The Stock Market Continues to Digest Inflation Fears – Above the 40 (March 19, 2021)

Stock Market Commentary

A great stock market divergence continued last week. However, the market overall is looking more and more resilient as it continues to digest inflation fears. Even the biggest victim of the great divergence, the NASDAQ (COMPQX), remains well above its lows for the month.

A very dovish session with Federal Reserve Chair Jay Powell stoked a market rally and carved an important breakdown for the volatility index (VIX). Powell provided zero assurance that the Fed planned to interfere with the rise in long-term bond yields. However, he also insisted that inflation expectations would regardless remain well-anchored around 2%. Still, in classic post-Fed style, the market next day faded the initial post-Fed reaction before stabilizing on Friday. With the NASDAQ down for the month while the S&P 500, small caps, and financials remain up for the month, inflation fears are starting to wane as a broad-based catalyst for market weakness. Instead, the on-going churn looks like digestion rather than crippling heartburn.

The Stock Market Indices

The S&P 500 (SPY) ended the previous week with an all-time closing high. The index hit two more all-time highs last week before wobbling into a successful test of support at the flattening 20-day moving average (DMA) (dotted line below).

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) bounced perfectly off 20DMA support.

The NASDAQ (COMPQX) pivoted around its 50DMA (red line below) for 5 trading days before stumbling into a fresh 50DMA breakdown. Friday’s buyers saved the tech-laden index from confirming the breakdown.Accordingly, the NASDAQ is safe from a test of the March lows for now.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) gained 0.8% and avoided confirming a 50DMA breakdown.


The iShares Trust Russell 2000 Index ETF (IWM) started the week at an all-time high. The index of small caps ended the week with a successful test of 20DMA support. The short side of my weekly diagonal calendar call spread on IWM expired harmless. However, with a $235 strike on the long side, I will need a fresh rally this week to come up roses.

The iShares Trust Russell 2000 Index ETF (IWM) gained 0.8% and held 20DMA support.

The Select Sector SPDR Trust Financial (XLF) tested uptrending 20DMA support for the first time since January. The rally in financials looks well intact.

The Select Sector SPDR Trust Financial (XLF) had a now rare down day but bounced off 20DMA support.

Stock Market Volatility

The volatility index (VIX) provided the most interesting drama for the week. In the wake of the Fed-inspired rally, the VIX closed below the 20 level for the first time since February 21st. However, the lack of follow-through cooled my heels from getting more bullish and less neutral on the short-term trading action. The VIX jumped 12.2% the next day. Cue the drumroll….volatility faders went right back to work on Friday.

At the beginning of the week I completely reset my volatility hedge. I dumped my money-losing UVXY shares and March calls and bought 2 fresh May 5 call options. I am looking to keep a shorter leash on this hedging going forward. The chart below provides a great reminder that VIX spikes are just as inevitable as the reversal of those same spikes.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) rebounded from a 1-day breakdown below the 20 level.

The Short-Term Trading Call In A Stock Market Divergence

  • AT40 (T2108) = 58.8% of stocks are trading above their respective 40-day moving averages
  • AT200 (T2107) = 86.1% 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, faced rejection from the 70% overbought threshold. My favorite technical indicator closed the week at 58.9%. AT40 now trades in limbo after reaching as high as 66% last week. An interesting tension now exists in the middle of the great divergence: a digestion of inflation fears. The failure of AT40 to break through the overbought threshold is bearish. The VIX’s close encounters with the 20 support level are borderline bullish. On the bearish side, I am content to wait for the S&P 500 to confirm a 50DMA breakdown. On the bullish side, I will increase dip buying if the VIX confirms a breakdown below 20.

Stock Chart Video Reviews

Stock Chart Reviews – Below the 50DMA

Okta Inc (OKTA)

A post-earnings rebound above 200DMA resistance (the blue line below) held out the promise of recovery for Okta Inc (OKTA). Instead, after a quick return to its 200DMA, OKTA confirmed a fresh breakdown on a 7.1% loss on Thursday. OKTA also tested its post-earnings closing low. As a result, OKTA suddenly looks in danger of resuming its pullback to lower levels.

