A Stock Market Melt-Up With Shrinking Participation – Above the 40 (July 2, 2021)

Stock Market Commentary

A stock market melt-up is in full effect. Investopedia defines a melt-up as “…a sustained and often unexpected improvement in the investment performance of an asset or asset class, driven partly by a stampede of investors who don’t want to miss out on its rise, rather than by fundamental improvements in the economy.” In the current melt-up, the rush is subtle given the slow creep in the S&P 500 (SPY) since the early April breakout, and the NASDAQ’s earlier double-top. Moreover, the fundamentals of the economy continue to improve as further confirmed by the jobs report for June. Instead, THIS melt-up is more characterized by the renewed persistence of a select group of stocks to move ever higher despite the drag of the majority of the stock market. Shrinking participation in the latest rally makes me as wary as ever of the stock market despite key buying opportunities.

The Stock Market Indices

In two weeks flat, the S&P 500 (SPY) transitioned from a breakdown below support at its 50-day moving average (DMA) (the red line below) to a surge above its upper Bollinger Band (BB). The index gained 0.8% and closed the week at an all-time high. In fact, the S&P 500 is on a 7-day streak of all-time highs.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) gained 0.8% and closed at an all-time high above its upper Bollinger Band (BB)

The NASDAQ (COMPQX) barely looked back after invalidating the double-top from February and April. The tech-laden index also closed the week at an all-time high for its participation in the melt-up. The 0.8% gain is the 6th up day of the 8 trading days since the breakout.

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% for a fresh all-time high.


The iShares Trust Russell 2000 Index ETF (IWM) persists in lagging. The trading range for most of 2021 remains well intact. IWM even lost 1.0% to close the week as an underline of its underperformance. The IWM prefers a melt-away to a melt-up.

The iShares Trust Russell 2000 Index ETF (IWM) lost 1.0% and shrunk away yet again from the top of its 2021 trading range.

Stock Market Volatility

The volatility index (VIX) spent the week churning. Despite the fresh 16-month closing low, the VIX somehow persisted in holding the recent intraday lows. Accordingly, the VIX remains poised for the next surge. Moreover, the bullish signal of declining and then extra low volatility remains elusive. As a reminder, in the previous week I jumped into a September $35/$45 UVXY call option for early (and cheap) coverage ahead of the S&P 500’s most dangerous months. UVXY closed the week at an all-time low although it managed to rally off its gap open.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) lost 2.7% but still managed to bounce off its recent pandemic intraday lows.

The Short-Term Trading Call For A Melt-Up

  • AT40 (T2108) = 48.1% of stocks are trading above their respective 40-day moving averages
  • AT200 (T2107) = 75.0% 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, keeps me wary of the stock market rally. Despite the melt-up and all-time highs in the S&P 500 and the NASDAQ, my favorite technical indicator closed lower for the week. In other words, a decent number of stocks not only failed to participate in the melt-up, but also they melted away into poorer technical positions. Since melt-ups can persist, there is no cause for flipping bearish. Sellers have a LOT to prove before I dare make such a call. However, I also must remain neutral despite the interesting buying opportunities that a melt-up market can create.

AT200 (T2107), the percentage of stocks trading above heir respective 200DMAs, also keeps me wary. This longer-term indicator of market health is still above its May low, but it remains on a year-to-date downtrend. At some point, something must give. Next month’s trading during the stock market’s most dangerous month should provide the resolution I prefer to see.

Stock Chart Video Review

Stock Chart Reviews – Below the 50DMA

Jumia Technologies (JMIA)

Since making a splash with all-time highs in February, Jumia Technologies (JMIA) has disappointed. The “Amazon of Africa” delivered bouts of hope but trended down until what now looks like a cathartic post-earnings response in May. JMIA picked itself out of a deep hole (post-earnings gap down) and rallied to close slightly up on the day. Buyers retained just enough strength to take JMIA to its converging 50 and 200DMAs.

Jumia Technologies (JMIA) lost 3.3% as it continues to pivot around its 50DMA for the month of June

TPI Composites, Inc. (TPIC)

A good friend of mine keeps putting TPI Composites, Inc (TPIC) in front of me. The manufacturer of wind blades looks well-positioned for today’s rush into alternative energy sources. Despite a low valuation, currently 1.0x sales, TPIC tumbled along with expensive growth stocks in March. Last week, TPIC broke out above its 50 and 200DMAs, so I got ready to buy. Unfortunately, buyers failed to confirm the move with a subsequent higher close. In fact, TPIC ended the week closing below its 50 and 200DMAs again. Still, thanks to my good friend, I am pretty sure I will not miss buying a confirmed breakout.

TPI Composites, Inc. (TPIC) attempted a breakout above the converged 50 and 200DMAs but failed to confirm. The stock ended the week with a 2.8% loss and closed below its 50DMA.

U.S. Global Jets ETF (JETS)

Despite the excitement over reopening trades, the U.S. Global Jets ETF (JETS) peaked in March and is now trending downward since June. JETS looks poised to test its 200DMA. I will be watching the trading action closely there for a buy on a successful test of support…or short on a confirmed 200DMA breakdown.

U.S. Global Jets ETF (JETS) topped out in March and has been sinking since the break of the trading range in June.

