Stock Market Commentary
Say whatever you want, Jerome (Jay) Powell, the chair of the Federal Reserve, affectionately known as J-Pow, has become a master orchestrator of the stock market. Other Federal Reserve Board members peppered the airwaves with hawkish talk about tapering and inflation in the days preceding Powell’s address at this year’s Jackson Hole, Wyoming confab. The S&P 500 (SPY) trembled enough to drop a whole 0.6% the day before. However, J-Pow sprinkled just enough fairy dust on the stock market to keep investors happy and the buyers eager for more stocks.
J-Pow insisted that the U.S. economy lacks evidence of “broad-based inflation pressures.” J-Pow even stuck to the now familiar Fed-speak phrase: “the baseline outlook is for continued progress toward maximum employment, with inflation returning to levels consistent with our goal of inflation averaging 2 percent over time.” He reassured markets that “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” In other words, monetary policy will remain extremely accommodative for as far as investors can see. This signal is very important given how well growth in the Fed’s balance sheet seems to support higher and higher stock prices.
The Stock Market Indices
The S&P 500 (SPY) took the ball from J-Pow and ran up the flagpole for a 0.9% gain and yet another all-time high.
The NASDAQ (COMPQX) took the ball from J-Pow and popped a 1.2% gain and new all-time high. The tech-laden index broke out to start the week. The week ended with impressive and strong follow-through.
I had my eye on the iShares Trust Russell 2000 Index ETF (IWM) ahead of J-Pow’s speech. One moment, IWM was straddling its pivot at the 50-day moving average (DMA) (red line below), the next moment it soared for a breakout. I failed to catch the move. Given previous trading range behavior, I am skeptical IWM can follow through with an end to the trading range.
Stock Market Volatility
Although the volatility index (VIX) held above 20 for two straight days, the fear gauge failed to follow-through on its breakout above its 200DMA (the blue line below). The VIX lost 13.0% as faders went to work in celebration of J-Pow’s fairy dust.
The Short-Term Trading Call with J-Pow Sprinkling Fairy Dust
- AT50 (MMFI) = 54.8% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 59.6% of stocks are trading above their respective 200-day moving averages
- Short-term Trading Call: neutral
AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, soared to 54.8%. My favorite technical indicator closed at a 2-month high. Market breadth has made a notable recovery since closing “almost oversold” the previous week. I was skeptical about the prospects for a rebound, but market breadth certainly looks more constructive here.
Yet, August was a month of extremes per Carter Braxton Worth.
I tend to fade extremes, not follow them. Accordingly, I remain quite comfortable staying neutral on the stock market. I am also poised to fade the market in general on a run-up to or toward overbought conditions (AT50 over 70%). Moreover, the downtrend on AT200 remains steep. A breakout above 67.5% might change my tune.
Stock Chart Video Reviews
Stock Chart Reviews – Below the 50DMA
Dollar Tree (DLTR)
The 12.1% post-earnings plunge in Dollar Tree (DLTR) took me aback. My mental image of a secular bullish trend for discount stores vaporized once I actually looked at the DLTR chart. DLTR had a nice 14.1% post-earnings surge in November. That gap closed ahead of March earnings which in turn revived the stock. Sentiment definitely soured with a post-earnings sell-off in May. The rally in August earnings turned into a disastrously false signal.
At the end of July, I used Zendesk (ZEN) as an example of lingering weakness in software plays. The selling continued from there. Buyers half-heartedly returned in the second half of August. An aggressively bearish play is a short right here with a stop above Friday’s intraday high.
Red Robin Gourmet (RRGB)
Red Robin Gourmet (RRGB) quickly cleared my hurdle for a buy, but I was a little late in moving. As a first start, I created a covered call position. I will add shares on a dip. I am assuming RRGB confirmed a bottom with the post-earnings intraday low. Upside looks capped for a while at the converged 50 and 200DMAs.
Peloton Interactive (PTON)
The sellers who faded Peloton Interactive (PTON) just ahead of earnings were on to something. PTON sold off to a near 3-month low after earnings. Peloton Interactive reminded investors about price cuts. The company shifted revenue out to the next fiscal year. Revenue growth is decelerating, subscriptions fell sequentially, and FY22 is headed for an EBITDA loss instead of a gain. These results and the market’s reaction remind me of the dangers of paying premiums for companies that greatly benefited from the unique dynamics of the pandemic economy. I shorted PTON in the after market after it rebounded to $108.50. I covered shortly after the gap down open. Even with analysts rushing to PTON’s defense, I have little to no interest in trading PTON from the long side until/unless it breaks out above its 200DMA again. Until then, the chart looks bearish.
