Along with the unexpected Covid-19 vaccine news from Pfizer last Monday and some lingering controversy about the election results, evidence of renewed cyclical rotation surfaced again as some big cap growth stocks lagged. The Market Review explains followed by a long call spread idea taking the cyclical rotation side with Freeport-McMoRan (FCX).
S&P 500 Index (SPX) 3585.15 added 75.71 points or +2.16% making a new closing high on Friday after making a new outlier intraday high at 3644.22 last Monday's on Pfizer's Covid-19 vaccine news. Then Tuesday, after closing Monday's opening gap, it wobbled a bit before closing back above the September 2 high on Friday. Now the new intraday high makes a tempting target for the bulls going into year-end, a period of seasonal strength. Any pullback from an unexpected event should find support around the 50-day Moving Average at 3405.17.
Invesco QQQ Trust (QQQ), 290.93 declined 3.68 points, or -1.25% last week. Previously called "the decider," it failed to make a new intraday or closing high last week while becoming exhibit one for rotation into the cyclicals argument. Although tech and Semiconductors remain in well-defined uptrends and could continue higher into year-end, more rotation into cyclicals while good for SPX will cause QQQ to underperform. However, semiconductor favorite Nvidia Corp. (NVDA) 531.88 scheduled to report earnings on Wednesday, could change the picture. The 50-day Moving Average at 279.81 should support any unexpected pullback.
CBOE Volatility Index® (VIX) 23.10 slid 1.76 points or -7.08% 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, declined 2.42 points or -11.57%, ending at 18.49%, regressing to the mean and then some encouraging the bulls.
The IVXM and SPX charts follow.
Next, the VIX 30-day options and the VXST 9-day options spread turned briefly negative again last Monday, but turned positive again Tuesday and closed Friday at 2.09. Going in the bullish direction.
One more, the Equity Only Put/Call ratio dropped down to an abnormally low .37 last Monday but returned back to .50 on Friday. Unless contrarians actively adjust positions after using extreme lows as sell signals the results will likely be disappointing unless supplemented by other indicators.
The updated chart follows.
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 just two trading days until November expiration, the day-weighted premium between November and December allocated 10% to November and 90% to December for a premium of 7.51% still in the neutral zone. However, on Fridays before futures expire the premium remains abnormally high and then quickly fades on Monday and Tuesday. For comparison, the alternative volume weighted premium was 4.65%.
Since most of the volume and open interest are in the two closest futures contracts measuring the day-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.
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 just two trading days until November expiration, the day-weighted premium between November and December allocated 10% to November and 90% to December for a premium of 7.51% still in the neutral zone. However, on Fridays before futures expire the premium remains abnormally high and then quickly fades on Monday and Tuesday. For comparison, the alternative volume weighted premium was 4.65%.
Since most of the volume and open interest are in the two closest futures contracts measuring the day-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.
Setting the Stage – Sector Rotation
Of all the influences tugging on the markets including Covid-19 vaccine news, more fiscal stimulus, and continuing election uncertainty it's becoming apparent the extreme valuation of a small group of big-cap growth stocks may have reached their upper limit encouraging sector rotation into cyclicals and those perceived as value stocks. If so, market breadth should widen – a healthy sign. Indeed, our preferred market breadth indicator continues showing improvement.
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, added 203.36 points or +144.53% last week ending at 344.06 after climbing back above both the 200-day and 50-day Moving Averages.
Cyclical Rotation Idea
Freeport-McMoRan (FCX) 20.14, up 1.02 points or 5.33% last week as copper prices continue higher helped by EV production and expanding industrial demand in China. The last suggestion in Digest Issue 38 "Momentum Mania [Charts]," then at 17.00 quickly failed as the big cap growth stocks roared higher. Now using that decline as a pivot for a well-defined upward sloping trendline a new and perhaps better timed long call spread suggestion follows.
Using the ask price for the buy and mid for the sell the call spread debit was .95 on Friday about 24% of the distance between the strike prices. Use a close back below the upward sloping trendline at 18 as the SU (stop/unwind).
Strategy
In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing. Now, however, for the S&P 500 Index, the odds for a pullback developing before it reaches the intraday high made on the Covid-19 news at 3,644.22 seem low especially since November and December are seasonally strong months. Nevertheless, sector selection remains important presuming last week's rotation activity continues and interest rates don't spike higher on more Covid-19 vaccine news.
Ideally, cyclicals and value sectors can close some of the performance gap between tech and semiconductors as breadth continues improving. Should tech and the semiconductor sector turn lower and close below their 50-day moving averages would increase the odds of a meaningful pullback and would renew the call for hedges.
More likely the S&P 500 Index will continue up to and test the intraday high and then,
- Attempt to form a double top or
- Exceed the previous high, and start forming a potential H&S Top pattern or
- Resume the long-term uptrend.
Summary
The one day market spike up in response to Pfizer's Covid-19 vaccine news created a new upside target for the S&P 500 Index that could be reached soon presuming market breadth continues improving as money continues rotating into cyclical and value sectors. Needless to say, an unexpected breakdown of the tech and semiconductor sectors would change the outlook.
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