Last week the S&P 500 Index made new closing and new intraday highs every day with secular growth leading the rotation derby three days, cyclicals one day, and one day a draw with no clear winner. The Market Review explains along with a case study for the Micron Technology, Inc. (MU) earnings report calendar spread.

S&P 500 Index (SPX) 4352.34 added 71.64 points or +1.67% consistently making new closing and new intraday highs all week, although the total gain was modest. It's now advancing well above the operative upward sloping trendline that began at the October 30 low and the 50-day Moving average at 4208.13. With the 14-day relative strength indicator moving into overbought territory the area around 4250 should provide good support on any unexpected decline. Since second quarter an earnings reporting begins next week with the big banks, the odds favor continued market strength.

Invesco QQQ Trust (QQQ) 358.64 advanced 9.18 points or +2.63% last week. Rotation back into secular growth stocks from cyclicals continues on the assumption the Fed will raise interest rates sooner than previously expected thereby eventually slowing the economy along with some weakness in the reopening stocks due to renewed Covid-19 worries. Friday it made a gap up opening and like the SPX moved into overbought territory based on the 14- day relative strength indicator.

A close below the operative upward sloping trendline that began May 19 at 315.93 would be the first sign of slowing momentum with the first support around 342 followed by the 50-day Moving Average now at 336.88. The important yield on the 10-Year Treasury Note, especially for this ETF since low rates fuel secular growth stocks, declined 5 basis points to end last week at 1.44%.

CBOE Volatility Index (VIX) slid .55 points or -3.52% last week ending at 15.07. 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, gained .13 points or +1.26% to close at 10.45% near 10.33%, last week's bullish 52-week low.

VIX Futures Premium 

VIX futures premium ended last Friday at 22.22%, well into the bullish green zone, vs. 18.53% on June 25. July futures expire in 11 trading days.

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, last week again disappointed the bulls declining every day except for a small gain on Thursday. For the week, the final tally ended 45.43 points or -6.49% lower and below the 50-day Moving Average at 693.09.

Other breadth measures such as the percentage of S&P 500 Index stocks above their 50-day Moving Average, confirm narrowing breadth at 56%, compared to above 90% in April. This means greater concentration in fewer big capitalized stocks. 

Best Calendar Spread Case Study

"Digest Issue 25 "Less Accommodative Not Hawkish [Charts]" featured a Micron Technology, Inc. (MU) long calendar spread idea with the implied volatility (IV) and time to expiration added to the legs originally displayed.

Buy Oct 15 82.50 calls 4.85  IV 39.60  (117 days).

Sell July 2 82.50 calls 1.02  IV 49.82  (12 days).

Net indicated debit of 3.83 on June 18.

Results follow based on two opening assumptions, the first on the Monday following the initial suggestion made the Friday before. The second based on opening the trade on the afternoon of June 30, just before they reported results in an effort to capture the maximum implied volatility value for the short call.

The first:

On Monday, June 21, the stock closed at 77.07 up .07 from Friday so the debit of 3.83 became the base for this alternative.

The second:

On Wednesday, June 30, before the reporting earnings with the stock at 84.98 +2.05 for the day:

Buy Oct 15 82.50 call 8.60  IV 39.88  (108 days).

Sell July 2 82.50 call  3.53  IV 82.94  (1 day).

Net debit 5.07.

Now two closing assumptions. The first on Thursday after reporting at the close with the stock at 80.97 -4.01 for the day.

Buy the Jul 2 82.50 call to close at .34  IV 51.62.

Sell the Oct 15 82.50 call to close at 5.60  IV 36.96.

Credit 5.26

Results for alternative one opened June 21 = 1.43 credit (5.26- 3.83)

Results for alternative two opened June 30 = .19 credit (5.26 - 5.07) seems sub-optimal but it was for only 1 day.

Second closing assumption at the close on Friday, June 2 with the stock at 80.33 +.22 for the day:

Jul 2 82.50 calls expires worthless.

Long October 15 82.50 calls bid 5.35.

Opening alternative one marked-to-market = 1.52 credit (5.35 - 3.83)

Opening alternative two marked -to-market = .28 credit (5.35 - 5.07)

This closing alternative uses mark-to-market assuming the stock advanced abnormally before reporting to then sell on the news as in "buy the rumor sell the news" and will now stabilize and turn higher since the Van Eck Vectors Semiconductor ETF (SMH) recently broke out to the upside and secular growth stocks have a tailwind provided by the low yield on the 10-Year Treasury Note.

With this scenario, the still long October 15 82.50 calls with a basis of 3.83 or 5.07 depending on the opening date can be used again for more calendar spreads in July, August and even September.

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.

While still bullish especially going into earnings reporting next week, uncooperative market breadth justifies raising the yellow caution flag one notch as the rotation battle between secular growth and cyclicals continue.

Summary

All of the indicators, except for market breadth, improved again last week with secular growth stocks in the Invesco QQQ Trust (QQQ) outperforming cyclicals and the broader market. With 2Q earnings reporting about to begin the media focus will likely shift to reporting on the ones that report better than expected.