Stock Market Commentary:
For a second straight day, retailers put pressure on the stock market. As retailers increase the pain of this bear market, bullish traders and investors lost one more place to “hide”.
The Stock Market Indices
The S&P 500 (SPY) plunged 4.0% and immediately dashed the prospect of leaving behind the price range formed by the May, 2021 low and the bear market line. Suddenly, the index looks like it will soon test the fate of the bear market one more time. Given the extreme nature of the move, I proceeded to trigger my more aggressive trading rules for oversold trading. In my last post, I did not anticipate an extreme downward move when I plotted to switch to options only on a higher close on the S&P 500. As a starter, I jumped into a weekly calendar call spread $410/$405. A breakdown below the bear market line will of course open the floodgates of further downside risk.
The NASDAQ (COMPQX) confirmed overhead resistance from its September, 2020 high. The tech-laden index now returns to potential downside risk to prices last seen in October, 2020. Still, with my more aggressive oversold trading rules in place, I speculated on Invesco QQQ Trust (QQQ) call options expiring next Friday at the $310 strike.
The iShares Russell 2000 ETF (IWM) confirmed overhead resistance from its downtrending 20-day moving average (DMA) (the dotted line below) with a 3.5% loss. I did not pull the trigger on any IWM calls. Instead, I am content to waiting for the next (lower) buy signal near recent lows.
Stock Market Volatility
The volatility index (VIX) perfectly held support at its May closing low. The VIX surged 18.6% and put its May highs back into play. I am waiting on a VIX breakout to add to my aggressive oversold trade positioning. I may start nibbling on shares in ProShares Short VIX Short-Term Futures ETF (SVXY) ahead of that trigger.
The Short-Term Trading Call As Retailers Increase the Pain
- AT50 (MMFI) = 17.7% of stocks are trading above their respective 50-day moving averages (oversold day #1)
- AT200 (MMTH) = 22.3% 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, dropped 7 percentage points in a return to oversold trading conditions (AT50 below 20%). The inability to stay out of oversold trading conditions is a hallmark of bear market behavior. So, this start of a new oversold period just a day after a 6-day oversold period confirmed the fight with the bear.
Still, the drops in the indices qualify as extreme enough behavior to warrant triggering the aggressive side of the AT50 trading rules for oversold conditions. These trades are pure speculation and do NOT mean I am predicting a bottom at current levels. Instead, I see a good enough risk/reward setup that justifies a trade. The short-term price targets are at or above overhead resistance levels. As I noted above, the next buy spots happen when/if the VIX spikes to new highs. This approach is consistent with the AT50 trading rules.
Retailer Carnage
The carnage for retail stocks was so dramatic, I had to put the related ETFs on display. The SPDR S&P Retail ETF (XRT) plunged 8.3% and revisited a complete wipeout of 2021 gains. Under the hood, Target (TGT) became the next major retailer to increase the pain in the stock market. TGT lost a startling 24.9% post-earnings. Sellers moved to get ahead of the next retail disaster and sold Costco (COST) down 12.5%. This pain also pulled Walmart (WMT) down another 6.8% to prices last seen in the first few months of the pandemic. Since I am now actively shopping extreme trading conditions, I bought WMT shares to hold for a longer time period. I also bought a June $125/$135 call spread to speculate on an eventual relief rally.
So much for the out-performing, inflation-friendly stocks. The pain in retail extended to the Consumer Staples Select Sector SPDR Fund (XLP). XLP lost 6.4% and almost tested its March low. The last two days of selling in retail reveal a financial market quickly losing faith in the consumer economy.
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 #1 under 20% (first day oversold ending 1 day over 20%), Day #10 under 30%, Day #19 under 40%, Day #30 under 50%, Day #35 under 60%, Day #306 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long WMT shares and call spread, long SPY call calendar spread, long QQQ calls, long XLP
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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.