Stock Market Commentary
Good employment news came in the form of the May jobs report. The unemployment rate stayed flat at 3.6% while the U.S. economy added 390,000 jobs. Both the number of unemployed and the unemployment rate are essentially back to the pre-pandemic levels of February, 2020. The labor force participation rate remains 1.1% points below the pre-pandemic level. The stock market stalled on this overall good news because it kept the green light on and bright for the Federal Reserve to proceed with its plans for normalizing monetary policy. Accordingly, bond yields increased on the day while stocks swooned. The pullback stalled a key breakout for the S&P 500.
The Stock Market Indices
The S&P 500 (SPY) ended the previous week with an impressive and key breakout above the May, 2021 low. Two subsequent days of cooling avoided challenging the new line of support from the May, 2021 low. Thursday’s 1.8% jump confirmed the breakout. Unfortunately, Friday’s 1.6% pullback made that key breakout stall.
While the S&P 500 churns, overhead resistance from the 50-day moving average (DMA) (the red line below) is rapidly descending toward the price action. Accordingly, a resolution move, whether a breakout or fresh breakdown is imminent in coming weeks.
I used Thursday’s surge to take profits on my June SPY call spread. I have a July 420/430 call spread remaining. It is important to lock in some profits in a bear market when rallies work out favorably.
The NASDAQ (COMPQX) confirmed a breakout above its September, 2020 high. However, Friday’s 2.5% pullback stalled further progress. Instead of a key breakout, the tech-laden index ended the week in a pivot around the September, 2020 high. I used Friday’s pullback to add to my QQQ calls.
The iShares Russell 2000 ETF (IWM) started the week with a 20DMA breakout already confirmed. So Thursday’s 2.4% surge made the ETF of small caps look ready to challenge overhead resistance from the 50DMA. Instead, the challenged stalled. Friday’s gap down and 0.9% loss left the audience in suspense. I have a June 187/192 call option, so I will likely take profits on the first visit to the 50DMA.
Stock Market Volatility
The volatility index (VIX) confirmed the week’s bullish bias. The week’s 3.6% loss understates the positive significant of the continued downtrend in the VIX. The VIX even started the week with a gap up but faders took the VIX well off its intraday high.
The Short-Term Trading Call After A Key Breakout Stalled
- AT50 (MMFI) = 40.2% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 27.8% 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, finished the week higher than it started. The broadening participation in the rally ran parallel to the declining VIX. Thursday’s jump took AT50 to its highest point since late April. Even with the stalled breakout, AT50’s sharp rally from oversold lows continues to confirm the bullish bias in the stock market.
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 #8 over 20%, Day #5 over 30%, Day #2 over 40% (overperiod), Day #42 under 50% (underperiod), Day #47 under 60%, Day #318 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long QQQ put spread, call spread and calls; long SPY call spread, 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.