How Declining Market Breadth Delivered A Beating On Stocks – Above the 40 (July 16, 2021)

Stock Market Commentary

The stock chickens have come to roost on declining market breadth. The stock market indices still generally appear fine, but an ever growing swath of individual stocks have fallen further and further behind. Last week in particular, sellers delivered an extended beating on individual stocks. The signs of waning confidence in the reopening trades and economic recovery are spreading across a broad range of sectors and industries. For a good number of stocks, investors priced in the best scenarios months ago. Now, they are looking ahead and finding sources of worry – or at least reservoirs of reduced optimism. The selling last week was enough to get me waiting on oversold trading conditions.

The Stock Market Indices

The S&P 500 (SPY) declined 0.8% and stopped just short of uptrending support at its 20-day moving average (DMA) (the dotted line below). The near relentless uptrend for the index says nothing about the underlying weaknesses from declining market breadth. The S&P 500 (SPY) is not the place to find deteriorating conditions.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) dropped 0.8% and closed just above its uptrending 20DMA

The NASDAQ (COMPQX) suffered four days straight of selling coming off the all-time high. The tech-laden index closed below its 20DMA. In an oversold market, the NASDAQ could be poised to test its 50DMA. I expect the resolution of declining market breadth will hit the NASDAQ a lot harder than the S&P 500. The trade below the 20DMA for the first time in two months is a first small sign of weakness.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) fell 0.8% and closed below its uptrending 20DMA for the first time in 2 months.


The iShares Trust Russell 2000 Index ETF (IWM) revealed a little more of the underlying weakness. Four straight days of selling took the index of small caps back to the lower part of its range. The resolution of declining market breadth into oversold conditions should take IWM through the bottom of its trading range and on to a test of 200DMA support.

The iShares Trust Russell 2000 Index ETF (IWM) lost 1.2% and closed just above the bottom of its 2021 trading range.

Stock Market Volatility

The volatility index (VIX) jumped 8.5% as if in a sudden recognition of looming oversold conditions. Still, the VIX did not close above the 20 threshold of “elevated” conditions. The VIX even closed below the last surge that faders knocked off the shelf. If declining market breadth takes the stock market into oversold conditions, the VIX has plenty of upside potential. The kind of selling required to take the market into oversold territory should motivate enough of a rush for put protection to push the VIX toward May’s heights.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) popped 8.5% to close at 18.5 in a move that holds the recent bottom.

The Short-Term Trading Call With Declining Market Breadth

  • AT40 (T2108) = 29.2% of stocks are trading above their respective 40-day moving averages (9-month low)
  • AT200 (T2107) = 63.5% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation) (8-month low)
  • Short-term Trading Call: neutral

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, closed at its lowest point since October, 2020. At that time, the stock market almost returned to oversold trading conditions after going oversold the prior month. Now at 29%, AT40 can easily drop to oversold conditions in the coming week. However, a significant rebound can happen at any moment. AT40 is “close enough” to oversold in a bull marjet. Trading difficulties are accentuated by the current earnings season (which I suspect will validate some economic concerns) and the still lofty levels of the major indices. In other words, the potential for further downside coincides with the imminent potential for a sharp rebound. This tension describes the nature of a divergent market with declining market breadth and keeps my short-term trading call tucked away at neutral. Moreover, I maintain an August or September target for true oversold trading.

My trading interest rests mainly with the beaten up stocks that have suffered mightily from the declining market breadth. The simple technicals of 50 and 200DMA support and resistance along with confirmation of breakouts and breakdowns are my guides for trading opportunities.

Whether it was March, May, or June, a wide swath of stocks have declared sustained tops. The sell-offs in recent weeks and months suggest that the high expectations for an economic recovery were priced in and new catalysts must revive these stocks. Some of the charts below are just a few examples of the stocks taking a beating through much of this period of declining market breadth.

