Stock Market Commentary
A week ago, the fading of the growth tantrum further solidified my bullish read on the stock market. Last week, big cap tech took over from the growth tantrum. Buyers passed the baton in impression fashion but left small caps behind. Regardless, market dips are attracting buyers in a rotating fashion. The market’s liquidity engulfs everything in its due time. The only question is what’s up next for the rotation.
The Stock Market Indices
The S&P 500 (SPY) had an uncharacteristically strong week. The index managed to close twice above its upper Bollinger Band (BB). The 4000 level was barely a speed bump and is now a distant memory. If the current pace continues, the S&P 500 will take on the look of a parabolic surge.
The NASDAQ (COMPQX) is catching up. The tech-laden index started the week with a definitive confirmation of its latest 50DMA breakout. The NASDAQ closed the week rushing toward its all-time high. Big cap tech led the way and demonstrated that declarations of their collective death were greatly exaggerated. Instead, big cap tech simply rested ahead of a fresh rotation.
The iShares Trust Russell 2000 Index ETF (IWM) was my focus for the week, but the index of small caps disappointed. The rotation back to big cap tech left small caps behind. After gapping higher to start the week, IWM waned and limped to the finish of the week. Now, IWM is struggling to hold on to 50-day moving average (DMA) support (the red line below) long enough to wait out the next rotation cycle.
Stock Market Volatility
The volatility index (VIX) continues to confirm the bullish mood. The VIX actually started the week with two days of gains. It dropped from there to new 13-month lows. The old 15.35 pivot line is finally coming back into view.
With volatility lower and the VIX “cheap”, now is the time to buy protection ahead of the next pullback. CNBC’s Options Action described a monster trade in July VIX futures that looks like protection on a large portfolio. Of course, if money managers load up on a lot of protection, then general selling the stock market becomes less likely. Hedges specifically lower the need/desire to sell positions. The show’s options expert Michael Khouw also discussed the benefits of buying protection here. I am still holding UVXY call options and SPY puts as hedges.
The Short-Term Trading Call for the Big Cap Tech Take-Over from the Growth Tantrum
- AT40 (T2108) = 55.0% of stocks are trading above their respective 40-day moving averages
- AT200 (T2107) = 83.7% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation)
- Short-term Trading Call: cautiously bullish
AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, did not follow the major indices higher. My favorite technical indicator actually declined for the week to 55.0%. Clearly, big cap tech took over from the growth tantrum and left a lot of stocks behind. I am not quite ready to call this a bearish divergence: the gap is small. If the trend continues in the coming week, I will worry enough to downgrade my short-term trading call to neutral. I will only switch back to bearish after a failed challenge of the overbought threshold (70%) and/or a breakdown below the 50DMA on the S&P 500. For now, the 50DMA breakouts and the burst of fresh buying in this latest rotation are the dominant stories.
Stock Chart Video Reviews
Stock Chart Reviews – Below the 50DMA
Maxeon Solar Technologies Limited (MAXN)
It looks like Maxeon Solar Technologies Limited (MAXN) is a trading stock for now. I had to take profits after the stock failed at 50DMA resistance last month. With earnings coming up, I sat on my hands. MAXN sold off into earnings and lost another 13.9% post-earnings. I sold an April $25 put option to start building a fresh position.
Robo Global Healthcare Technology and Innovation ETF (HTEC)
With so many individual stocks running hot and expensive, I started reviewing the theme ETFs during March’s sell-off. The Robo Global Healthcare Technology and Innovation ETF (HTEC) was one that caught my attention. Advancements in healthcare technology and methodologies will be critical in keeping the global population safer. Yet, individual stocks are fraught with event risks as disappointing clinical trials and research & development can generate catastrophic losses. An ETF like HTEC is an attractive way to reduce risk while allowing for participation in upside. I bought a starter position in mid-March and will add more on a test of 200DMA support if one comes. (Last month I also made a brief case for Invitae (NVTA)).
