A Market Melt-Up Alongside A Government Melt-Down – The Market Breadth

Stock Market Commentary

We now have a stock market melt-up alongside a government melt-down…and financial markets could not care less. In fact, the stock market can hardly get more bullish with the long-term, mid-term, and short-term uptrends each flashing green and pointing upward. Still, I cannot help checking my peripheral vision for signs of caution. This week’s key reason for caution comes courtesy of the volatility index (VIX). The VIX has a bottoming pattern as it hugs ever more closely to its level from right before the tariff drama, trauma, and noise. In other words, volatility looks ready for another surge. Given October is the last of the stock market’s most dangerous months of the year, one more VIX pop seems both appropriate and timely. Yet, a convincing catalyst remains elusive. Perhaps some signal actually emerges that suggests this latest government shutdown could get worse than the last one.

The volatility index looks like a developing cup. Volatility has churned around and near the long-standing pivot level as seen in the purple line above. Th VIX increasingly pressing against that pivot suggests pressure building into a short-lived burst. If a shutdown headline or an October surprise forces a selloff and a volatility pop, I expect the counter-forces to arrive quickly, just as they have throughout recent dislocations. Seasonally, October’s drawdowns are typically buying opportunities that kick-off seasonal stock market strength until at least April.

The Stock Market Indices

S&P 500 (SPY)

The S&P 500 logged gains every day of the week with two marginal gains. On day one of the shutdown, the index added roughly 0.3% and notched another all-time high, then tacked on incremental highs into week’s end. The message from price action is simple: the shutdown headlines do not matter to the stock market…for now.

NASDAQ (COMPQX)

The NASDAQ kept its melt-up posture intact despite a 0.3% dip to end the week. The tech-laden index printed a new all-time high on Thursday and remains well above its 20DMA, with its 50DMA and 200DMA comfortably stacked below. Even with some mega-cap wobble, the NASDAQ is very bullish.

iShares Russell 2000 ETF (IWM)

Small caps finally strung together one of their most consistently good weeks in a while. IWM tapped 20DMA support repeatedly and pushed higher into another all-time high. I did not like the intraday fade off the peak, but I still closed out another successful week trading IWM call options.

The Short-Term Trading Call With Market Breadth Wavering

• AT50 (MMFI) = 58.5% of stocks are trading above their respective 50-day moving averages
• AT200 (MMTH) = 60.2% 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, closed the week at 58.5%. My favorite technical indicator wavered the whole week until Friday’s jump reversed the losses for the week and then some. AT50 still has a slight downtrend, so I keep market breadth on my mind as a reason to stay cautious and neutral on the stock market, especially given the persistent inability to punch into overbought territory (above 70%). This failure represents bearish trading action according to my AT50 trading rules. On the longer-term side, AT200 continues to churn but holds a key support level that aligns with where it stood when the S&P 500 last hit a prior all-time high earlier this year. That check passes my under-the-hood health test for overall market breadth.

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The Equities: Government Melt-Down

Costco (COST)

Description: Costco (COST) operates membership warehouses offering groceries, consumer goods, private-label products, and related services.
Technical status: Post-earnings, COST closed below its July reference level near $927 and confirmed short-term bearish conditions. For a stock that has gone essentially nowhere for a little over a year, a bearish move from a flat range raises the risk of a more extended topping pattern.
Trade commentary: I am not interested in buying given valuation. Shorting such a star stock is also fraught with risk as the stock can pop higher at any time, for any reason.

Etsy (ETSY)

Description: Etsy (ETSY) operates a global online marketplace for handmade, vintage, and craft goods and related services.
Technical status: ETSY’s chart has whipsawed, but since the early-September low the trend has been more controlled to the upside. After a 15.8% surge on September 29 and a subsequent and swift 10.7% drop, the stock settled back into its uptrend. I am watching the 20DMA as a guide for support.
Trade commentary: I keep ETSY on radar to buy a dip toward the rising 20DMA or the lower edge of the current uptrend channel. The swiftly changing interpretation of the news on tariffs and shipping charges should be shaking out now.

Fair Isaac Corporation (FICO)

Description: Fair Isaac Corporation (FICO) provides analytics software and the FICO credit scoring system for financial services and other industries.
Technical status: After months of pressure tied to FHFA criticism, FICO flipped sharply higher on news of productive conversations with the director and then plans to license credit scores directly to mortgage lenders, bypassing credit bureaus. FICO confirmed a 200DMA breakout and accordingly ended its bearish trading tone.
Trade commentary: I want back in, but I prefer to wait for price to settle into 200DMA support.