Stock Chart Video Review

Stock Chart Reviews – Below the 50DMA

American Outdoor Brands, Inc. (AOUT)

Earnings did not treat American Outdoor Brands, Inc. (AOUT) well. A 22.0% post-earnings loss disrupted a year-to-date relentless uptrend. Until the post-earnings 50DMA breakdown, this outdoor recreation outfitter was following a steady and reliable ride up its 50DMA. AOUT is also the kind of company that should do well in the reopening economy. However, now the stock has a lot to prove after reversing all the gains from its May breakout. I expect a good number of formerly reliable to stocks to start crumbling in the coming weeks given the continued deterioration in the underlying market’s health.

Interestingly, an undeterred B. Riley Securities raised its target on AOUT from $44 to $46. As a result, I will keep my eye on this stock for renewed buying interest for at least a rebound back to 50DMA resistance. A buy on this stock must include a stop below the preceding closing low or the post-earnings closing low, whichever is lowest at the time of the buy.

American Outdoor Brands, Inc. (AOUT) plunged 22.0% post-earnings. In one move, the 50DMA breakdown wiped out all the gains from the May breakout.

Coupa Software (COUP)

I pegged Coupa Software (COUP) as a comeback trade after a 50DMA breakout. The trade worked well until COUP pulled back on June 30th just short of the highs from April. I interpreted that move as a failed challenge of overhead resistance and took profits. COUP had just enough juice left to marginally beat that resistance but gapped down just short of overhead 200DMA resistance. That pullback was another cue to leave COUP behind.

Whatever Coupa Software said during its investor day on July 15th accelerated the selling. A 9.9% loss sliced COUP through 50DMA support. Sellers returned for more with a 3.8% loss and test of the June low. This stock is a clear no touch for me until at least the next 50DMA breakout.

Coupa Software (COUP) plunged right back to its post-earnings low on the heels of an investor day. Two days of selling created 13.3% in losses and confirmed a 50DMA breakdown.

Maxar Technologies (MAXR)

Sometimes I sit on a winning trading position to leverage patience into further gains. That approach went awry with Maxar Technologies (MAXR). I took my eye off the ball after MAXR turned backward from a marginal breakout above the April high. I did not take the cue to sell. A 200DMA and 50DMA breakdown later, I am still holding the stock with a small loss. I think the fundamental thesis riding an analyst call remains, but I should have locked in remaining profits and watched and waited for further developments.

Maxar Technologies (MAXR) faded to a 1.9% gain on a failed attempt to recover from a confirmed 50DMA breakdown.

Micron Technology (MU)

Once Micron Technology (MU) hit my upside target at the downtrending 50DMA, my calendar call notched meager profits. I decided to risk holding on. That decision failed to work out. Now the long side of my position needs to survive a 200DMA breakdown. I am not optimistic given with the declining market breadth now weighing down semiconductors.

Micron Technology, Inc (MU) bearishly sliced through 200DMA support on a 2.5% loss. MU closed at its low for the year and is back to flat for the year.

Lennar Corporation (LEN)

Lennar Corporation (LEN) became another failed hold. My position looked promising, and I anticipated a winning trade once LEN broke out to a two month high. Sellers took over from there. I failed to salvage value by Friday’s expiration. LEN should be my last trade on home builders outside the seasonal trading strategy. I made an exception given the technicals, and the originally strong reaction to the company’s earnings.

Lennar Corporation (LEN) has not quite confirmed a fresh 50DMA breakdown and faded off its 50DMA resistance.

Taylor Morrison Home Corporation (TMHC)

The award for worst home builder stock (in my universe) goes to Taylor Morrison Home Corporation (TMHC). TMHC is the only home builder stock in negative territory for the year. Sellers took control of TMHC starting with late April earnings. The chart says everything: bears could have short TMHC on the 50DMA and/or 200DMA breakdowns. TMHC now trades at an 8-month low.

Taylor Morrison Home Corporation (TMHC) lost 1.8% and closed at its lowest point since November, 2020.

Boise Cascade, LLC (BCC)

I identified wood products company Boise Cascade, LLC (BCC) as an opportunity to play a bounce from 200DMA support. Sellers took the briefest of pauses at the 200DMA and ended the week with a confirmed 200DMA breakdown. I did not even get a chance to think about buying the stock. BCC is now 35.5% off its all-time high set just two months ago. BCC is yet one more stock suffering mightily from declining market breadth. The 200DMA breakdown adds to doubts and warnings about what awaits the economy around the corner, home builders in particular.

