Stock Market Commentary
The stock market survived a choppy week. The churn almost looked like stabilization after a disappointing start to the new year. However, the attempt to absorb the news of a hawkish Fed is taking its toll in the form of toppiness. With each passing day I get more and more wary about the market’s behavior. Last week, the market went into convulsions over simple words from Lael Brainard, the Fed’s reportedly most dovish member. Brainard officially flipped hawkish during her Senate confirmation hearing. On that day, sellers dumped the indices nearly wholesale with notable losses across the board.
“..inflation is too high, and working people around the country are concerned about how far their paychecks will go. Our monetary policy is focused on getting inflation back down to 2 percent while sustaining a recovery that includes everyone. This is our most important task.”
Nomination hearing, Governor Lael Brainard, Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C. January 13, 2022
The Stock Market Indices
The S&P 500 (SPY) was in a promising position after confirming a breakout above the 50-day moving average (DMA) (the red line below). The index closed above its 20DMA. I held onto my weekly $472/$477 call spread in great anticipation. However, the Brainard confirmation hearing took the S&P 500 down 1.4% and below its 50DMA all over again. That move blew out my position. The gap down on Friday had the making of the first confirmed 50DMA breakdown since September. Buyers stepped into the breach and saved the day with a flat close.
The choppiness looks like toppiness. The $472 level on SPY is looking like some kind of cap on buyer enthusiasm. As a result, the breakout from the brief Santa rally could be the head of a head and shoulders type of top.
The NASDAQ (COMPQX) exhibited toppiness after the Santa rally stopped short of the all-time high set in November. Subsequently, the tech-laden index entered correction territory. The NASDAQ survived this important breach, but the relief rally only lasted two more days. The Brainard sell-off sent the NASDAQ tumbling a full 2.5%. Friday’s gap down took the NASDAQ right back to 200DMA support (the blue line below). Something tells me the algorithms are a little less enthusiastic about buying into this second “obvious” technical setup. I held off from buying fresh QQQ calls. {Correction: in fact, I bought 2 QQQ put spreads. I took profits on January 18th}
The iShares Russell 2000 ETF (IWM) is looking more and more endangered. I was able to profit from the last bounce from the bottom of the trading range. However, I did not buy into this return to support. I am content to wait to see a little more buying interest. The repeated failures at overhead resistance from the 50 and 200DMAs make the IWM look ready to break down into 52-week low territory.
Stock Market Volatility
While the major indices flop around in various forms of toppiness, the volatility index (VIX) is also churning. Faders quickly fought off each surge above the important 20 threshold. Yet they were also unable to keep the VIX pinned in complacent territory. I am bracing for an upside resolution to this stalemate.
The Short-Term Trading Call with Looming Toppiness
- AT50 (MMFI) = 42.0% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) 44.6% 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, ended the second week of the new year at 42.0%, essentially even with the close of the first week. This lack of progress aligns with the lack of progress on the above major indices. Yet, the various stages of toppiness compel me to downgrade my short-term trading call from bullish to neutral.
In my previous AT50 post, I indicated I would downgrade to cautiously bullish if the S&P 500 confirmed a 50DMA breakdown. That confirmation did not quite materialize, but I still dislike the technical setup. About 90% of my trades last week were in put options and almost all were successful. Those trades were telling for me. Moreover, I do not see positive catalysts on the horizon. I cannot identify what gets investors excited enough about stocks to send the indices to new highs while the Fed is jawboning inflation.
On the other hand, I cannot get bearish. First of all, I had to flip my put options quickly to secure profits. The choppiness in the market prevents comfort with any position. Additionally, I prefer to get bearish with AT50 at higher levels and particularly coming off the overbought threshold. Thus, I need compelling evidence down here for bearishness.
The NASDAQ is of course one confirmed 200DMA breakdown from bearish territory. IWM is one breakdown away from a major bearish signal. The S&P 500 has the most cushion with its distance from the December low. A breakdown below that level would bring the index near 200DMA support….for the first time since June, 2020.
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 #441 over 20%, Day #17 over 30%, Day #3 over 40% (overperiod), Day #8 under 50% (underperiod), Day #41 under 60%, Day #221 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long 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.