Eagle Bulk Shipping Inc. (EGLE)

Even shippers are slipping out of bullish form. Eagle Bulk Shipping Inc. (EGLE) transports bulk shipping across the world’s oceans and should be a great play on an expanding global recovery. Indeed, EGLE is up 139% year-to-date. However, insiders saw juicy profits and decided to dump 1,695,182 shares on the market in a secondary stock offering priced at $46.50. EGLE dutifully closed the week just under that price. Per the trading strategy on stock offerings, EGLE is not a buy again until it closes above $46.50. Given the proximity to 50DMA resistance, I will not touch EGLE until a confirmed 50DMA breakout. Until then, EGLE could be a candidate for a short sale…except 18% of the float is already sold short. Thus, EGLE sits vulnerable to a short squeeze at any random time.

Eagle Bulk Shipping Inc. (EGLE) suffered a 50DMA breakdown but did not technically confirm the move.

Stock Chart Reviews – Above the 50DMA

Schlumberger (SLB)

The dip came in Schlumberger (SLB) soon after the confirming breakout. Per my plan, I am accepting the discount from the market and accumulating shares. I still think of oil-related stocks as good contrarian plays for 2021.

Schlumberger (SLB) lost 0.9% but continues to levitate above 50DMA support.

CryoPort (CYRX)

I identified CryoPort (CYRX) as a potential buy on a breakout two months ago. Earnings a few days later confirmed the breakout, and I bought in. However, sellers quickly took over. They plunged CYRX to its first close below the 200DMA since April, 2020. I held out for a test of support from the March and April lows (the thick horizontal line below). Buyers showed up again to defend the lows and even printed a bottoming hammer (see label below). I added more shares once CYRX climbed over its 200DMA.

CryoPort (CRYO) pulled back from a breakout and is trying to cling to 20DMA support.

Fastly (FSLY)

The roller coaster called Fastly (FSLY) continues. FSLY lost 27.1% post-earnings in May and apparently washed out most of the sellers. In mid-June, FSLY closed the post-earnings gap up after a 50DMA breakout. Last week, the gas finally ran out on FSLY. The stock drifted back to 20DMA support (the dotted line). Given fresh sellers are seemingly showing up in relief to get their money back from the post-earnings calamity, I am waiting for the outcome of a 50DMA test to decide on a next move.

Fastly (FSLY) benefited from a consistent post-earnings recovery. The rebound stalled after the gap closed. Stock now looks poised to test 50DMA support.

Herman Miller, Inc. (MLHR)

Even at this stage in the game, I relearn tried and true lessons. Herman Miller, Inc. (MLHR) lost 6.9% post-earnings, and I jumped into a short position assuming this 50DMA breakdown would carry momentum. I ignored the prior 50DMA breakdown which sellers failed to confirm. I should have at least waited for a confirmation of the latest breakdown not to mention a break of the previous low. Perhaps predictably, MLHR turned on a dime and once again recovered above its 50DMA. Now I wait to see whether I stop out above the pre-earnings high or get another chance to ride downward momentum.

Herman Miller, Inc. (MLHR) quickly recovered from a post-earnings 50DMA breakdown but ended the week with a 3.4% loss.

Advanced Micro Devices Inc. (AMD)

Advanced Micro Devices Inc. (AMD) woke up last week with a sharp melt-up of its own. AMD shot straight up on fresh momentum in the semiconductor sector. NVIDIA (NVDA) broke out in June and perhaps AMD is playing fashionably late. Belatedly, I jumped back into AMD near the end of Wednesday’s 4.9% surge and close well above its upper-BB. In FOMO (fear of missing out) cases like this I choose the low risk (and low potential) position of a calendar call spread. Given the small likelihood of a further surge into Friday expiration, I chose a July 02/16 $95 call spread. As it turned out, AMD had just enough juice to tap $95 at one point on Friday and from there trigger my initial profit target. Now I will look for a new entry in the coming week.

Advanced Micro Devices Inc. (AMD) shot straight up after its second 200DMA breakout in June.

Plug Power, Inc. (PLUG)

I almost forgot about Plug Power (PLUG). The precipitous fall from the January highs looked like the end of an amazing ride from the low single digits. Last week, PLUG came into my radar again. I noticed May’s bottoming move. On high volume, buyers printed a bullish engulfing pattern that erased a plunge to a 6-month low with a 17.6% gain. The first buy signal flared on the next higher close. Given PLUG survived its last earnings report, I jumped into a small position last week to ride what looks like the early stages of a slow recovery.

Plug Power, Inc. (PLUG) has pivoted around its 200DMA since breaking out in late May.

Alphabet Inc (GOOG)

Alphabet (GOOG) made a move on Friday to join the melt-up. Buyers met the challenge at 20DMA support with a quick rebound to a fresh all-time high. The tag of the upper-BB makes GOOG look poised for a continuation move as long as the major indices cooperate. I am riding July $2600/$2620 call spread that I bought while GOOG was churning at its prior all-time highs.

Alphabet Inc (GOOG) pushed on a fresh breakout to an all-time high with a 1.9% gain.

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 #166 over 20%, Day #150 above 30%, Day #10 over 40% (overperiod), Day #5 under 50% (underperiod), Day #17 over 60%, Day #79 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%). Chart always show the latest download date. 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

Grammar checked by Grammar Coach from Thesaurus.com

Full disclosure: long UVXY call spread, long GOOG call spread, long PLUG, short MLHR, long JMIA, long SLB, long CYRX

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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.

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