Stock Market Commentary:
The expected first of the month buying only showed up in the last hour of trading, but it still made an important impression. The recovery created a picture perfect bounce off the oversold threshold. At the same time the S&P 500 perfectly tapped its May, 2021 closing low before recovering. The volatility index faded from a near challenge of its March intraday high. Combined, this poetry in motion delivered the worst kind of oversold bounce. Not only do the moves look overly mechanical (no rush to sell or signs of exhausting sellers), but also they come ahead of an important meeting of the Federal Reserve. If these rebounds happened in the wake of the Fed news, I would be ready to declare a tradable bottom. Instead, I remain wary.
The Stock Market Indices
At the lows of the day, the S&P 500 (SPY) revisited its May, 2021 closing low for the first time in almost a year. Like a reawakening, this test suddenly got the buyers (probably more like the algorithms) interested again. The index barely looked back as users rallied into the close for a 0.6% gain.
The NASDAQ (COMPQX) did not decline fast enough to deliver its own poetry in motion. When the S&P 500 triggered the buying surge, the tech-laden index was just 157 points away from its September, 2020 high. The scramble to buy benefited the NASDAQ even more than it helped the S&P 500. The NASDAQ ended the day with a 1.6% gain.
The iShares Russell 2000 ETF (IWM) was relatively unremarkable compared to the tests facing the S&P 500 and the NASDAQ. The ETF of small caps finished the day with a 1.1% gain. Buyers saved IWM from closing at a fresh 18-month low.
Stock Market Volatility
The volatility index (VIX) may have surged for the last time in this cycle. The VIX was just about to test its March intraday highs when buyers rushed in. The faders seized the opportunity and sent the VIX back down to a 3.2% loss.
The Short-Term Trading Call With the Worst Kind of Oversold Bounce
- AT50 (MMFI) = 23.6% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 26.9% 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, dropped to 19.6% at its low of the day. The subsequent rally above the overbought threshold at 20% almost took my favorite technical indicator back to flat on the day. Technically, AT50 triggered the overbought trading rules on an intraday basis. However, as I noted in the intro, this move was the worst kind of oversold bounce. Adding to my wariness is a small bit of bearish divergence. The S&P 500 pulled off a gain from an important test while AT50 closed with a small loss after its important test. Accordingly, I left my short-term trading call at neutral instead of flipping bullish.
Still, I could not resist nibbling on some SPY shares. I plan to flip them ahead of the Federal Reserve’s meeting on Wednesday. Otherwise, I am content to stay on the sidelines and watch how this tentative test of the oversold threshold unfolds.
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 #514 over 20% (overperiod), Day #5 under 30% (underperiod), Day #7 under 40%, Day #18 under 50%, Day #23 under 60%, Day #294 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long SPY put calendar spread, long QQQ put calendar spread, long SVXY, long SPY shares
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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.
would you mind reviewing cloudflare (NET). Crowded space but they have alot of high end accounts and are profitable. Whats a fair price?
I happened to look at the chart earlier today. I don’t think I have the expertise to do a good fundamental analysis. However, the rule in this market is to value companies on profits, not sales. NET flunks that test. Do you happen to know when they claim they will get to profitability?
agree with you there….fundamentals matter again…since november……I thought they were on verge of profit based on what I could see on tradingview, but deeper dive into financials looks like they might still be some time before they become profitable.
Longed Shares, sold a CC 10 DTE to protect me 10 percent to downside…. thought surely it wont drop much more than 10 percent in 10 days…roll a CC….boy was I wrong. Ha!
Yep. Fundamentals matter a lot right now because the companies that survive this period will be the ones who actually make money. Money-losing companies will have to keep issuing equity to hang in there.