Last week's rotation back into value ended as defensive sectors, also called Risk-Off topped the sector table every day. Some analysts claim fear of another round of lockdowns due to COVID Delta deserves the blame supported by a 9% declined in WTI Crude Oil futures. Although Friday's trading was encouraging, deteriorating market breadth suggests otherwise. The Market Breadth includes details along with a hedge suggestion using ProShares UltraPro Short QQQ (SQQQ).

S&P 500 Index (SPX) 4441.67 slipped 26.33 points or -.59% after making new closing and intraday highs on Monday before pulling back to testing the 50-day Moving Average on Thursday where it reversed to make a pivot as dedicated "buy the dippers" turned it higher once again. It needs to close above the new intraday high at 4480.28 to renew the uptrend while the reliable 50-day Moving Average at 4352.78 should provide support should the pullback continue.

Invesco QQQ Trust (QQQ) 367.73 declined 1.09 points or -.39% last week holding up slightly better than the SPX but below the operative upward sloping trendline, USTL from the May 18 low at 316.20 while still above support from the 50-day Moving Average at 359.14. While encouraging for the bulls it takes a close above the August 5 high of 369.91 to renew the uptrend.

CBOE Volatility Index (VIX) added 3.11 points or +20.13% last week to end at 18.56. 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 2.43 points or +22.97% last week. The six-month chart below shows a spike up above 15 on Thursday before dropping back on Friday to end at 13.01% compared to 10.58% for the week ending August 13.

Our estimate of the mean for the relevant range begins on June 5, 2020, at 19.70% slopes downward, ending Friday at 16.16%. Thursday's spike above 15 seems consistent with the regression to the mean.

VIX Futures Premium

VIX futures premium on Friday ended at 13.50%, still slightly in the green bullish zone. Sep futures with 23 days to expiration are the new front-month contracts.

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, disappointed the reopening trade advocates and the bulls last week as previous enthusiasm proved premature. For the week, it declined 190.93 points or -104.23% to close at -7.75 the first negative closed since September 30, 2020, at -8.12. For some perspective at the March 24, 2020, low at was -1256.95. With the 50-day Moving average at 403.60, this latest reversal seems to confirm rotation into Risk-Off defensive sectors due to Covid-19 Delta.

Hedge Thought

ProShares UltraPro Short QQQ (SQQQ) ended in the Number 2 sport on Friday's Top 5 stocks based on IV Mean vs. 30D HV, a daily feature found on our front page. Increasing options implied volatility reflects buying out-of-the-money call options since SQQQ advances as QQQ declines. For the week it advanced .06 points or +.62%.

With a current Historical Volatility of 30.25 and 31.56 using the Parkinson's range method, the Implied Volatility Index Mean is 58.69 at .12 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 1.86 so option prices are moderately high relative to the recent movement of the ETF. Friday’s option volume was 183,313 contracts with the 30-day average of 149, 890 contracts with narrow bid/ask spreads. 

Consider this long call spread.

Using the ask price for the buy and mid for the sell the call spread debit would be .395 about 13% of the distance between the strike prices with 23% of the long call risk hedged by the short call. Notice the implied volatility difference, called edge, between the long call at 50.40 and the short call at 88.10. In the event it opens up .50 or more today adjust the strike prices accordingly. Use a close back below 8 as the SU (stop/unwind).

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.

Risk-Off signs due to Covid -19 Delta, along with other concerns justify opening a "just in case" hedge against Invesco QQQ Trust (QQQ) using SQQQ. In the event of another decline, less defensive Risk-Off stock makes it more vulnerable than the broader SPX.

Summary

While last week's modest pullback and reversal reflect "buy the dip" activity, continuing narrowing market breadth suggests Risk-Off rotation that may continue, although lower trading volume may also play a role as sentiment turned lower last week. Consider a SQQQ long call spread as a hedge.