Stock Market Commentary
The stock market wilted toward oversold territory ahead of the Federal Reserve’s latest pronouncements on monetary policy. However, the relief from hearing exactly what everyone expected was so large that the S&P 500 (SPY) gained 1.6% and almost hit a new all-time high. The move fooled a lot of people (see below). The typical fade of the initial Fed reaction rolled out on schedule the following day. After the dust settled, the subsequent selling left the imprints of a manic market as it wrestles with the Fed’s new found religion on inflation.
The Stock Market Indices
The ceiling on top of the S&P 500 (SPY) remained intact through the swings of the manic market. The index started the week fading away from the ceiling (defined by the black horizontal line). The post Fed relief rally pushed the index back into the ceiling. The top held from there with sellers fading the post Fed reaction into a test of support at the 50-day moving average (DMA) (the red line below). Since the 50DMA has served as a reliable champion for the S&P 500, the manic market could maintain an upward drift. I bought a weekly 465/470 SPY call spread as a play on the manic market favoring a bounce here.
The NASDAQ (COMPQX) is in a slightly worse technical position than the S&P 500. The manic market has more consistently applied downward pressure to the tech-laden index. The 20DMA (the dotted line below) has a definitive downtrend. The NASDAQ also marginally confirmed a 50DMA breakdown. On the positive side, the NASDAQ successfully clung to support from the earlier December low. A punch through this support would put 200DMA support (the blue line below) into play. In the meantime, I gulped hard and sold short a weekly 380/375 put spread.
I have the iShares Russell 2000 ETF (IWM) on “breakdown watch.” Buyers are frantically trying to defend the lows from the 2021 trading range. If not for this trading range, I would interpret the confirmed 50 and 200DMA breakdowns as bearish. Instead, I enter the coming week holding the long side of a calendar call spread. IWM’s out-performance on Friday with a 0.9% gain is a good, albeit, tenuous start.
Stock Market Volatility
The volatility index (VIX) ended the previous week with a complete fade of the November/December surge. The manic market revived volatility enough for three closes above the critical 20 threshold. The resulting consolidation looks like a potential launchpad for the next surge in the VIX. Accordingly, the VIX represents a lingering warning flag for the trading action.
The Short-Term Trading Call With A Manic Market
- AT50 (MMFI) = 26.7% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) 38.1% of stocks are trading above their respective 200-day moving averages
- Short-term Trading Call: bullish
AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, closed at 26.7%. All week, my favorite technical indicator churned above the oversold threshold of 22%. My bullish short-term trading call remains in place given the proximity to oversold conditions. I will face a tougher challenge if the selling expands into a a lower low for the S&P 500. At that point, I would likely go to cautiously bullish and brace for an extended trip in oversold territory. Indeed, AT200’s struggle to hold the low for 2021 presents a key pivot point. A fresh breakdown for AT200 would signal a greatly increased risk of extended selling to follow.
Wrestling with the Fed can generate myopic interpretations of the subsequent stock market action. However, I was surprised to see a season veteran like Mohamed A. El-Erian make the mistake of jumping to post-Fed trading conclusions. El-Erian looked at the manic market’s rally and proclaimed that the market is just fine with monetary tightening.
Needless to say, I think the jury is still out. In the meantime, I am going no further than extending my bullishness to overhead resistance on the indices.
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 #422 over 21% (overperiod), Day #5 under 31% (underperiod), Day #16 under 40%, Day #20 under 51%, Day #22 under 60%, Day #202 under 72%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long IWM calls, long SPY call spread, short QQQ put spread
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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.