Two things are for sure. September finally ended and energy is alive and well on Wall Street. The S&P 500 Index failed to hold support at the 50-day Moving Average as interest rates on the 10-Year Treasury Note added 7 basis points by Wednesday before retreating on Friday. The Market Review adds details along with a mark-to-market update for last week's Energy Select Sector SPDR Fund (XLF) long call spread idea.

S&P 500 Index (SPX) 4357.04 declined 98.44 points or -2.21% last week after making a gap lower open on Tuesday ending any chance support at the 50-day Moving Average would turn the tide as "buy-the- dippers" decided to stay away.

From a trendline perspective the operative upward sloping trendline, USTL begins at the October 30, 2020 low of 3233.94, touches the lows made July 19 at 4233.13 and August 19 at 4367.73. On September 13, it closed below the USTL and continued lower after testing support at the 50-day Moving Average before gapping lower last Tuesday. Looking up at the 50-day Moving Average, now hovering above at 4443.13, "It's a long way to Tipperary, – It's a long way to go."
In the rosy scenario view, support around at the 50-day Moving Average would have held and limited the pullback as it has the previous 9 times if September seasonal weakness deserved all the blame. The quick rise in yield on the 10-year Treasury Note to 1.55% on Thursday could be another reason, and perhaps one more could be anticipation of weaker than previously expected earnings and revenue due to higher costs when 3Q earnings reporting begins in two weeks. One thing for sure, this pullback deserves more attention than the last nine.

Invesco QQQ Trust (QQQ) 360.18 declined 13.15 points or -3.52% last week and like the SPX support around the 50-Day Moving Average failed to hold as it declined 2.83% last Tuesday. From a trendline perspective the current upward sloping trendline, USTL, begins at the May 19 low at 315.93 and touches the August 19 low at 359.56. On September 17, it closed below the USTL then gapped lower at the open the next day. Support at the 50-Day Moving Average, now at 370.29 appeared to hold the line until last Tuesday's 10.48 point or -2.83% drop. Now declining faster than SPX, expectations for rising interest rates and less than stellar upcoming earnings reports are two possible reasons.

CBOE Volatility Index® (VIX) advanced 3.40 points or -19.15% last week ending at 21.15. 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 a bit more up 4.38 points or  +33.21% to close at 17.37% compared to 13.04% for the week ending September 24.

VIX Futures Premium

VIX futures premium on Friday ended at 4.68%, back in the yellow caution zone vs.15.22% as of September 24. Front month October futures expire in 16 days.

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.

VIX-VXST Spread

While the VIX Index is calculated using monthly options with 30-days to expiration, VXST uses options with 9-days to expiration and include options that expire in one week making then more sensitive to changes in short-term implied volatility. This spread measures the distance from the 30-day VIX to the 9-day VIX to produce an indicator.

Typically, the spread is positive with the VIX higher than the VXST. Caution signals begin flashing when it turns negative as short-term implied volatility increases faster than the standard 30-day measure. Consider it like an option sentiment indicator usually displayed as it begins turning negative. However, it can also be useful to measure the degree of bullishness or hedging complacency.

On Friday, the spread ended at 2.51 up from -1.99 on Monday. Last week this indicator remained slightly positive every day except for last Tuesday closing the week +1.73. Call it inclusive.

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 continued lower at a slower rate. For the week it declined 31.81 points to end at -92.71 and well below the low made last September 30 at -8.12 before it turned higher on October 1, 2020 (left side of the chart) then declined once again in mid-October. No slow upturn came last week as expected.

Continuing decline by this indicator adds support to the caution view.

WTI Crude Oil (CL) 75.88 basis November futures ended the week up another 1.90 points or +2.57% higher.

Energy Select Sector SPDR Fund (XLE) 53.84 up 2.94 points or + 5.78% last week making most of the gain last Monday as it opened with gap higher. See last week's suggestion in Digest Issue 39 "Buy-the-Dippers Return [Charts]."  This meant adjusting the strikes for the long call spread higher: 54 for the long leg and 57 for the short leg resulting in a debit of 1.08.

Marked-to-market at 1.17 on the close Friday resulted in a slight gain. Although the energy sector shows relative strength, it will not help much if the equity market makes another downturn so be prepared to close it should it fail to hold 51.

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.

From Digest Issue 37 "Storm Clouds Gathering [Charts] " "After a much weaker jobs report on Friday, September 3, followed by the Federal Reserve’s latest Beige Book saying a “deceleration” in economic activity in August, especially in dining out, travel and tourism, was linked to the spread of Covid Delta, with events canceled throughout the U.S. the equity markets began seeing storm clouds gathering." 

Another weak jobs report on Friday for September could be more important than easing the pressure on the Fed to begin tapering QE.

In conclusion, equities could go either way this week. Watch the data and pay less attention to news reports. Friday's turnaround could have been a reversal ending the pullback since the record shows the first two weeks of October are usually positive ahead of earnings reporting. However, it could also be just a counter-trend bounce before turning lower again. If so, consider reducing long-duration positions while hedging others.

Summary
Last week's failure by both the S&P 500 Index and the Invesco QQQ to hold their 50-day Moving Averages after previously closing below their operative upward sloping trendlines dramatically changed the near term outlook for equities. From initially dismissing the pullback as just September seasonal weakness it now seems like rising interest rates and perhaps weaker than expected upcoming earning reports should be considered reasons why equities are now more vulnerable. Watch the turnaround bounce that began Friday any signs of further weakness.