Stock Market Commentary
The split personality of the stock market resolved into major breakdowns in the stock market on Tuesday…for about 30 minutes. Apparently increasing inflation fears gave way to the soothing words of Federal Reserve Chairman Jerome Powell at the Fed’s semiannual monetary policy report to Congress. Buyers quickly met the latest sharp and sudden rush downward with eager buying power. However, the recovery was not broadly applied. The current favorites of the “reopen” trade raced higher, even into positive territory, while yesterday’s winners like big cap tech, lagged. The dichotomy continued on Wednesday but the buying was just broad enough to broadly benefit the major indices.
The Stock Market Indices
The S&P 500 (SPY) confirmed a picture-perfect test of 50DMA support with a 1.1% gain. The index stopped just short of its all-time high. This pricing action was a decent turn-around from the selling that took the index down as much as 1.8% the previous day.
The NASDAQ (COMPQX) took the brunt of the selling and its 1.0% gain barely finished the job of reversing Tuesday’s loss. The NASDAQ was down as much as 3.9% before it closed the day with a 0.5% loss. Unlike the S&P 500, the tech-laden index pierced through its 50DMA support before rebounding. The NASDAQ is several days, likely longer, from re-challenging its all-time high.
The iShares Trust Russell 2000 Index ETF (IWM) followed-up its recovery from a 20DMA breakdown with a 2.4% gain. Like the S&P 500, IWM finished just under its all-time closing high. Overall, the uptrend in small caps remains well-intact.
Financials skipped most of the fireworks the previous day. The Select Sector SPDR Trust Financial (XLF) followed up with a 1.9% rally to an all-time high. The steady increase in long-term interest rates is a solid tailwind for financial stocks.
Stock Market Volatility
The volatility index (VIX) lost 7.7% and found itself right back at recent support. The prior launchpad launched a rocket with little fuel as faders went to work on the VIX quite successfully.
The Short-Term Trading Call:
- AT40 = 68.0% of stocks are trading above their respective 40-day moving averages (ending 6 days overbought)
- AT200 = 88.1% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation)
- Short-term Trading Call: cautiously bearish
AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, closed at 68.0%. My favorite technical indicator fell as low as 58% the previous day. I was surprised it did not fall a lot further given the depth in the selling in the first 30 minutes after trading opened. The inability to close above the overbought threshold (70%) left my short-term trading call at cautiously bearish. However, I fully expect to fall back to neutral soon. The fresh buying power in the stock market looks strong enough to trigger a new overbought period.
Indeed, the bearish moments for the stock market seem to get shorter and shorter. Given the previous patterns of sellers promptly giving way to buyers, I took profits on most of my short positions and puts soon after Tuesday’s open. I even nibbled on a few more bullish plays. Only the AT40 trading rules keep the short-term trading call from neutral. In deference to my rules, I will fade SPY with a fresh set of put options.
The currency market remains firmly planted in “risk-on” territory. The on-going strength in the Australian dollar versus the Japanese yen (AUD/JPY) suggests buying power is very much alive and well.
Stock Chart Reviews – Below the 50DMA
Home Depot (HD)
A post-earnings loss of 3.1% pushed Home Depot (HD) through 200DMA support. Sellers confirmed a 200DMA breakdown with another 2.7% worth of selling. HD is on the edge of breaking through a 7-month trading range – a very bearish event.
Amazon.com (AMZN)
The 50DMA is a pivot point for Amazon.com (AMZN). The stock has effectively gone nowhere for over 7 months. The uptrending 200DMA support is rushing fast to meet the AMZN price action.
Equinix Inc (EQIX)
Data center company Equinix returned to prices last seen last April. The stock confirmed 50 and 200DMA breakdowns earlier this month. EQIX peaked in October and trended mostly down from there. Since reporting earnings, EQIX has lost 8 of 9 trading days on very heavy trading volume. The bear growls with EQIX.
Fastly (FSLY)
The drama continues in content delivery networking (CDN) company Fastly (FSLY). The stock has been stuck in an 8-month trading range, yet it swings wildly from top to bottom. The latest downward swing started with a post-earnings 200DMA breakdown.