TransUnion (TRU)

Description: TransUnion (TRU) provides consumer credit reporting and risk data solutions.
Technical status: TRU fell 10.6% on the FICO news and then bounced 5.2% in a relief rally. The stock has effectively gone nowhere since 2019 and remains in the middle of its long-term range.
Trade commentary: With a years-long trading range, I have no interest in buying or shorting here in the middle; I only get interested near range extremes. Still, I am intrigued a bit seeing TRU bounce away from its April lows. I might be tempted to sell a put with a $70 strike…

Equifax (EFX)

Description: Equifax (EFX) provides consumer and business credit reporting and data analytics services.
Technical status: EFX slid 8.5% on the FICO news and managed only a 1.9% relief bounce, staying within a long, unproductive range that dates back to 2021.
Trade commentary: No trade for me in the middle of a choppy, multi-year range. EFX did not fall close enough to its April low to make a buy worth the risk.

IonQ (IONQ)

Description: IonQ (IONQ) develops quantum computing hardware and cloud-based quantum computing services.
Technical status: IONQ delivered a picture-perfect 20DMA bounce and now sits poised to break out above its all-time high to continue the uptrend.
Trade commentary: I eagerly bought shares on the first bounce from 20DMA support, and I am riding follow-through hopefully to fresh all-time highs.

Meta Platforms (META)

Description: Meta Platforms (META) operates social media and messaging platforms including Facebook, Instagram, WhatsApp, and related ad technologies.
Technical status: The gap-and-crap at a new all-time high set off a warning back in June. META later confirmed 50DMA support on a post-earnings surge, but the stock turned lackluster and then weak, breaking 50DMA support and the previous all-time high. META is now short-term bearish.
Trade commentary: If this post-earnings reversal completes itself, I expect buyers to reemerge at 200DMA support. Going short is tempting, but I will pass given the overall bullish tone in the market.

Reddit (RDDT)

Description: Reddit (RDDT) operates an online community and discussion platform with advertising and data-licensing revenue.
Technical status: RDDT plunged 11.9% on an analyst’s claims that Reddit is receiving fewer citations from ChatGPT. Other analysts stepped in to defend the stock on Friday, and the stock settled into a 3.1% relief rally. Post-earnings momentum remains intact despite the confirmed 50DMA breakdown.
Trade commentary: The initial drop looked like a classic over-reaction. To take advantage of the extra options premium I sold a call spread and a put spread on a bet the stock would stabilize going into Friday’s expiration. The trade was a close call, but it worked out well. Now I wait for RDDT to recover its 50DMA before going long. I do not want to short the stock with the overall bullish mood in the market.

Robinhood Markets (HOOD)

Description: Robinhood Markets (HOOD) provides a retail brokerage platform for trading equities, options, and crypto.
Technical status: HOOD held 50DMA support in early September. From there, the stock resumed its amazing post-April bounce after a 15.8% surge in response to news of S&P 500 inclusion. The momentum has barely slowed since then.
Trade commentary: Over a year and half ago, I made a short-term bet that HOOD was a better trade than Coinbase (COIN). I should have made a longer-term bet! Since then HOOD is up over 8x while COIN is up less than 2x. Heck, I could have bought both. Now, I just wait for the net buy-the-dip opportunity.

Beyond Meat (BYND)

Description: Beyond Meat (BYND) produces plant-based meat alternatives for retail and foodservice.
Technical status: News about a debt restructuring slammed BYND to a fresh all-time low. A subsequent sharp rebound nearly closed the entire 57% gap down by the end of the week. I assume buyers realized that the near-term news flow cannot get worse and the debt restructuring helps the company to keep fighting.
Trade commentary: The current rebound is encouraging, but BYND remains bearish until and unless it can confirm a 200DMA breakout. Given July’s false breakout, I would even wait until a high over July’s peak. In other words, I am only marginally interested in speculating on this struggling business and stock again.

Wix.com (WIX)

Description: Wix.com (WIX) provides a cloud-based website creation and management platform with AI-assisted tools.
Technical status: After a breakout over its 200DMA, WIX plunged 13.4% on Wednesday on no clear news. The stock is trying to stabilize above 50DMA support. A 50DMA breakdown would put August’s post-earnings low back in play.
Trade commentary: I have WIX on watch awaiting some kind of news that explains the recent plunge. Until then, I am watching the technicals to suggest potential trades: above the 200DMA I am bullish; two closes lower below the 50DMA I am bearish even with the bullish market given WIX’s severe under-performance this year.

