After the Georgia Senate election and the siege of the U.S Capitol Building, with Covid-19 running ramped in parts of the U.K. and U.S., equities ended higher every day last week except Monday. Have the bulls lost touch with reality or do they have it right? While some well-known money managers renew "bubble" calls, the bulls seem to be singing "Don't worry be happy." First, our Market Review including another Bitcoin comment.

Before beginning, we must confess to some "Mission Creep" guilt for expanding coverage beyond the S&P 500 Index. If continued the Digest could become just like other long-established financial media publishers. Instead, we will return to basics where we are more likely to add value using our best in the business rankers, scanners, and volatility charts to prepare both tactical and strategic trading plans, along with a few economic indicators that don't seem to get much coverage.

S&P 500 Index (SPX) 3824.68 advanced 68.61 points or +1.83% last week after last Monday's key reversal failed to make a lower low on Tuesday ending what could have become a pullback. From there multiple new closing and new intra-day highs boosted sentiment, as in "For we can fly, we can fly up, up and away." In the event of an unexpected pullback, the zone between 3750 and 3700 should provide the first support followed by the 50-day Moving Average way down below at 3618.64.

CBOE Volatility Index® (VIX) 21.56 dropped 1.19 points or -5.23% 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, slipped .44 points or -.53% closing the week at 16.93%. Based upon the chart below, from August of last year the mean, as in regression to the mean, appears near 20%. If so, this suggests increasing volatility risk associated with pullbacks.

VIX Futures Premium

For many years, we calculated the day-weighted premium for the first and second futures compared to the VIX, based on the notion it may offer some advantage over the volume-weighted version in the event of unusual trading activity. Comparing the results led to the conclusion that the differences were insignificant and in fact, the day-weighted version produced abnormal readings on Fridays before the next Wednesday's expiration. Accordingly, going forward the future premium charts will use the volume-weighted method. On Friday, it nudged back into the bullish green zone ending at 10.18% vs. 7.70% on December 31.

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.

Equity Only Put/Call Ratio

From a contrarian, perspective lows are considered sell signals. After spiking higher in the first quarter, the trend continues downward reaching a low of .39 on December 4. Trading off the last four lows since June in anticipation of a market correction produced losses sufficient to challenge this strategy. However, an advance above the October 30 high at .60 could be a good confirming indicator for a market already declining.

Setting the Stage

Last week's comment that the Georgia election contest to control the U.S Senate had the potential to become an unexpected fundamental event since increased taxes and more regulation should not receive support on Wall Street. However, the market reaction to both the Georgia election and protesters occupying the U.S. Capital Building in Washington toppled old assumptions – advancing on both Wednesday and Thursday.

Apparently, the markets concluded more fiscal stimulus in the near term would more than offset any tax increases that may or may not occur in the distant future. As for the siege of the Capital, there doesn't seem to be a line in their earnings forecasting models to reduce estimates, unlike reductions already incorporated for Covid-19. Remember it's all about future earnings although sentiment can affect the multiples applied to those earnings.

As a sentiment indicator, some esteemed professionals call recent SPAC (Special Purpose Acquisition Company) enthusiasm and Bitcoin examples speculative excess typifying "Bubble" markets. However, checking the record, some were declaring bubbles a year or more ago based upon valuation and other metrics.     

As for Bitcoin, the latest Commitment of Traders report from the Commodity Futures Trading Commission as of Tuesday, January 5, shows open interest increased 885 contracts for the week; Leveraged Funds increased their net short position from - 42.58% to - 45.38% of the open interest while Other Reportable increased their long position to 19.76% from 16.59%. None of these changes remotely reflects the 26.85% week's price increase in the January futures contract (BTF21) as of Tuesday, January 5 at 34,515. By Friday's close, it increased even more to 39,520. As a Bubble candidate, this one gets the nod.   

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, made a pivot and bottomed Tuesday at 918.95. By Friday, it added 18.48 points to end the week 16.03 lower, but no longer diverging from the market. Good news for the bulls.

Strategy

In bull markets, the 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.

Other than any damage that could be caused by a Bitcoin correction that could come at any time from any level, most all indicators confirm the new closing and intraday highs especially after an unprecedented week of unexpected fundamental events. Since a rising tide lifts all boats, host your sail while the wind is fair.

Summary

After a week of unexpected and even unprecedented fundamental events, the S&P 500 Index responded with unexpected strength and continued higher every day except one making several new closing and intraday highs. Previously diverging market breadth make a pivot and turned higher ending the breadth concern. Other than Bitcoin, reasons for concern are hard to find.