T2108 Status: 83.3% (March 3rd marked the first time above 80% since 2013!) – 6th overbought day
T2107 Status: 34.0% (matches highs from December, 2015)
VIX Status: 16.9
General (Short-term) Trading Call: cautiously bullish
Active T2108 periods: Day #16 over 20%, Day #15 over 30%, Day #12 over 40%, Day #9 over 50%, Day #5 over 60%, Day #4 over 70%, Day #2 over 80% (overbought)
Commentary
This week was remarkable, but you may not realize it by simply reviewing the major indices.
The S&P 500 (SPY (NYSE:SPY)) closed up 2.7% for the week, dominated by a 2.4% rally to start the month of March. This move was a convincing confirmation of a 50DMA breakout that ushered in the first overbought period in 414 trading days.
The S&P 500 has followed-through on its breakout with gains every day of this overbought period.
The NASDAQ’s follow-through has been more muted than the S&P 500’s
At 1999.99, the S&P 500 is still below declining 200DMA resistance. As the chart above shows, even the NASDAQ experienced a very moderate follow-through to its own 50DMA breakout. Traders have to turn to T2108, the percentage of stocks trading above their respective 40DMAs, and T2107, the percentage of stocks trading above their respective 200DMAs, to see the remarkable (relative) strength in the market.
T2108 has raced upward in a near straight line since going oversold for the last time. At 83.3%, T2108 is at a level last seen in January, 2013.
T2107 has also raced higher nearly non-stop and has now finally returned to recent highs.
T2108 and T2107 provide evidence of a rapidly healing market. This healing is not readily evident from the major indices. T2108 was last this high in January, 2013. T2108 is back to the highs seen after the recovery from the August angst. T2108 is so high that I am not expecting a lot further progress. I have only recorded THREE periods since 1986 where more than 90% of stocks traded above their respective 40DMAs: February to March, 1991, May to June, 2003, and April to May, 2009. Stock market historians will notice that these were the sharp recovery months following major market sell-offs. The last few stocks that have yet to recover above their 40DMAs are mainly the worst of the lot. I will give examples below of speculative stocks that have ripped higher for big gains. The stocks who could not gain on a week like this last one are simply not likely to gain much support later without a direct stock-specific catalyst.
I now move from T2108 to T2107. As long as T2107 can continue its advance, I will assume the market is still getting stronger. I have downgraded my trading call from bullish to cautiously bullish to reflect the dependence on a new dynamic. Moreover, the S&P 500 is now “close enough” to its 200DMA resistance to warrant even more caution than what I expressed when the index first began testing its 50DMA resistance; the index also finally showed more tentativeness by fading off Friday’s intraday high.
Overall, the trading rules I introduced in the last T2108 Update remain. I will stay bullish until/if the S&P 500 closes below its 50DMA support AND follows through. Even a failure to break through 200DMA resistance will not cause me immediate alarm, especially if T2107 is advancing. Since there is little room between the 50 and 200DMAs, I do not feel an urgency to switch back to a bearish bias. The bearish alarms will go off if/once T2108 tumbles out of overbought status (below 70%).
The volatility index, the VIX, managed to print a marginal gain, but it remains in a definite downtrend. The VIX is on a path to return to the old 15.35 pivot.
The volatility index, the VIX, continues its breakdown.
The Australian dollar (NYSE:FXA) is fully supporting the bullish market sentiment. However, against the Japanese yen (NYSE:FXY), the Aussie is getting very stretched. It has closed above its upper-Bollinger Band® (BB) for four days straight and Friday’s close was well above the region that defines two standard deviations from the 20DMA. Resistance also looms overhead from the 200DMA.
AUD/JPY confirms bullish sentiment by breaking out of the recent consolidation above 3 1/2 year lows. Now I watch for a retest of 200DMA resistance.
AUD/USD is particularly impressive at a 7+ month high.
Currency speculators are further confirming a bullish change in sentiment with increasing net long positions on the Australian dollar.
Speculators have not been this bullish on the Australian dollar since September, 2014
Source: Oanda’s CFTC’s Commitments of Traders
The signs of bullishness are actually everywhere and easy to find. I present a a stream of charts showing different flavors and aspects of the current bullishness; yet they are just a small sample. I also discuss the key trades I have made in the past three days.
First the trades with no charts…
I decided to finally sell all my shares of ProShares Ultra S&P500 (NYSE:SSO) and ProShares Short VIX Short-Term Futures (NYSE:SVXY). This closes out my T2108 oversold trades. From here, I will primarily focus on the trades of individual stocks. I will get interested in SSO and SVXY on the next big dip in the market. I sold my shares in Tableau (NYSE:DATA) just in time. The stock is sliding along its 20DMA. A critical Bollinger Band squeeze is developing. I added a few hedges with shares in Direxion Daily Energy Bear 3X ETF (NYSE:ERY) and Direxion Daily Russia Bear 3X ETF (NYSE:RUSS). I also sold the bulk of my shares in FXCM (NYSE:FXCM).
What better way to start a chart-fest than with Caterpillar (NYSE:CAT) and Apple (NASDAQ:AAPL)?
CAT is following along with the run-up in commodities. CAT has ripped off a 26% gain from the January lows. When it tested 200DMA resistance I purchased a new round of hedges with put options. CAT promptly faded from this resistance. Needless to say, my overall bullishness will be tainted if CAT turns south from here.
Caterpillar (CAT) faces its next critical test at 200DMA resistance.
Apple (AAPL) finally woke up this week. It not only broke out above 50DMA resistance, but also it broke through a region of consolidation. I am rubbing my eyes as I contemplate a LONG overdue AAPL bottom. I could not pull the trigger on AAPL calls this past week because the stock traded along the upper-BB. Going long at such an out-stretched point carries too much risk for a short-term trade. Buyers are showing off by maintaining the upward pressure here.