Stock Chart Reviews – Above the 50DMA
Apple (AAPL)
Apple (AAPL) is “back”. America’s favorite stock woke up last week as part of the rotation back into big cap tech. The buying in AAPL was so strong that the stock closed above its upper Bollinger Band (BB) three times. Friday’s 2.0% surge was particularly surprising. The weekly call trade in AAPL is now back in play with the bullish 50DMA breakout. Since AAPL did not provide a dip on Thursday or Friday, I do not yet have a position. I will bend the rules and buy a round of weekly call options on a pullback Monday or Tuesday of at least 1%.
iShares Expanded Tech-Software Sector ETF (IGV)
In the previous Above the 40 post, I noted that growth was making a comeback. The iShares Expanded Tech-Software Sector ETF (IGV) was ground zero in the growth tantrum yet it survived the selling with near misses of 200DMA support. I bought some shares on Friday’s confirmation of a 50DMA breakout even as big cap tech streaked ahead. I anticipate holding until at least a challenge of the all-time high set in February.
Walmart (WMT)
Shares of Walmart (WMT) suffered their own tantrum in March. I made the case for accumulating WMT shares and now have a substantial position. More and more, I am looking to “grow roots” in cheaper and more reliable staples of the American (reflating) economy. The rebound from the recent lows has been surprisingly fast and sharp, but I am not complaining. WMT is a longer-term hold. The position gets re-evaluated on a challenge of all-time highs.
Brooks Automation (BRKS)
Brooks Automation (BRKS) provides manufacturing automation to the semiconductor and life sciences industries – two very key sectors. BRKS was stuck in a trading range from last January through March. An 8.5% gain and breakout on April 5th made the stock a buy. The small pullback for the rest of the week set up the first entry point. I did not see any news to explain the pop.
Warner Music Group Corp (WMG)
I first identified Warner Music Group Corp (WMG) for a buy after its February earnings report. I used the March sell-off to start buying shares. My last tranche was right at 200DMA support. With a confirmed 50DMA breakout last week, I feel relatively good about holding my position for quite some time. I am looking for an eventual breakout to new all-time highs.
Upstart (UPST)
A new trade on a secondary stock offering appeared in the form of software company Upstart (UPST). The company announced its offering of 2 million shares on April 7th and UPST promptly lost 12.6%. After announcing a $120 price for the offering on Friday, the stock dropped as low as $118. Once the stock rebounded above the offering price, I jumped in to buy shares (call options are too expensive with poor bid/ask spreads). I did not wait given the stock’s recent history of exceptionally large moves. Note the currently successful and picture-perfect test of 20DMA support (the dotted line in the graph below). The stop loss point is below the 20DMA.
U.S. Concrete (USCR)
I continue to “hawk” U.S. Concrete (USCR). The buying interest I was looking for as a trade signal may already be here. I was hoping for another round on a test of 50DMA support. Instead, buyers are defending 20DMA support. I will buy a smaller position than usual this week assuming support holds.
iShares U.S. Home Construction ETF (ITB)
The renewed interest in housing-related stocks ignited by Lennar (LEN) continues to grow. The iShares U.S. Home Construction ETF (ITB) suddenly jumped 2.6% on Friday to close at a fresh all-time high. Accordingly, the seasonal trade in home builders remains alive and well!
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 #117 over 20%, Day #101 above 30%, Day #99 over 40%, Day #6 over 50% (overperiod), Day #11 under 60%, Day #30 under 70%
Black line: AT40 (T2108) (% measured on the right)
Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%). Source: FreestockCharts
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long UVXY calls, long SPY puts, long WMT, long WMG, long HTEC, long UPST, long IGV, short MAXN put
FOLLOW Dr. Duru’s commentary on financial markets via StockTwits, Twitter, and even Instagram!
*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.
So much for rushing in to buy $UPST ahead of confirmation that $120 pricing support would hold! Stock plunged 12$ and closed at $112.46. A fresh lesson learned.