HubSpot (HUBS)

Description: HubSpot (HUBS) offers a cloud-based customer platform for marketing, sales, service, and CRM.
Technical status: HUBS fell roughly 10% and then another 6% as potential threats from OpenAI solutions sparked a sector-wide sell-off. The stock has severely under-performed this year with a steady downtrend in the middle of a wide range dating to 2021.
Trade commentary: Like so many other AI-related scares, I think the sell-off in HUBS is overdone. However, a trade in the stock is fraught with technical risks given the current downtrend and the 50DMA breakdown. Accordingly, I am sitting on my hands until/unless HUBS makes a bullish breakout.

Atlassian (TEAM)

Description: Atlassian (TEAM) builds collaboration and developer tools including Jira, Confluence, and related cloud services.
Technical status: The OpenAI scare sent TEAM to a new 14-month low alongside software peers and, like some of them, has gone nowhere net since 2020.
Trade commentary: The sympathy selling in TEAM surprised me given TEAM has a strong suite of software. Yet, I am not buying into what I see as an over-reaction because the stock is even more weak on a technical basis than HUBS. TEAM not only has suffered a steady downtrend since February’s peak but also TEAM trades at a 14-month low.

Vertiv Holdings (VRT)

Description: Vertiv Holdings (VRT) provides power, thermal, and infrastructure solutions for data centers and communications networks.
Technical status: VRT cleared its prior all-time high on strong volume, a textbook breakout that further highlights the AI infrastructure theme.
Trade commentary: VRT is my core and favorite AI pick-and-shovel holding. If this breakout holds, I will add yet more shares. I am particularly excited to see that VRT qualifies for inclusion in the S&P 500. I expect the combination of AI enthusiasm and inclusion expectations to keep VRT powering higher. During Friday’s CNBC’s Fast Money a BoA analyst made a particularly strong case for stocks like VRT..

Micron Technology (MU)

Description: Micron Technology (MU) manufactures memory and storage solutions used in data centers, AI, and devices.
Technical status: Micron delivered another bullish earnings report, but the market sold the news. The pullback was shallow and brief and did not even reach uptrending 20DMA support. MU proceeded to drift higher until Wednesday’s AI enthusiasm drove MU 8.9% higher to a fresh all-time high.
Trade commentary: I was watching MU closely into and after earnings. I jumped back in as soon as I saw buying interest return. My November $175/$185 call spread turned out to be very timely but not aggressive enough. The strong surge helped explain my options premiums looked so high.

NVIDIA (NVDA)

Description: NVIDIA (NVDA) designs GPUs and AI platforms for data centers, gaming, and edge computing.
Technical status: A subtle double-top warning failed quickly as NVDA pivoted around its 50DMA and marched to new all-time highs.
Trade commentary: What else is there to say about NVDA? It just goes up and up and up. The rebound and resumption of strength revalidates the entire AI trade.

Dell Technologies (DELL)

Description: Dell Technologies (DELL) provides PCs, servers, storage, and IT solutions for enterprises and consumers.
Technical status: DELL remains below its 2024 all-time high but continues to repair the chart after a clean 200DMA breakout earlier; last week’s AI-aided strength gave way to a 4.5% pullback Friday, with trend lines still intact.
Trade commentary: DELL has become a core AI-related holding. I added to shares on its 200DMA breakout. I may add more on a successful test of 50DMA support.

Intel Corp (INTC)

Description: Intel Corp (INTC) provides PCs, servers, storage, and IT solutions for enterprises and consumers.
Technical status: INTC is riding a tidal wave of positive news flow. After a brief pullback following the NVDA deal, INTC has shot nearly straight up after one good headline after another. INTC is so strong now it is easily riding along its upper Bollinger Band (BB).
Trade commentary: I missed the last picture-perfect buy setup on INTC and can only watch now until the price action cools down into the next setup. While this sudden positive change in fortunes is a welcome change for INTC, the company apparently still has serious issues with its foundry business and has a lot to prove beyond this stream of press releases.

Be careful out there!

Footnotes

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“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 #77 over 20%, Day #75 over 30%, Day #70 over 40%, Day #43 over 50% (overperiod), Day #7 under 60% (underperiod), Day #50 under 70%

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long IWM shares, long SPY put spreads, long IONQ, long VRT, long DELL, long MU 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.

* Blog notes: this blog was written based on the heavily edited transcript of the following video that includes a live review of the stock charts featured in this post. I used ChatGPT to process the transcript.