Splunk (SPLK)
I thought Splunk (SPLK) would be another tech stock that quickly reversed a post-earnings loss to emerge stronger than before. A rebound took SPLK to 200DMA resistance, but that move ended the recovery story. A downward trending 50DMA served as sufficient resistance. SPLK’s troubles started Friday with a 5.2% loss. The stock closed at a 9-month low.
Stock Chart Reviews – Above the 50DMA
Churchill Capital Corp IV (CCIV)
I am a HUGE Lucid Motors fan. When I grow up, I want to buy one of these beautiful and slick electric vehicles (EVs).
I think the Lucid Air is the beginning of a major challenge to Tesla (TSLA). So I was quite disappointed to learn that Lucid would come public via a SPAC. SPACs have been billed as an easily accessible way for investors to get in early to great investments. Instead, these Special Purpose Acquisition Companies have acted as vehicles for extreme speculation with prices going parabolic on rumor and into deals with prices far above the entry point for well-positioned insiders.
After much rumor, Churchill Capital Corp IV (CCIV) and Lucid Motors announced a deal to SPAC-ify with the ticker symbol LCID. The stock promptly fell 38.6% and followed that plunge with an 18.5% loss. A few more days of these kinds of losses and maybe new investors can get started close to the $15 price offered to insiders through the private investment in public equity (PIPE).
Brinks Company (BCO)
A positive reaction to earnings helped push Brinks Company (BCO) to a breakout above a three month trading range. The stock did not quite finish recovering all its pandemic-driven losses, but I would think that a company that hauls cash would be on the down side of the slope of change. However, the company apparently is thinking of new ways to extend its secure transport business to include digital assets. From the Seeking Alpha transcript of the earnings conference call:
“…cash is the most popular form of in-person transactions in the U.S. at 35% of payments ahead of debit and credit cards. That survey suggests that retailers have no intentions as well of stopping acceptance of cash as a form of payment. So, even as ecommerce becomes a larger part of the payments landscape, in-person sales where cash is the preferred method of payment are also expected to grow. This data supports our belief that Brink’s is very much a growth business given our strategic focus on increasing organic revenue, grow through acquisition, and our development in digital cash management solutions targeted at a very large market of underserved or unserved customers and retailers today.”
Micron (MU)
There is an old adage on Wall Street that says once a stock breaches $90, it “must” reach $100. Micron (MU) failed to deliver in 2000 when it topped out just short of $100. Perhaps the second time, almost 21 years later, is a charm. That adage provides the main bull case for semiconductor chip company Micron (MU) for the next 10% or so of upside. MU snapped back from a test of 20DMA support with a 2.3% gain and a 4.8% gain for good measure.
U.S. Global Jets ETF (JETS)
The near parabolic move in U.S. Global Jets ETF (JETS) provides a good visual of the fresh popularity in the reopen trade. JETS is up 12.6% since last week’s breakout. JETS still has a ways to go to finish recovering its pandemic-related losses.
Be careful out there!
Footnotes
“Above the 40” (AT40) uses the percentage of stocks trading above their respective 40-day moving averages (DMAs) to measure breadth in he stock market. Breadth indicates the distribution of participation in a rally or sell-off. As a result, AT40 can identify extremes in market sentiment that are likely to reverse. Above the 40 is my alternative name for “T2108” which was created by Worden. Learn more about T2108 on my T2108 Resource Page. AT200, or T2107, measures the percentage of stocks trading above their respective 200DMAs.
Active AT40 (T2108) periods: Day #91 over 20%, Day #75 above 30%, Day #73 over 40%, Day #16 over 50%, Day #13 over 60% (overperiod), Day #4 under 70% (underperiod)
Black line: AT40 (T2108) (% measured on the right)
Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%). Source: FreestockCharts
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long UVXY shares and calls, long IWM calendar spread, long SPY put spread
FOLLOW Dr. Duru’s commentary on financial markets via StockTwits, Twitter, and even Instagram!
*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. TradingView.com charts for currencies use Tokyo time as the start of the forex trading day.
Great update. Very much appreciated, especially the wisdom readers gain in your unique style of accurate analysis.
Thanks as always, Richard, for checking in!
Since I am here, a quick update to readers: I faded SPY with puts as planned, but I quickly took profits. I am still holding a March put spread. The SPY is not in a confirmed bearish position until two closes below its 50DMA.