Our focus on market breadth continues again this week as it has for the last few weeks since the divergence will be resolved either by more issues participating in the advance or by the entire market turning lower. Last week more issues joined the advance so breadth improved slightly delighting the bulls. The Market Review includes the details.

S&P 500 Index (SPX) 4535.43 nudged up 26.06 points or +.58% while making new closing and new intraday highs on Monday and then again on Thursday with risk-off sectors bettering the more cyclical risk-on sectors 4 to 1. The operational upward sloping trendline that tracks the 50-day Moving Average at 4407.75 should provide solid support on any pullback attempt.

Invesco QQQ Trust (QQQ) 381.57 added 5.53 points or +1.47% again breaking out into new high territory making a new intraday high on Wednesday at 382.71, before pulling back slightly on Thursday and Friday. Once again, the big cap stocks tech stocks outperformed the SPX. The 50-day Moving Average at 365.72 and the slightly higher upward sloping trendline make solid support.

CBOE Volatility Index (VIX) added .02 points or +.12% last week to finish 16.41. 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 .01 points or -09% last week closing at 10.71%, compared to 10.72% for the week ending August 27 and again approaches the June 25 low at 10.32%. – Still bullish.

Our estimate of the mean for the current relevant range begins on June 5, 2020, at 19.70% and slopes downward, ending Friday at 15.57%.

VIX Futures Premium

VIX futures premium on Friday ended at 17.13%, in the green bull zone with the front month September futures losing time premium fast with 9 days to expiration.

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 4.75 vs. -1.55 on August 18.

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, the advance continued from the week before gaining another 114.33 points or +649.97% closing at 131.92. Finally – say the bulls.

Breadth divergences will be resolved either by the major indices declining or greater participation by more issues. Last week more issues advanced than declined.

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 Jay Powell's comments on August 27 about plans to begin tapering while further delaying interest rate hikes, to weakening consumer demand due to the increasing Covid Delta, the SPX then declined only 1.52 points Friday after a much weaker jobs report. Internally, however, rotation continued into big-cap tech and risk-off sectors that do OK when the economy slows.

Although the historical seasonal record for September shows weakness, this year could be an exception, so until signs of weakness begin to appear such as challenging trendlines or 50-day Moving Averages along with signs of increased hedging in the options and futures markets, odds favor further advances, complicated by often confusing sector rotation.

Summary
Once again, new highs by both the S&P 500 Index and the Invesco QQQ Trust confirm the bulls remain in charge confirmed by improving the market breadth, the last holdout indicator to confirm the current advance. Although the September record shows weakness until the indicators begin flashing signs of concern, the bulls have it.