Spotify Technology (SPOT)
A stock buyback worth up to $1.0B woke me up on Spotify Technology (SPOT). I missed the market’s initial reaction which sent SPOT up for 5.6%. My week ended with an October $240/260 call spread. I am assuming the company will get particularly aggressive with buybacks at current prices at the bottom of the extended trading range.
SoFi Technologies, Inc. (SOFI)
I keep hearing excited chatter about SoFi Technologies (SOFI) as the future of finance. The stock chart never motivated me to buy into the hype. Lingering weakness after a 14.2% post-earnings gap down has me wondering what’s all the fuss about. I am now looking to buy closer to a complete reversal of SOFI’s big one-day 57.9% surge back in January.
Stock Chart Reviews – Above the 50DMA
Applied Materials (AMAT)
The momentum in semiconductor-related stocks stalled for all but a select group of stocks. Applied Materials (AMAT) trickled its way above its 50DMA pivot. I am looking to buy on a confirmed breakout.
Best Buy (BBY)
The bizarre post-earnings moves in Bet Buy (BBY) continue. After surging 8.3% in the immediate wake of earnings, sellers descended upon BBY. The stock ended the week where it opened post-earnings. I guess BBY will remain stuck in its trading range for quite some time.
Caterpillar, Inc (CAT)
Caterpillar, Inc (CAT) gained just 0.8% after the fairy dust from J-Pow. Still, the gain was enough to hold on to 50DMA support. While a 50DMA breakout remains outstanding, I jumped into some call options in case fairy dust momentum continues into the coming week.
iShares Expanded Tech Software Sector ETF (IGV)
I let the iShares Expanded Tech Software Sector ETF (IGV) sneak right past me, especially last week. I last visited IGV two months ago. At the time I saw the rotation back into these software stocks and eyed a breakout above the February highs for a bullish signal. The first breakout lasted just a short time. It took a small pullback to shake out enough sellers to hold the next breakout. IGV churned from last July to mid-August. Fairy dust from J-Pow worked its magic on IGV on Friday for a 1.5% gain to an all-time high.
J-Pow fairy dust pushed Facebook (FB) to a 2.3% gain. While FB stopped short of its all-time high set last month, the stock looks ready for a new run-up. I was poorly positioned with a mix of call options and short shares. I stayed hedged as I see plenty of downside potential for FB if a real market sell-off happens in the next month or two. In the meantime, I am overloaded with short-term call options.
Splunk (SPLK) is rounding the corner after a downtrend that lasted from November to June. SPLK is bullishly positioned with a confirmed breakout above its converging 50 and 200DMAs. I tried a bullish pre-earnings play by paying for a call spread with a short put spread. In retrospect, I should have left the position as a short put spread given SPLK went into earnings already trading above its upper Bollinger Band (BB). In other words, the stock had a bullish setup but was still extended to the upside. I am looking to get repositioned in the coming week.
Be careful out there!
“Above the 50” (AT50) uses the percentage of stocks trading above their respective 50-day moving averages (DMAs) to measure breadth in the stock market. Breadth defines the distribution of participation in a rally or sell-off. As a result, AT50 identifies extremes in market sentiment that are likely to reverse. Above the 50 is my alternative name for “MMFI” which is a symbol TradingView.com and other chart vendors use for this breadth indicator. Learn more about AT50 on my Market Breadth Resource Page. AT200, or MMTH, measures the percentage of stocks trading above their respective 200DMAs.
Active AT50 (MMFI) periods: Day #346 over 21%, Day #29 over 31%, Day #4 over 41% (overperiod), Day #40 under 51% (underperiod), Day #52 under 62%, Day #116 under 72%
Source for charts unless otherwise noted: TradingView.com
Grammar checked by Grammar Coach from Thesaurus.com
Full disclosure: long UVXY call spread, short FB shares and long FB calls, long CAT calls, long SPOT call spread, covered call position in RRGB
*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.