With the major averages at or near new highs, the bulls must be wondering how much higher they can go. Leaving the prognostications and guesses to others, we look at the current situation in an effort to set some "what if" parameters. Seasonally the January record shows small capitalization stocks tend to outperform creating what has become known as the January Effect. More follows in the Market Review along with a bit more about Bitcoin.

S&P 500 Index (SPX) 3756.07 gained 53.01 points or +1.43% last week while making several new closing and intraday highs including Friday, the last day of the year. In terms of sectors, three of the four days were Risk Off including Friday as it made an intraday high at 3760.20 with less than average combined daily volume of 1.6 bn shares. The Georgia Senate election tomorrow could qualify as one of those unexpected fundamental events, so watch for a close under Friday's low at 3726.88, at the junction of the upward sloping trendline from last November's low. Should that fail look for the 50-day Moving Average to provide support now at 3585.48.

iShares Russell 2000 ETF (IWM) 196.06 slid 2.95 points or -1.48% last week after making a new intraday high at 201.18 on Monday. Giving up the "decider" title and closing below the upward sloping trendline from the November low, the modest decline likely reflects portfolio adjustment selling of underperforming stocks before year-end, something called "window dressing" in the trade. After all, most portfolio managers want to avoid the embarrassment of showing an energy stock in their year-end report. For example, the Energy group placed at the bottom, or near bottom, of the sector list three out of four days last week. However, the January Effect probably won't help since that phenomenon referrers to small less liquid capitalized stocks.

Invesco QQQ Trust (QQQ) 313.74 gained 4.18 points or 1.36% last week to end right on the upward sloping trendline from the November low. In the event of an unexpected decline, the zone between 300 and 295 should provide substantial support from both previous highs and the 50-day Moving Average.

CBOE Volatility Index® (VIX) 22.75 added 1.22 points or +5.67% 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, advanced only.46 points or +2.72% closing the week at 17.37%.

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VIX Futures Premium 

With 17 trading days until January expiration, the day-weighted premium between January and February allocated 48% to January and 52% to February for a premium of 8.03% just below the green bull zone and less constructive than the week before at 13.47%.

Since most of the volume and open interest are in the two closest futures contracts measuring the day-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. 

Bitcoin Futures Update

Our Bitcoin introduction in Digest Issue 51 "About Bitcoin [Charts]" included the premise that the breakout on December 16 resulted from short-covering by Leverage Funds. If so, the next report should show a reduction in total open interest along with a decline in the Leveraged Funds short position. The last Commitment of Traders report from the Commodity Futures Trading Commission as of Tuesday, December 22 shows something else.

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The next report due today could show something different, but based on this data, short-covering by Leveraged Funds in the futures market did not contribute to the initial breakout above twenty thousand on December 16, in fact, Leveraged Funds continued increasing their short position. Perhaps they are long cash Bitcoin (BTCUSD) and selling futures as a hedge, after all that's what the futures market does best. 

January futures (BTF21) closed Thursday at 29,385 up 2,275 points or +8.39% for the week after a gap up on the December 28 opening. With each point value of $5, that's an $11,375 gain for the week. Another gap up at the open should be expected today as the cash (BTCUSD) continues higher at 33,373.90 up 3,830.76 as of early afternoon on Sunday in the Eastern Time zone.

Setting the Stage

The Georgia election contest to control the U.S Senate scheduled for Tuesday has the potential to become an unexpected fundamental event since increased taxes and more regulation should not receive support on Wall Street.

Remember Tom McClellan recently published an interesting article including charts showing Bitcoin currently leads the S&P 500 Index by 5-days. However, trees don't grow into the sky.

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 by 45.50 points or -4.55% last week ending at 953.46. With the SPX at new highs, this divergence will eventually get resolved one way or the other.

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.

Rather than waiting to see if a pullback will become a correction or a more serious downturn, consider hedging as soon as the first signs appear and consider it like the cost of insurance. If unnecessary, existing long portfolio positions will continue higher and the insurance protection can be canceled. In addition, by watching and managing a put spread, for example, keeps attention focused, should the pullback develop into something more serious requiring, even more, put spreads or even a put ratio backspread.

Summary

The S&P 500 Index regained the lead making new highs and doing slightly better last week than the Invesco QQQ Trust and even better than the iShares Russell 2000 ETF that may have been under pressure from the year-end portfolio "window dressing." Diverging market breadth, the Georgia U.S. Senate election on Tuesday, and the relentless Bitcoin advance are all reasons for concern.