the post-IPO run-up. However, a post-earnings 50DMA breakdown undermined the technical picture. Unity Software confirmed the 50DMA breakdown and continues to drift downward. Technically, the stock is a short, but this is hardly the market to try to fade high-flying, expensive story stocks. Per Yahoo Finance, “Unity Software Inc. operates a real-time 3D development platform. Its platform provides software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices.”

If not for my bearish short-term trading call, I would take Friday’s 2.6% gain as a sign to play the stock for a rebound to downtrending 20DMA resistance.

Unity Software (U) drifted its way to a 3-month low.

Stock Chart Reviews – Above the 50DMA

Applied Materials (AMAT)

Applied Materials (AMAT) faded from its intraday high but managed to close with a post-earnings 5.3% gain and all-time high. The global chip shortage has the semiconductor industry in the spotlight. Capacity and product shortages make for a lot of opportunity.

Applied Materials (AMAT) jumped 5.3% post-earnings although it faded hard from intraday highs.

Caterpillar (CAT)

I relaxed a bit on my regular rotation in Caterpillar (CAT) call options and paid the price of lost opportunity last week. CAT popped to a new all-time high with a 5.0% gain. The on-going rally in CAT is consistent with the bullish trade on industrial names, particularly those companies involved with infrastructure and commodities.

Caterpillar (CAT) broke out to an all-time high.

Deere & Co. (DE)

Speaking of the industrial/commodities trade, Deere & Co. (DE) got a firm post-earnings pop with a 9.9% gain and all-time high. DE has come in and out of my radar. Time to leave it on!

Deere & Co. (DE) soared 9.9% post-earnings to an all-time high.

Eventbrite Inc (EB)

The re-opening trade promises recovery for companies that help people gather. Eventbrite (EB) adapted to lockdowns by enabling virtual events. The return to physical gatherings will be a great bonus. EB had a bullish 50/200DMA breakout in early November and never looked back. Friday’s breakout promises to release EB from a 2+ month trading range. EB last traded this high 52 weeks ago, just ahead of the coronavirus pandemic.

Eventbrite Inc. (EB) broke out to a new 52-week high on a 7.1% surge.

Live Nation Entertainment (LYV)

Current business for ticketing and events company Live Nation Entertainment (LYV) is so bad that its last earnings report was mainly about deferred revenue. From Seeking Alpha transcripts:

“A bit more detail on deferred revenue, which is tracking ahead of where we told you last quarter we were going to be. At the end of the third quarter, deferred revenue for events in the next 12 months was $1.4 billion. Of the $421 million increase, $383 million was due to a shift from long-term deferred revenue to current deferred revenue for concerts rescheduled Q3 of 2021.

At the end of the third quarter, we still had $103 million of long-term deferred revenue most of which equipped to short term deferred revenue by the end of the year. Given this, along with the projected Q4 outflow of $74 million from additional ticket refunds, we now forecast deferred revenue of $1.4 billion at the end of the year prior to any additional ticket sales. Given the uncertainty in the market on timing of shows returning, we cannot give any more guidance beyond the burn rates and refund levels we just gave you.”

News like that was still good enough to earn LYV a 14.9% post-earnings gain in November. Friday’s 4.3% gain got LYV a new all-time high. Incredibly, LYV is even up 18.8% from its pre-pandemic high set 52-weeks ago; that kind of performance is a great one-year return in times of good business. The stock can do this with almost no business for a year. Imagine what will happen when business normalizes…unless of course the rebound and recovery is already priced in. Hard to tell without hindsight.

Live Nation (LYV) gained 4.3% to close at an all-time high

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 #89 over 20%, Day #73 above 30%, Day #72 over 40%, Day #14 over 50%, Day #11 over 60% (overperiod), Day #2 under 70% (underperiod)

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 put spread and puts, long IWM calendar spread

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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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