Boise Cascade, LLC (BCC) confirmed a bearish 200DMA breakdown with a 4.7% plunge.

AGNC Investment Corp (AGNC)

It was hard to sell AGNC Investment Corp (AGNC) but the confirmation of the 50DMA breakdown forced my hand. Now, AGNC is struggling to hold on to 200DMA support. I doubt it will hold as declining market breadth should continue to weigh on stocks in economically sensitive sectors. A looming decision by the Federal Reserve to pull back on purchases of Mortgage Back Securities (MBS) must be weighing on AGNC as well. An adage says to buy what the Fed buys. I supposed the converse applies as well.

AGNC Investment Corp (AGNC) is struggling to hold on to 200DMA support.

Oscar Health, Inc (OSCR)

I watched a Yahoo Finance interview with a smiling CEO of Oscar Health, Inc. (OSCR) on the day of the IPO. The surreal combination of the scripted optimism along with a stock opening $3 below its $39 IPO price took me aback. Sellers have weighed on OSCR in one more hard lesson about the ominous implications of a busted IPO. May earnings gave the stock a near 1-month respite before sellers went back to work. My favorite moment of the interview was the question “what do you want out of the capital markets?” The CEO replied “we want to tell our story” – as if money-making and filling the corporate treasury is not the prime purpose.

Alphabet (GOOG) backs this high-tech health insurance play. Perhaps Alphabet will eventually need to step in and just buy Oscar Health, Inc outright.

Oscar Health, Inc. (OSCR) has sold off nearly non-stop for a month.

U.S. Global Jets ETF (JETS)

I was a buyer on U.S. Global Jets ETF (JETS) on its test of 200DMA support with a stop below $23. JETS never confirmed a bounce from support. Instead, JETS confirmed a 200DMA breakdown and looks like a short with a stop above $23.75 or so. Airlines provide yet one more area of the stock market suffering from declining market breadth. The on-going losses also generate questions about the health of the reopening trade.

U.S. Global Jets ETF (JETS) confirmed a 200DMA breakdown and is deeper into bearish territory.

Valero Energy Corporation (VLO)

The energy markets are a late sufferer of the declining market breadth. Oil refiner Valero Energy Corporation (VLO) confirmed a 50DMA breakdown this month and fell nearly straight down to 200DMA support. I am of course eyeing VLO for a buy here, but I doubt that the stock is up to the challenge of surviving this test.

Valero Energy Corporation (VLO) lost 2.9% and faces a critical test of 200DMA support.

Schlumberger (SLB)

I was optimistic about the implications of the breakout for Schlumberger (SLB). That buying was the last positive for SLB. The pullback in the oil sector dragged SLB through a 50DMA breakdown. Now SLB looks ready for a 200DMA test. I will look to add to shares on a successful test of 200DMA support.

Schlumberger (SLB) tumbled to a 2 1/2 month low and looks ready to test 200DMA support.

ChargePoint Holdings (CHPT)

The secondary bug hit ChargePoint Holdings (CHPT) last week. After market close on July 12th, insiders announced plans to dump 12 million shares, almost 10% of the current float. Sellers got ahead of the plan with a 9.5% drop that created both a 50 and 200DMA breakdown. ChargePoint Holdings announced a $23.50 price for the offering 3 days later. Per the strategy for trading after a secondary stock offering, CHPT is a no touch until it closes above $23.50. Overhead resistance complicates the trade. The insiders may have caused enough damage to limit the upside in CHPT for some time.

ChargePoint Holdings, Inc (CHPT) has sold off almost every day of July and bearishly sliced through 200DMA and then 50DMA support.

Carnival Corporation (CCL)

The peak for Carnival Corporation (CCL) came just last month. The declining market breadth and retreat from reopening trades took its toll from there. Sellers have been unrelenting. CCL has lost almost a third of its value in just one month. Last week’s confirmed 200DMA breakdown looks very bearish for CCL. CCL seems poised to retest its post-earnings lows from January.

Carnival Corporation (CCL) confirmed a bearish 200DMA breakdown last week and lost another 4.7% to close the week. CCL has sold off nearly straight down since early June.

