{"id":40170,"date":"2017-07-24T01:34:27","date_gmt":"2017-07-24T08:34:27","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=40170"},"modified":"2017-07-24T01:57:04","modified_gmt":"2017-07-24T08:57:04","slug":"t2108-update-170721","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2017\/07\/24\/t2108-update-170721\/","title":{"rendered":"Above the 40 (July 21, 2017) – A Stock Market Soaring High But On the Edge"},"content":{"rendered":"

AT40<\/strong> = 64.0% of stocks are trading above their respective 40-day moving averages (DMAs)
\nAT200<\/strong> = 60.4% of stocks are trading above their respective 200DMAs
\nVIX<\/strong> = 9.4 (volatility index) (2nd lowest VIX since at least 1990!)
\nShort-term Trading Call<\/strong>: cautiously bullish<\/p>\n

Commentary<\/strong>
\nThe S&P 500 (SPY) is soaring high since its impressive breakout two weeks ago.<\/p>\n


\n
\"The<\/a>
The S&P 500 (SPY) is holding onto significant moment since its last breakout: the upper-Bollinger Bands (BBs) define the latest uptrend.<\/figcaption><\/figure>
\n<\/center><\/p>\n

The NASDAQ and PowerShares QQQ ETF (QQQ) have charts very similar to the S&P 500. Unfortunately, the stall of the last two trading days happened to occur right at the edge of the overbought threshold. AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), closed at 68.2% on Wednesday, June 19th. AT40 got as high as 68.9% the next day. On Friday, AT40 closed at 64.0%. This fade from the 70% overbought threshold counts as a bearish signal.<\/p>\n


\n
\"After<\/a>
After dipping in and out of overbought in December and January, AT40 (T2108) has struggled to regain such lofty heights.<\/figcaption><\/figure>
\n<\/center><\/p>\n

For some context, AT40 last faded from overbought on April 26th. In three weeks, my favorite technical indicator plunged as low as 32.8%. The good news: the S&P 500 stayed remarkably resilient over this period. The index actually drifted slightly HIGHER over this time until, all at once, the pent-up selling pressure unleashed in one day. On May 17th, the S&P 500 knifed through 50DMA support in a move that forced me to downgrade my short-term trading call to neutral<\/a> (but I was NOT bearish). The plunge turned out to be a speed bump on the road of resilience. The S&P 500 turned right around from there and rallied nearly straight up until time approached for the next Fed meeting.<\/p>\n

Every AT40 bearish divergence<\/a> seems to unfold slightly differently – with some divergences skirting the edge of bearishness<\/a> – but the prospect of some kind of selling event for this divergence seems quite palpable. For example, inspired by a StockTwits poster<\/a>, I created these relative performance charts of the S&P 500 that includes bands for one and two standard deviations.<\/p>\n


\n
\"The<\/a>
The year-to-date performance of the S&P 500 (SPY) in 2017 is well above average but well within one standard deviation of performance.<\/figcaption><\/figure><\/p>\n

\"If<\/a>
If the average year-to-date performance holds, then the S&P 500 (SPY) has seen its best performance of the year and at best will stall out for the next few months.<\/figcaption><\/figure>
\nSource for Data: Yahoo Finance<\/a><\/strong>
\n<\/center><\/p>\n

I was greatly intrigued to see that the S&P 500’s average year-to-date (YTD) performance since 1951 completely flattens out from around now until the 210th trading day (which is right around late October or early November). After that, the S&P 500’s YTD performance soars. However, on average, the S&P 500 soars to an annual performance right around the S&P 500’s current performance just seven months into the year. So, if we think averages, we cannot expect much better from the S&P 500 for the rest of the year. If we think seasonality, the S&P 500 should stall out for the next 3 or so months. If we think a range of “reasonable” outcomes, the S&P 500 is not doing anything unusual at all. Performance within plus or minus one standard deviation covers about 68% of all outcomes. Performance within plus or minus two standard deviations covers about 95% of all outcomes. Note well that these are approximations since the S&P 500’s performance is NOT normally distributed and as a skew to to the downside. See Math Is Fun and scroll down to “standard deviation”<\/a> for a simplified explanation of this concept. Click here<\/a> to download the spreadsheet I used for these charts.<\/p>\n

So, while my short-term trading call remains cautiously bullish, I am uninterested in taking on new bullish positions for more than swing trades or special cases (like SHLD below). If AT40 manages to close above the overbought threshold, I will likely change my tune and turn my gaze to outer bands of YTD performance. First things first though: let’s see what happens after the policy announcement from the U.S. Federal Reserve this Wednesday, July 26th<\/a>. <\/p>\n

While I await resolution of this latest technical drama in the stock market, there is plenty of action in individual stocks for earnings-based swing trades. Amazon Panic also continues to generate tradable cascades.<\/p>\n

Chipotle Mexican Grill<\/strong> (CMG)
\nI last mentioned CMG<\/a> in the wake of the company’s latest food-borne illness scare. I was fortunate to go into that selling holding onto a put option, but I did not capitalize on the full extent of the large gain in that put. I then flipped around and went bullish to bet on a bottoming process. While I was able to snatch profits on the related call options, overall, I would have been better served staying bearish for the rest of the week. <\/p>\n


\n
\"The<\/a>
The selling in Chipotle Mexican Grill (CMG) in the wake of the Sterling, VA illness reconfirmed the 200DMA breakdown. Selling since then has taken only brief pauses.<\/figcaption><\/figure>
\n<\/center><\/p>\n

There are several features of interest in this chart. First, CMG held the intraday low as support on the trading day following the breakdown. It was a setup very similar to what happened December 6th and 7th at the EXACT same price point after CMG posted disappointing guidance for 2017. This time around a bottom was not to be: CMG sliced through that low on Thursday and the selling barely abated on Friday. In the middle of trying to play bottoms I alleviated the pain with some puts but the frenetic trading was a waste of time and energy given staying short made the most sense once the presumed double-bottom failed.<\/p>\n

Jim Cramer was another disappointment. Cramer was a fan of CMG and promoted the idea that 18 months after a calamity from a food-borne illness, restaurants recover and consumers fully forget. With the 18-month clock ending, Cramer opined on Monday, ahead of Tuesday’s sell-off, that he would start loading up on CMG under $400 if he could get the price. Instead, when he next mentioned CMG he reset the 18-month clock. While I understand the reset, I was surprised given norovirus can hit anywhere, and this outbreak does not appear to reflect poorly on CMG’s food chain. <\/p>\n

In the middle of all this, the company has stayed silent with no related press releases<\/a>. I imagine with an earnings call coming up, management has little choice given the quiet period. The main potential upside here is that a good deal of motivated sellers SHOULD finally be out the stock ahead of earnings. If CMG can somehow manage to avoid reporting any worse news, the stock could pop. I am looking to bet that way for one more speculative bet. I am glad at least Guy Adami from CNBC’s Fast Money agrees with me…<\/p>\n


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