Invesco QQQ Trust Breakdown

While the S&P 500 Index remains the primary benchmark, recently the Invesco QQQ Trust, an ETF based on the Nasdaq 100 Index® gets all the attention. With more than 20% of the issues also included in the S&P 500 Index, QQQ has been towing up, and now may be pulling down, the S&P 500 Index. The Market Review includes details along with a seasonal long call spread idea for VanEck Vectors Gold Miners ETF (GDX).

S&P 500 Index (SPX) 3215.63 slipped 9.10 points or -.28% last week. First creating a new upward sloping trendline from the March 23 low last Monday, it then closed back below it on Thursday after stalling at resistance from the earlier February 21 -24 gap like one of those cartoon characters who takes a few steps back to gain some momentum before coming crashing into the door. Look for support first at the 50-day Moving Average at 3104.14 and then the 200-day 3041.34 should it continue lower. In the absence of unexpected bullish news, August tends to experience light volume with a downward drifting bias.

Invesco QQQ Trust (QQQ), 255.56 called "the decider," declined 3.86 points or -1.49% last week after closing last Thursday below the upward sloping trendline from the March 23 low for the first time. The crucial test of its ability to bounce back should come at the 50-day Moving Average now 244.49, just below.

Regardless of valuation, the bulls claim it's different this time citing low interest rates, support from the Federal Reserve, and the Treasury while apparently disregarding economic dislocations caused by Covid-19, rightfully claiming so far, secular growth stock favorites have the advantage in a slow growth economic environment.

So, don't expect the bulls, still counting gains from the March 23 low, to give up easily.

"...the mental attitude of a 'sold out bull' toward a rising market is much the same as that of a bulldog chained to his kennel while a dog fight is going on outside" – Henry Howard Harper, The Psychology of Speculation, 1926.

CBOE Volatility Index® (VIX) 25.84 nudged up .16 points or +.62% 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, added .17 points or +.82% ending at 20.88%.

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The spike up to 77.15% on Monday, March 16, the day SPX declined 324.89 points, likely marks the top for the recent market decline. Based upon regression to the mean theory its arrival near 20% supports the view that the SPX will likely continue higher, but expect it to advance quickly should the QQQ pull the SPX lower. 

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 August expiration, the day-weighted premium between August and September allocated 85% to August and 15% to September for a premium of 12.41% into the green bull zone after July futures expired last Wednesday.

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, August 19.

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Six Noteworthy Events Last Week 

1. SPX closed above the June 10 high that marked to top of the potential Island Top Reversal pattern ending its influence.
2. Last Monday SPX closed above the June 8 high creating a new upward sloping trendline, USTL from the March 23 low.
3. Thursday SPX closes below the newly established USTL.
4. Thursday QQQ closed below the USTL from the March 23 low for the first time.
5. US Dollar Index (DXY) closed Friday at 94.38, below the March 9 low at 94.61.
6. Gold Spot closed above 1,900 an ounce at 1,902.02 +14.58 (December futures 1,925.20 +7.80), SPDR Gold Shares (GLD) 178.70, up 8.58 points or +5.04% last week.

Gold Express 

VanEck Vectors Gold Miners ETF (GDX) 41.83 gained 2.52 points or +6.41% last week, breaking out above 39.44 with a gap open last Monday. Negative real interest rates and increasing gold prices benefit miners since product selling prices increase faster than costs, making miners leveraged to increasing gold prices.

Seasonally gold typically advances from August to October, pulls back in November then makes another run in December into year-end. Combined with negative real interest rates along with a declining U.S dollar increases the probability gold will continue higher.

Consider this long call spread idea.

With a current Historical Volatility of 32.50 and 32.67 using the Parkinson's range method, the Implied Volatility Index Mean is 40.90 at .21 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 1.25 so option prices are moderate relative to the recent movement of the ETF.

Friday’s option volume was 216,316 contracts with the 5-day average of 214,470 with reasonable bid/ask spreads while the ETF traded 35 million shares Friday. Good liquidity here.

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Using the ask price for the buy and mid for the sell the call spread debit was 1.14 on Friday, about 23% of the distance between the strike prices with 48% of the long call risk hedged by the short call. In the event it opens considerably higher today, adjust the strike prices accordingly. Use a close back below support at 39 as the SU (stop/unwind). 

Strategy

Since both the S&P 500 Index and Invesco QQQ Trust closed below their respective upward sloping trendlines from March 23 lows, consider reducing net long exposure in overextended sectors like IT until the QQQ finds support.

As the U.S. dollar declines, take a look at the gold and silver EFTs along with the miners.

Summary

As the Nasdaq 100 Index® represented by the Invesco QQQ Trust rolled over last week closing below its upward sloping trendline from the March 23 low, the S&P 500 Index dutifully followed along since they share a good number of the same large-capitalization stocks. With negative real interest rates and a declining U.S. dollar, gold and the miners may have more upside.