Wynn Resorts, Limited (WYNN)

The peak for Wynn Resorts, Limited (WYNN) happened in March. Declining market breadth weighed on WYNN from there. The stock did well to hold a trading range for several months. Sellers took over for most of July. A confirmed 200DMA breakdown has WYNN poised to test its 2021 low set in January.

Wynn Resorts, Limited (WYNN) confirmed a bearish 200DMA breakdown in the middle of 4 straight days of selling. WYNN closed at a 5-month low.

Booking Holdings Inc (BKNG)

The peak for Booking Holdings Inc (BKNG) dragged out from March to May. The declining market breadth gently pushed BKNG into a downward drift. The stock closed the week with a 200DMA breakdown and a new 5 month closing low. Of the travel-related reopening trades that I follow, BKNG is resisting gravitational pull relatively well.

Booking Holdings (BKNG) closed below its 200DMA for the first time in 8 months. BKNG is also down for the year again.

Stock Chart Reviews – Above the 50DMA

Amazon.com (AMZN)

Even mighty Amazon.com (AMZN) acquiesced to the sellers last week. A July 6th breakout ended a near 12-month long trading range. Selling last week dropped AMZN back to the top of that trading range with a test of 20DMA support. AMZN sits at the top of a buy list in a post oversold market. Even with the breakout reversing, the buying burst signals the market thinks AMZN has “paid its dues” for the sharp pandemic run-up that doubled the stock in just 4 months last year.

Amazon.com (AMZN) reversed much of its prior breakout. Two days of selling took AMZN back to uptrending 20DMA support.

Guidewire Software (GWRE)

I sold my position in Guidewire Software (GWRE) last year. The trading range tired me out. The provider of software for property and casualty insurers cannot gain traction in the stock market. I might revisit the stock on a test of the bottom of the trading range.

Guidewire Software (GWRE) has made no net progress in almost two years.

Tesla (TSLA)

Tesla (TSLA) tapped my upside target at the very start of the week. I went ahead and took profits even though my calendar call spread had plenty of time remaining. TSLA drifted down to 200DMA support from there. Subsequently, I almost pulled the trigger twice but the relatively “cheap” price for call options expiring next week worried me too much. It looks like the market is bracing for more downside risk. With earnings coming July 26th, I will likely just need to wait things out.

Tesla (TSLA) drifted right back into a fresh test of 200DMA support.

Stitch Fix, Inc (SFIX)

Declining market breadth has been a problem for Stitch Fix, Inc (SFIX) since the beginning of the slide in January. Last week, SFIX flipped bearish again with a breakdown from 50DMA and 200DMA support. I expected SFIX to fare well on the clothing trade: workers returning to office life need to supplement wardrobes for expanded waistlines and more professional definitions of desk-facing comfort.

Stitch Fix, Inc. (SFIX) lost 4.6% on a bearish breakdown below converged support at its 50 and 200DMAs

Fastly (FSLY)

I never pulled the trigger on Fastly (FSLY) as it failed to hold 50DMA support. Instead, declining market breadth pushed FSLY into a confirmed 50DMA breakdown. The stock looks bearish all over again and looks at risk for a reversal of the post-earnings recovery.

Fastly (FSLY) confirmed a bearish 50DMA breakdown although it closed the week above the previous 5-week low.

NVIDIA Corporation (NVDA)

Sentiment must be turning when even a bullish stock like NVIDIA Corporation (NVDA) gives into declining market breadth. Sellers dragged NVDA away from its all-time high with three straight days of heavy selling. The 10.3% accumulated loss was good for a tap of the lower Bollinger Band (BB). NVDA looks poised for a 50DMA test. Like AMZN, NVIDIA sits at the top of a post oversold shopping list.

NVIDIA Corporation (NVDA) suffered three straight days of selling for a 10.3% total loss. NVDA looks poised to test 50DMA support.

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 #176 over 20% (overperiod), Day #1 under 30% (underperiod ended 159 days above 30%), Day #5 under 40%, Day #15 under 50%, Day #27 over 60%, Day #89 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 SLB, long MAXR, long MU calls

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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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