Due to its importance as an indicator of the overall market condition and not necessarily useful for exact market timing, a focus on market breadth will continue until it improves or drags the entire market lower. How could that be a concern after a week of higher highs every day except Thursday? The Market Review explains.

S&P 500 Index (SPX) 4509.37 gained 67.70 points or +1.52% last week making the best weekly gain since July 23 when it gained 1.96%. With higher closing and higher intraday highs three out of five days, including Friday the upward momentum continues at a steady pace after renewing the uptrend as it closed above the August 16 high at 4480.28. The infallible (at least so far) 50-day Moving Average at 4377.71 should provide support should an unexpected the pullback occur.

Invesco QQQ Trust (QQQ) 376.04 added 8.31 points or +2.26% breaking out into new high territory gaining more in percentage terms than the SPX and highlighting the outperformance of big-cap stocks. Now back above a new operative upward sloping trendline, USTL from the May 18 low at 316.20 one that's close to the 50-day Moving Average at 362.31, it's also a solid support level on any unexpected pullback.

CBOE Volatility Index® (VIX) declined 2.17 points or -11.69% last week to end at 16.39. 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, slipped 2.29 points or -17.60% last week closing at 10.72%, compared to 13.01% for the week ending August 30 and again approaching the June 25 low at 10.32%. – All bullish.

Our estimate of the mean for the relevant range begins on June 5, 2020, at 19.70% and slopes downward, ending Friday at 15.87%.

VIX Futures Premium

VIX futures premium on Friday ended at 21.94%, well into the green bull zone with 16 days before front-month September futures expire. Last week's lower volume suggests less hedging activity.

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. For the week, it advanced 25.24 points or +326.97% closing back into positive territory at 17.59.

The alternative breadth measure based on S&P 500 Index stocks above their 50-day Moving Averages ended the week at 70.54%, up 10.42% compared to 36.67% on July 19 confrims recent big-cap relative outperformance.

Narrowing breadth measures a market condition when more issues decline than advance often associated with rotation into highly liquid large-cap stocks that are easy to sell in the event it becomes necessary. From this perspective, it reflects declining market liquidity as more money becomes concentrated in fewer issues.

"Divergences can persist for a long time before they finally matter, and they won't tell you the moment when they are going to start mattering. So any bearish divergence is only a temporary message, and subject to revision."  – Tom McClellan.

Rather than giving a precise sell signal, it describes a condition like looking out the window to see clouds in the sky suggesting it may rain but not exactly when it may begin. Alternatively, a gentle breeze may come along and blow the clouds away clearing the sky. Breadth divergences will be resolved either by the major indices declining or greater participation by more issues. Seasonality could also play a role since fewer managers hunting for undervalued small and midcap stocks are active in August.

Hedge Thought Follow-up

Last week's hedge idea in Digest Issue 34 "Breadth Disappoints [Charts]" quickly became a nonstarter as the SQQQ opened near last Monday's SU (stop/unwind) at 8 and quickly declined on Pfizer's FDA vaccine approval news.

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.

Since reversing just above the 50-day Moving Average on August 19 on 2.2 bn shares the SPX volume declined slightly, but hardly enough to call it light August trading activity. Perhaps geopolitical macro events that seem to occur in August are one reason In addition since Jay Powell offered no clarity on the start of bond-buying tapering by the Federal Reserve on Friday, this macro concern has been deferred for a least another month.

Summary
Multiple new highs by both the S&P 500 Index and the Invesco QQQ Trust confirm the bulls are clearly in charge despite the weak record for the month of August when trading volume typically declines along with a dubious historical record of geopolitical events that seem overwhelmed by continuing support from the Federal Reserve.