Okta Inc (OKTA) confirmed a fresh 200DMA breakdown and tested its post-earnings low.

iShares 20-Year Treasury Bond ETF (TLT)

The downtrend continues in the iShares 20-Year Treasury Bond ETF (TLT) as the bond market gorges on inflation fears. I finally bought a fresh set of (May) put options as a fade of Friday’s small gain. TLT suddenly looks like it could go a lot lower than most expect it can…or at least faster than expected. It could also be time to do a big pairs trade between TLT and XLF. Stay tuned.

iShares 20-Year Treasury Bond ETF (TLT) fell to a near 2-year low before Friday’s 0.6% gain.

Coupa Software Inc. (COUP)

Earnings were not kind to procurement software company Coupa Software (COUP). The sell-off in growth stocks pushed COUP below its 200DMA for the first time in 11 months. A 4.8% post-earnings drop confirmed the change in sentiment for COUP. The stock is a short here. However in this market, a stock like COUP could sprint higher 8-10% on an open just because. Eleven percent of the float is already sold short.

Coupa Software Inc (COUP) is struggling to stabilize after a 4.8% post-earnings loss.

ReneSola Ltd (SOL)

Earlier this month I wrote about the incredible journey of ReneSola (SOL) through a series of secondary stock offerings. The stock fell another 7.8% the next trading day and bottomed from there. An analyst upgraded SOL to an outperform. Buyers rushed back into SOL to the tune of a 36.3% gain. SOL has not made net progress from that close. Still, that move perked up my interest in solar companies that I want to hold. Sentiment may be changing again for the solar sector. Last week I bought back into Maxeon Solar Technologies (MAXN).

Renesola Ltd (SOL) rallied back to 20DMA resistance and momentum ended just as abruptly as it started.

Zillow Group (ZG)

Zillow Group (ZG) is down 30.4% from its all-time closing high. Somehow the stock did not even come close to testing its 200DMA support. ZG has enjoyed an incredible run-up. This month’s churn is a major display of digestion for inflation fears. Typically, higher interest rates kill interest in housing-related stocks. Yet, demand remains strong for homes. The current Spring selling season could cause several big flares of trading in these stocks (bright or explosive flares!).

Zillow Group (ZG) confirmed 50DMA resistance.

DMC Global Inc. (BOOM)

True to its ticker symbol, DMC Global Inc (BOOM) produces and sells explosive equipment for a variety of heavy industries. For some reason, the float is sold 19% short despite the persistent run-up for a year. On Friday, BOOM finally confirmed a 50DMA breakdown and closed the week 19.7% off its all-time high.

DMC Global Inc. (BOOM) confirmed a 50DMA breakdown.

Stock Chart Reviews – Above the 50DMA

Intel Corp (INTC)

Ever since Intel (INTC) bounced neatly off 200DMA support in January, I have eyed it for between earnings trades. I have only managed one round of call options because I assumed that the 9.3% post-earnings reversal signaled the end of the abrupt sentiment shift for the semiconductor chip company. I am now on alert for the next dip to buy like a test of 20 and/or 50DMA support.

Intel Corp (INTC) fell back from a 13-month high.

Boeing Co (BA)

I missed the last run-up in Boeing (BA). In 4 trading days the previous week, BA soared 20.2%. As with so many parabolic moves, the fun ended after BA stretched well above its upper Bollinger Band (BA). The stock is now in a cooling off period. I am eyeing the $250 level as a potential spot for a swing trade on a “calm after the storm” technical pattern.

Boeing (BA) cooled off last week after a brief parabolic burst upward.

Best Buy (BBY)

Just as the immediate post-earnings swings made little sense for Best Buy (BBY), the current swing higher makes little sense. BBY ended the week with a 4.2% gain. While BBY pulled back intraday from resistance that has held since October, I made a “this time is different” trade with a Mar/April $125 calendar call spread. Note at the same time I have a small short position and April puts on the SPDR S&P Retail ETF (XRT). Churn in the coming month could allow me to exit both positions net profitably.

Best Buy (BBY) surged off 50DMA support and closed the week with a 4.2% gain.

Autozone (AZO)

Finally, Autozone (AZO) made a strong move to a new all-time high. I am a buyer again on the dips.

Autozone Inc (AZO) broke out to a new 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 #108 over 20%, Day #92 above 30%, Day #90 over 40%, Day #11 over 50% (overperiod), Day #2 under 60% (underperiod), Day #21 under 70%

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 calls, long SPY put spread, long MAXN, long TLT puts, long IWM calls, long BBY calendar call 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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