Breadth Improving

When big capitalized growth stocks stall like AMZN did recently after reporting, either the entire market turns lower or money rotates once gain back into lagging sectors and stocks. Based upon improving market breadth, value-seeking rotation appears underway; thereby improving the odds for further gains should breadth continue improving. The Market Review explains.

S&P 500 Index (SPX) 4468.00 gained 72.74 points or +1.65% over the past two weeks trading in upward sloping narrow ranges consistent with activity suggesting few are willing to challenge the momentum. In addition to a new closing high, it also made another new intraday high at 4468.37 on Friday. On any unexpected decline, the 50-Moving Average at 4332.12 should provide support.

Invesco QQQ Trust (QQQ) 368.82 advanced 4.25 points or +1.17% in the past two weeks after making a new closing high on August 5 at 369.67 and a new intraday high at 369.91. Friday's close-ended just below the operative upward sloping trendline, USTL from the May 18 low at 316.20 but well above the 50-day Moving Average at 356.25 that would likely hold any unexpected pullback.
CBOE Volatility Index (VIX) declined 2.79 points or -15.30% in the last two weeks ending at 15.45. 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, declined 2.84 points or -21.16%  over the same two week period to end 10.58%, approaching the June 25 low of 10.32%.

Trading volume typically declines in August as some traders and investors shift attention to vacation activity making August one of the weaker months for the averages, but this year so far, they are holding up well as reflected by the volatility index drifting lower as shown in this bullish 6-month chart.

VIX Futures Premium

$VIX futures premium on Friday ended at 18.90%. Still in the bullish green zone with front-month August expiring Wednesday.

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts.

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, deserves special attention as it turned higher over the last two weeks, gaining 52.66 points of +40.35% ending at 183.18. Although well below the 50-day Moving Average at 472.02 the change in direction confirms broader market participation attributed to rotation into value and cyclical stocks something that seems out of character with renewed concern about the Covid -19 delta variant.

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Despite seasonal weakness that often occurs in August the major equity indices continue making new highs, so consider staying on the long side while the path of least resistance points higher, or until some fundamental event changes sentiment.

Summary

Multiple new closing and intraday highs by the major indices confirm market strength along with rotation into value and cyclicals although August seasonally reflects lower trading volume and less support for higher prices. So far, in the middle of August market strength prevails.