T2108 Status: 49.9%
T2107 Status: 32.7%
VIX Status: 15.5
General (Short-term) Trading Call: neutral (just switched from bearish)
Active T2108 periods: Day #35 over 20%, Day #34 over 30%, Day #5 over 40% (overperiod), Day #7 below 50%, Day #9 under 60%, Day #349 under 70%
Commentary
Going into the August Angst, I frequently pointed out what I thought of as a dangerous narrowing of market performance. I have finally stumbled across some stark quantification of the sharp divergence of performance between the top stocks and the rest of the S&P 500. Money manager Whitney Tilson found the following on November 20, 2015:
“…the 10 largest stocks (by market cap) in the S&P 500 are up 13.9%, while the other 490 are down 5.8%. This 19.7% spread is the largest in 15 years and has only been larger twice (in 1998 & 1999, at the peak of the internet bubble)…
The 10 largest stocks are (in order): Apple (O:AAPL), Google (O:GOOGL) (both classes of shares), Microsoft (O:MSFT), Exxon Mobil (N:XOM), GE, J&J, Wells Fargo (N:WFC), Berkshire Hathaway (N:BRKa), Amazon (O:AMZN) and JPMorgan Chase (N:JPM) (the numbers would be even more skewed if the #11 stock, Facebook (O:FB), were included, as it’s up 38% YTD).”
This is an incredibly narrow market. While there is no formula from here to a massive sell-off, this kind of unbalance merits monitoring. I find it prudent to assume the market is very vulnerable until this unbalance improves.
T2108 closed the week at 49.9% – smack in the middle of neutral territory and no gain from Thursday. The S&P 500 gained 0.5% on the day to close out a tremendous week. The index sprinted higher for a 3.3% gain on the week. This seems strong except the move failed to reverse the big loss from the previous week. While I understood the previous week’s loss in the context of the poor technicals, I cannot point to anything for this week’s gain except that T2108 dropped below 40%. As a reminder, the S&P 500 has proven quite capable of strong bounces after T2108 drops below 40%. (On a sidenote, I ended up correctly caveating the T2108 Update from last Friday by saying the tenor of trading could change following the tragic terrorist attacks in Paris).
The S&P 500 sprints higher on the week, but the index fails to reverse the loss from the previous week.
The volatility index, the CBOE Volatility Index, dropped all week. It closed just above the 15.35 pivot. So, I am still clinging to my call options on ProShares Ultra VIX Short-Term Futures (N:UVXY). If the VIX falls further, I will look to aggressively leverage these call options as hedges.
And just like that, the VIX is right back to the 15.35 pivot.
Two prime stocks on my radar are old favorites Netflix (O:NFLX) and Alphabet Inc (O:GOOGL). NFLX gained 19.5% for the week. GOOG gained 5.5% for the week for a fresh all-time high.
Alphabet (GOOG) resolves a Bollinger Band® squeeze to the upside with a strong gap up and fresh all-time high.
Netflix (NFLX) is helping the out-performance of big cap tech stocks
Splunk Inc (O:SPLK) is a post-earnings shorting opportunity I completely missed. While I have not updated my skeptical piece from last year titled “Splunk: An Insider Bonanza,” I am as skeptical as ever. I have been waiting and waiting for a good entry point to initiate a fresh short position. I should have been on the ball to short SPLK as it gapped up and surged well over its upper-Bollinger Band (BB). I should have been doubly ready to go short as SPLK fell back below its 200DMA. The stock ended the day with a clear and strong bearish engulfing pattern (the open and close are higher and lower than the previous day’s high and low respectively). If the pattern from August earnings repeats, then the stock could continue to slide. The huge caveat of course is that slide occurred while the rest of the market was struggling.
Splunk (SPLK) quickly transforms from a bullish post-earnings gap up to a very bearish post-earnings fade and bearish engulfing close.
One of the big surprises for the week was the strength in the Australian dollar. This is another case of a drive lacking a firm catalyst. However, the rally is definitely consistent with the rally in the stock market. The irony of this pop is that iron ore sold off along with the rest of the commodity space this week. Iron ore ran smack into multi-year lows just above the levels hit in July. Chinese steel futures are hitting fresh record lows. Copper keeps crying out in pain. Within the next few weeks, I am likely going to add significantly to existing shorts on the Australian dollar. In other words, there is yet one more reason to be extremely wary of this rally even as I look to “chase” some of the hotter movers in case this “contrary” rally continues.
The Guggenheim CurrencyShares Australian Dollar (N:FXA) surges on the week. Can the rally sustain for a retest of 200DMA resistance?
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)
Weekly T2108
Be careful out there!
Full disclosure: short the Australian dollar, long UVXY call options