Stock Market Commentary
Federal Reserve Chairman Jay Powell, aka “J-Pow”, finally decided the time has come to drop the descriptor “transitory” from America’s current experience with inflation (see the 37:00 mark in the video below). J-Pow even acknowledged that “it is therefore appropriate…to consider wrapping up the taper of asset purchases…perhaps a few months sooner” than originally planned (see the 54:00 mark in the video below). That revelation likely launched a campaign for jawboning inflation away. To-date, casually dismissing the “transitory” inflation problem has produced little except louder and louder complaints about persistent inflation problems. I call this action jawboning because J-Pow only referenced his own opinion. He was not in a position to commit the Fed to action. In fact, he added “I expect we will discuss that in our upcoming meeting.” In other words, the Fed has plenty of room to walk back this sudden display of hawkishness.
The Fed may eventually choose to walk back a faster tapering because of reactions in the stock market. The immediate reaction to the jawboning took the major indices down from Monday’s relief bounce and sent the volatility index soaring all over again. Suddenly, market participants face new risks even if in the grander scale of things a few months faster for tapering means precious little.
(Powell seemed prepared to resort to jawboning inflation away as he referred to his notes when responding to a Senator’s criticism about the Fed’s on-going bond purchases despite a strong economy and red hot housing market).
The Stock Market Indices
The S&P 500 (SPY) started the week with a healthy relief rally. The index gapped up and closed with a 1.3% gain. However, a fade from resistance at the 20-day moving average (DMA) (the dotted line below) raised a small red flag. The S&P 500 gapped down for a third straight day and sellers did not look back until they printed a 1.9% loss.
The NASDAQ (COMPQX) started the week with a gap up and test of 20DMA resistance. A subsequent 1.5% loss confirmed resistance. However, unlike the S&P 500, the tech-laden index avoided a new low for November. As a result, the NASDAQ looks more like it is churning rather than downtrending.
The iShares Russell 2000 ETF (IWM) confirmed its return to the 2021 trading range. A 2.0% loss confirmed a 200DMA (the blue line below) breakdown. Continued selling pressure should generate a quick return to the bottom of the trading range. I am guessing exhausted buyers now lack the interest to take IWM back to the top of the trading range anytime soon. IWM could suffer heavily going forward from tax loss harvesting of poorly performing holdings.
As I suspected, the Financial Select Sector SPDR Fund (XLF) looks topped out. Today’s 2.4% loss confirmed 50DMA resistance and planted XLF in bearish territory. Now XLF can test 200DMA support without cracking support from the September low. XLF last touched the 200DMA 13 months ago.
Stock Market Volatility
The volatility index (VIX) faded as expected from Friday’s 54.1% gain. That surge was simply too extreme to stand. The VIX opened the week plunging 19.7%. I decided to hold my SVXY shares (I even resisted the urge to take profits as a friend tried to convince me of further risks ahead). Powell’s jawboning introduced just the kind of new uncertainty and risk required to send the market into a fresh repricing cycle. The VIX jumped 18.4% but failed to make a new high. I added to my SVXY position for a second round of fading from a VIX extreme. This time, I will take profits if the market delivers. All bets are off if the VIX manages an even higher close!
The Short-Term Trading Call In the Wake of Powell’s Jawboning
- AT50 (MMFI) = 27.6% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) 39.0% of stocks are trading above their respective 200-day moving averages (14-month low)
- Short-term Trading Call: cautiously bullish
AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, tumbled to 27.6% and nearly tested the 2021 low. In turn, AT50 is hovering just above the oversold threshold of 21%. Given the VIX is running so hot, I decided to make the switch to a cautiously bullish trading call. Trading conditions have reached sufficient extremes that are “close enough” to oversold assuming the stock market remains in a bull market. However, note well that the fear of Fed hawkishness should linger heavy enough to make rate-sensitive stocks unattractive for quite some time (for example, hyper expensive growth and momentum stocks).
AT200 is flashing a fresh dose of caution. This longer-term indicator of market breadth plummeted to a 17-month low. More importantly, AT200 is right back to an extended downtrend. In other words, even with the stock market rebounding and rallying, the underlying health of the rally could be poor once again.
Be careful out there!
Footnotes
“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 #409 over 21% (overperiod), Day #1 under over 31% (underperiod, ending 71 days above 31%), Day #3 under 40%, Day #7 under 51%, Day #9 under 60%, Day #189 under 72%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long SVXY
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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.