According to our indicators, last week equities segued from an early correction to near perfection in five days. Helped by rotation into energy and small-capitalized stocks the major indexes reached new highs, dispelling worries created by short squeeze activity the week before. The Market Review explains with details along with an updated chart of the U.S. Dollar Index (DXY).

S&P 500 Index (SPX) 3886.83 gained 172.59 points or +4.65% last week making a new closing and intraday highs on both Thursday and Friday after bouncing off the respected 50-day Moving Average last Monday in a real display of support. With the new highs, a new upward sloping trendline emerged with about the same slope as the 50-day Moving Average now 3741.75.

iShares Russell 2000 ETF (IWM)  221.65 gained 16.09 points or +7.83% last week reflecting rotation into mid and small capitalized stocks helped by many in the energy sector as WTI crude oil broke out above 54 and closed at 56.85 basis March futures, up 4.65 points or +8.91%. Gaining considerable more in percentage than SPX last week, IWM regains the "decider" title once again also makes new closing and intraday highs.

CBOE Volatility Index® (VIX) 20.87 dropped 12.22 points or -36.93% 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, slid 9.73 points or -37.39% ending the week at 16.29%.

The chart below shows last week's spike up to 26.02% quickly fizzled as it dropped back to the lowest level since December 4 at 16.17%. From there the next lower levels were in early 2020 at 14.02% on February 21, 2020, and as low as 9.58% on January 17, 2020. Last week options implied volatility began returning to pre-Covid-19 levels. Suggesting the uptrend continues.

VIX Futures Premium

This indicator made an equally sharp reversal last week as shown in the Daily Volume Weighted premium chart spiking up to 21.69% and moving back into the green bull zone – back to levels reached in August and September 2020.

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.

VIX -VXST Spread Indicator

This indicator measures the difference between the 30-day option implied volatility and the 9-day option implied volatility. In the early stages of corrections, the shorter-term option implied volatility rises faster than the long term and the spread turns negative. Then when corrections end, it returns to positive. Note the substantial negative spread that began this time last year. Friday's spread at +5.35% confirms a brief short correction ended last week.

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 turned up last Wednesday gaining 4.41 points. For the week it gained 33.74 points or 4.72%, but still below the 50-day moving Average. As the indexes make new highs unless market breadth follows the divergence will eventually be resolved. The improvement so far, even though slight, should further encourage the bulls. The chart follows. Stay tuned.

On the Other Hand

The U.S. Dollar Index (DXY) & (DX) 91.04 gained .69 points or +.75% last week closing four days above the Neckline of the operative Head & Shoulders Bottom pattern. Friday's lower close-ended right on the Neckline as it declined .49 points. Any further decline will relieve the pressure, however, any further advance will create a headwind for commodities, especially crude oil. First noticed in Digest Issue 4 "Bulls Blowing Bubbles [Charts], "with a minimum upside measuring objective at 92.59. Stay focused on DXY this week.  

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.

Until the next indicator alerts consider unwinding hedges.

Other than potential resistance from a rising U.S. Dollar Index (DXY) the outlook can be summed up in a delightful song by Bobby McFerrin in 1988  " Don't worry, be happy."    

Summary

From caution created by short squeezes the week before, last week the uptrend resumed as the major indexes made new closing and intraday highs once again. With more evidence of rotation into cyclicals such as energy along with mid and smaller capitalized stocks, notable futures and option indicators returned to pre-Covid-19 levels, encouraging the bulls.