A View From The Top

Finally, on Friday the S&P 500 Index closed above the February 19 intra-day high, setting new closing and intraday highs. Warnings of a double top will likely continue despite crucial support from the Invesco QQQ Trust. For a view from the top, the Market Review includes a look at selected Foremost Indicators.

S&P 500 Index (SPX) 3397.16 crawled up another 24.31 points or +.72% last week reaching a new intraday high summit on Friday at 3399.16 before pulling back slightly at the close. Despite cyclical sector weakness, it kept climbing, in narrow trading ranges, on lower than average volume, tracking the trendline from the March 23 low while defying warnings that the August record is typically poor. With that thought in mind, with still a week to go, look for support at the 50-day Moving Average now 3221.04, just in case.

Invesco QQQ Trust (QQQ), 281.87, called "the decider," gained 9.71 points or +3.57% last week making a new closing and new intraday high. Called the decider, since as it goes – so goes the S&P 500 Index. On any pullback, the first support will come from the upward sloping trendline just below, followed by two previous highs at 270 and then 50-day Moving Average way down at 259.57. Since the big cap secular growth tech companies have assumed a "Risk Off" or a slow economic growth role, last week's sector score was "Risk Off", four and one for "Risk On."

CBOE Volatility Index® (VIX) 22.54 added .49 points or +2.22% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, diverged a bit sliding .63 point or -3.67% ending at 16.55%.

Based upon regression to the mean theory, its continuation below 20% supports the bullish rotation view shown in the IVXM and SPX charts below.

VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts as of last Friday.

With 17 trading days until September expiration, the day-weighted premium between September and October allocated 85% to September and 15% to October for a premium of 17.73%, comfortably in the bullish green zone.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at the next monthly futures expiration on Wednesday.

This second chart going back to May 2016, with a mean of 10.80%, adds some perspective to the current situation.

The relationship of the futures curve to the VIX, as measured by the premium, makes a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

For daily updates, follow our end-of-day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.

Equity Only Put/Call Ratio

Last week included a weekly equity-only put/call ratio back to January 2019 that generates sell signals when reaching low levels. Here is the current daily version for this year.

Like overbought and oversold indicators, it can remain on a sell signal for a long time, and taking action solely on this one indicator without other confirming indicators could cause serious portfolio damage while waiting.

Foremost Indicators

Market Breadth

Market Breadth is one of several indicators useful for confirming a sell signal given by equity-only put/call ratio signal.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, declined 118.43 points or -12.85% last week ending at 802.95 just below the 50-day Moving Average at 811.04. In the past, advances above and declines below, the moving average have been good changing trend indictors.

U.S. Dollar Index

U.S. Dollar Index (DX) 93.24 up .13 for the week. Here is an update of the DX chart in Digest Issue 31 "U.S. Dollar Index & Gold [Charts]."

After trading as low as 92.12 on Tuesday, August 18, it rebounded to form a possible double bottom or even a Head & Shoulders Bottom pattern. While some analysts suggest it is due for an oversold rebound since the next round of fiscal support seems delayed or perhaps canceled. How this could be positive for the dollar and the economy remains unclear since the other fundamental drivers such as a greatly expanded money supply remain unchanged.

Regardless, a change in direction for DX will change the picture for equities with meaningful overseas sales, and commodities, especially gold and silver. Of course, it could also be in the process of forming a continuation pattern. Watch the downward sloping trendline at 94 and the 50-Day Moving Average at 95.22 for confirmation of a possible trend change.

Gold Miners Update

Meanwhile back at the gold mine.

VanEck Vectors Gold Miners ETF (GDX) 40.89 gained .54 points or +1.34% last week.

COMEX cash gold closed the week at 1939.51down 4.14 points or -.21%. After making big gains last Monday and Tuesday they were eclipsed by a large loss on Wednesday.

Since GDX remains above 39 both trade plan suggestions in Digest Issue 30 "Invesco QQQ Trust Breakdown [Charts]" and Digest Issue 31 "U.S. Dollar Index & Gold [Charts]" remain open, however, both will be closed if GDX closes below 39.

Strategy

Now that the S&P 500 Index reached new closing and intraday highs, the time has come to start anticipating a pullback. Based upon recent history, since the beginning of 2018, each new weekly closing high has been quickly followed by a pullback, some meaningful others not so much. Look, they are marked on the chart.

What are the odds it will be different this time?

With unusually low forward visibility and a wide range of possible outcomes, prepare for a pullback by hedging some positions with collars or selling out-of-the-money call credit spreads.

It may be worthwhile to keep this Wall Street adage in mind. "There are old traders, and there are bold traders. But there are no old bold traders."

Watch for a key reversal or wide range decline on increased volume for both the SPX and QQQ.

Summary

After both the S&P 500 Index and the Invesco QQQ Trust made new intraday and closing highs last week and despite futures and option indicators remaining bullish the U.S. Dollar Index and market breadth suggest an increasing probability equity markets are due for a pullback. For the S&P 500 Index perhaps a double top or something less, but with extremely high uncertainty an increased defense seems like a better strategy than increasing long exposure, and with one week to go, the August seasonal record favors the bears.