Concerns about rising interest rates continued to dominate the narrative last week after Federal Reserve Chairman Powell's comments that they had no plans to limit rates on the 10-Year Treasury Note. Markets were apparently expecting something more specific. By the end of the week, the S&P 500 Index managed to recoup earlier loses and close the week slightly higher. Uncertainty and confusion resulted in a bumpy ride for equities as the S&P 500 Index moved up or down by more than 1% every day except Tuesday. The Market Review includes details along with an updated U.S. Dollar Index (DXY) chart and a hedge idea using ProShares UltraPro Short QQQ.

S&P 500 Index (SPX) 3841.94 settled 30.79 points or +.81% higher last week after closing below the important 50-day Moving Average on Thursday then bounding back Friday to close back above it. The support zone between 3750 and 3700 contained the decline, at least so far. With anxiety about higher interest rates apparently more important than earning reports or vaccine progress, volatility could continue since Powell will comment again after the next Fed policy meeting on March 17.

Invesco QQQ Trust (QQQ) 308.66 declined 5.46 points or -1.74% last week after recovering 4.58 point or +1.51% on Friday. Now well below the 50-day Moving Average at 320.36 it looks broken and headed lower, but could find some support around previous October and November highs near 295. Since more interest rates increases are the top concern it claims the "decider" title and could rebound quickly should interest rates decline. Consider the hedge idea in the Strategy section below.

CBOE Volatility Index® (VIX) 24.66 slid 3.29 points or -11.77% 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 2.86 points or -13.00% ending the week at 19.14%. The six-month volatility chart below, clearly show the Historical also called  Realized Volatility ( blue line) increasing after the January 29 SPX decline, especially in the last two weeks.

VIX Futures Premium 

This coincident indicator moved into the yellow caution zone between 0 -10% ending at 5.10%, compared to -2.22% in the bearish red zone below zero at the week ending February 26.

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. 

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 declining every day last week closing down 162.019  points or  -22.66%. Declining market breadth, often a leading indicator suggests caution.

U.S. Dollar Index (DXY) & (DX)  91.98 gained 1.10 points or +1.22% last week breaking out above the previous neckline of a potential  Head & Shoulder Bottom shown in the Digest Issue 6 "Don't Worry, Be Happy [Charts]" chart. This updated chart now shows an activated Double Bottom pattern. 

Point 1. represents the Head of the previous potential Head & Shoulders pattern activated with multiple closes above 91, but then failed as it declined back to retest the low. It then reversed forming point 2. and activated a Double Bottom with closes above 91.50. The measuring objective, determined by taking the height of the pattern from the middle of the line connecting points 1. & 2. to the top (91.50 - 89.50 =2) and then adding that distance to the breakout (91.50 + 2) is 93.50, up beyond the top of the chart. 

Rising long interest rates with short rates suppressed increases U.S dollar demand for carry trades. A stronger U.S. dollar is like swimming again the tide for large multinational companies with significant overseas revenue, commodities priced in dollars, and crude oil in particular.

Strategy

In bull markets, a best 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.

For those overweight big cap growth favorites, last week may have been the equivalent of getting on the most thrilling roller coaster ride of your life. The following idea may help smooth out the ride.

Consistent with the strategy consider hedging technology and large cap growth stocks.

ProShares UltraPro Short QQQ (SQQQ) 15.04 up .56 or +3.97 last week. At 3X short QQQ it's now well above the downward sloping trendline and the 50-day Moving Average at 14.03.

With a current Historical Volatility of 72.72 and 61.29 using the Parkinson's range method, the Implied Volatility Index Mean is 92.45 at .13 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 1.51 so option prices are moderately expensive relative to the recent movement of the ETF.

Friday’s ETF volume was 303 million with option volume of 484,636 contracts and a 5-day average of 339,230 with reasonable bid/ask spreads. With a lot of volume and liquidity, this is one of the places professionals go to hedge big cap technology risk.

Using the ask price for the buy and mid for the sell the call spread debit on Friday was .62 with some implied volatility edge. In the event it opens higher or lower by 1 point, adjust the strikes accordingly. Use a close back below 13 as the SU (stop/unwind). 

Summary

Volatility increased significantly last week for both equities and bonds. Federal Reserve Chairman Powell's comments were characterized as less dovish than expected and then Nonfarm payroll gains came in better than expected. In addition, the U.S Dollar Index broke out to the upside potentially creating problems for the large cap stocks in the QQQ Index as well as commodities and crude oil. Adding apprehension Powell is scheduled to speak again after the upcoming March 17 policy meeting.