Apple (AAPL) makes a strong case for a bottom.
Joy Global (NYSE:JOY) ripped higher in post-earnings trade. No doubt, this burst added a little more confidence to CAT buyers. I last talked about JOY on October 9, 2015 as a “catch-up” stock for buyers late to the bounce from oversold conditions. I have traded in and out of JOY since then with mixed results. The April call options I bought shortly after my post are now back to even with the stock returning to those October levels. With hindsight, I should have “backed up the truck” when JOY confirmed 50DMA support on February 24th.
Joy Global (JOY) has more than doubled since hitting an historic 12-year low in January
The commodity space has been absolutely fascinating. There is nothing like a run-up in this space to scream bullishness. In the previous week, I decided to double-down on iShares Silver Trust (NYSE:SLV) despite its big pullback. I assumed the 50DMA support would hold, and it did. I locked in my profits with SLV touching its upper-BB. I did not open a fresh short-term trade on SPDR Gold Shares (NYSE:GLD) because it did not dip enough; it has proved out once again the power of my method of analyzing short-term gold moves. I was very fortunate to let go of my raging bearishness on iron ore long enough to pair my standing put options on BHP Billiton (LON:BLT) Limited (BHP) with a fistful of call options on Rio Tinto plc (LON:RIO). The BHP put options are nearly worthless, but I almost paid for them with the profits I took on my RIO call options. Going forward, I will be trading this space a lot more actively. (Stay tuned for my trading calls).
The iShares Silver Trust (SLV) survived what initially looked like another failure to hold a 200DMA breakout. It now needs to print a higher high.
SPDR Gold Shares (NYSE:GLD) is still going strong with resolute buyers. Printing a fresh 13-month high was a signature moment.
Rio Tinto plc (RIO) has churned higher to levels last seen in December by surviving what looked like a devastating gap down below its 50DMA. THe earnings and dividend cut has turned into the latest bottoming event. (The numbers in the chart approximate the sport price of iron ore).
BHP Billiton Limited (BHP) looks even stronger than RIO now.
Vale S.A. (NYSE:VALE) has jumped from a 13-year low to print a double.
Steel stocks have ripped higher along with commodities. Nevermind that higher commodities are adding to costs. Hopefully, demand is ripping even higher!
Market Vectors Steel ETF (NYSE:SLX) has risen an incredible 42% from the January lows. This is a major run-up for an index and speaks to a broad bullishness across steel stocks. 50DMA support was long ago confirmed. Now, 200DMA resistance looms large.
U.S. Steel (NYSE:X) caught the bug late. The majority of its gains from the lows have happened in just the past week!
The Australian dollar has of course benefited from the sharp recovery in commodities. Emerging markets have as well (or have perhaps helped drive commodities higher). The iShares MSCI Emerging Markets (EEM) soared 9.4% on the week with a confirmation of a 50DMA breakout. With EEM stretched well above its upper-BB, I took this moment to re-establish one of my favorite hedge trades: long out-of-the money call and put options.
iShares MSCI Emerging Markets (EEM) is streaking relentlessly.
The market is so bullish that even broken down GoPro (NASDAQ:GPRO) is filing a petition for a breakout. Friday’s big fade put that request in jeopardy.
GoPro, Inc. (GPRO) is struggling to notch a 50DMA breakout.
Some of my biggest successes from this rally have come from the shares of home builders. I will cover some of my latest opinions in future posts. Here is iShares US Home Construction (NYSE:ITB) with a 17% gain from February lows with a near relentless march upward.
The iShares US Home Construction (ITB) is making a well-deserved comeback.
Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB) is making a steady surge higher. The rise is nearly in stealth mode as the stock makes very incremental gains in a curved form through the upper-BB channel.
Red Robin Gourmet Burgers Inc. is turning the corner from what looks like a sustainable bottom.
Like AAPL, Shopify Inc. (NYSE:SHOP) is breaking out of a tight period of consolidation. Buyers have made a convincing comeback from February’s false 50DMA breakout.
Shopify Inc. (SHOP) is making a case for a bottom by breaking out of a consolidation period.
Tesla Motors (NASDAQ:TSLA) followed through on my earlier claim that the stock would bounce back quickly from the Citron-related selling. I locked in my profits on Thursday thinking that buyers would only be able to reverse the selling before resuming a press downward. Buyers did not stop there. They decided instead to continue the previous momentum with what is now a bullish 50DMA breakout. Notice the increase in volume and increasing on-balance volume (OBV).
Tesla Motors (TSLA) has continued its run-up after what now looks like a Citron speedbump.
Wal-Mart Stores (NYSE:WMT) has stalled with a 200DMA pivot. At these levels, the stock is neatly holding onto a reversal of October’s big sell-off. This is a critical juncture. Buy on the breakout, buy on the next big dip to 50DMA support.
Wal-Mart Stores (WMT) is stuck in a 200DMA pivot, but it still enjoys 50DMA support.
Controversial Weight Watchers International, Inc. (NYSE:WTW) was walloped after earnings, but the 200DMA held true as support. Getting over the immediate pre-earnings price could launch the next big run-up. Otherwise, a lot more churn may be ahead.
Weight Watchers International, Inc. (WTW) continues surviving tests of 200DMA support.
Finally, financials are also strong participants in the rally. The 50DMA breakout pretty much confirms February’s abandoned baby bottom and 2 1/2 year closing low as a sustainable bottom.
Financial Select Sector SPDR ETF (NYSE:XLF) breaks out above its 50DMA and has very likely confirmed the 2 1/2 year low as a sustainable bottom.
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 AUD/JPY, long ITB call options, long GLD, long SLV call options, long RRGB call options, long CAT put options, long EEM call and put options