Stock Market Commentary:
The stock market continued its quest to convince us that the world is getting or soon will get a lot better. Perhaps the market is somehow feeding off the definitive hawkishness from the Federal Reserve. Whatever the explanation, market breadth expanded to levels last seen 4 months ago. The rally demonstrates broadly based buying in the stock market. This strength culminated in bullish signals that are hard to believe all things considered. The S&P 500 managed to break out above its 200-day moving average (DMA) (the blue line in the chart below) – a very bullish event. The NASDAQ cleared its downtrending 50DMA (the red line) for the first time since the beginning of the year. These bullish signals are happening even while the volatility index remains elevated. The currency market tops off the bullish chorus. The Australian dollar versus the Japanese yen (AUD/JPY) is now in a parabolic push.
I am freshly taken aback by this rally given Fed Chair Jerome Powell started this week with a staunch defense of his new hawkish religion. He delivered a pivotal speech that is likely the signature moment of his career as Fed Chair. I reviewed this speech in “Transitory Complete: Fed Chair Jay Powell Gets Comfortable With the Inflation Hawks.”
The Stock Market Indices
The S&P 500 (SPY) added to its 6.2% gains last week with a 1.1% gain. That move printed a bullish 200DMA breakout that also confirmed last week’s 50DMA breakout. The twin peaks of February are now in play as the next important test of overhead resistance. I now await confirmation of the new bullishness from a higher close. At that point I will add SPY back into the shopping basket.
While the S&P 500 ended its 50DMA downtrend last week, the NASDAQ (COMPQX) is still laboring away. Today’s impressive 2.0% gain pushed the NASDAQ over its 50DMA resistance. The last (clear) close above this downtrend happened at the beginning of the year. I used this extension of the rally to take profits on one of my QQQ call spreads purchased just on Friday. Like the S&P 500, the tech-laden index is in the middle of a V-shaped rebound.
The iShares Russell 2000 ETF (IWM) gained 1.0% but faded from its intraday high. As a result, IWM closed below February’s intraday high. Still, the ETF of small cap stocks pushed further away from the February closing highs. The breakout continues on IWM with 200DMA overhead resistance in play.
Stock Market Volatility
The volatility index (VIX) looks “destined” to hit the 20 level in due time. Faders have pressured the VIX throughout the current rally.
The Short-Term Trading Call with Hard to Believe Bullishness
- AT50 (MMFI) = 56.6% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 40.1% of stocks are trading above their respective 200-day moving averages
- Short-term Trading Call: cautiously bullish
AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, increased from last week’s close by almost three percentage points to 56.6%. My favorite technical indicator is underlining the bullish tone of the stock market by signaling expanding market breadth. While the bullish breakouts are hard to believe at this juncture, the sellers have the heavy burden of proof to demonstrate a different reality. I am now at the edge of my seat pondering the prospects for a test of the overbought threshold at 70%. Even AT200 looks as bullish as can be with higher highs.
Perhaps fund managers are already putting cash stockpiles back to work! Add to the list of hard to believe bullish signals the recent surge in cash back to shares last seen during the 2020 stock market crash.
Finally, the currency market is weighing in with a parabolic move in the Australian dollar versus the Japanese Yen (AUD/JPY). This forex tell on market sentiment has flagged bullish signals for over month. I could not quite accept the signal because soaring commodity prices are sharply shifting the balance of trade between Australia and Japan. However, at this point, AUD/JPY is one more hard to believe bullish signal. Once this parabolic move comes to an abrupt end (as is typical of parabolic price runs), I fully expect the stock market to remain in sync with this tell on market sentiment.
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 #486 over 20%, Day #11 over 30%, Day #5 over 40%, Day #3 over 50% (overperiod), Day #86 under 60% (underperiod), Day #266 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: net long QQQ call spreads, long IWM call 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.
Alot of money flowing into energy (OXY, BTU, DVN,OKE, ENB) and other commodity companies (X, CLF) among others. Have hit Euphoria yet with these guys? Seems like more more room to run.
It’s hitting euphoric levels for a fundamental reason. So as long as energy supplies are constrained and at risk, yes, I agree there is room to run. The danger is that – at some point – the run will zip right by the fundamentals, and it will be difficult to determine that point. Once the fundamentals change, the entire complex could come tumbling down really fast.