Already underway, rotation into cyclical and value stocks really got rolling as the energy sector came alive along with the Russell 2000 Index (IWM ) on the November 9 Pfizer Covid-19 vaccine news. With a seasonal tailwind, the Market Review takes a look and then offers a speculative put sale idea in the hot EV sector with Hyliion Holdings Corp. (HYLN).

S&P 500 Index (SPX) 3638.35 added 80.81 points or +2.27% last week making new closing highs on both Tuesday and Friday. However, the near term closing objective remains the November 9 intraday high at 3645.99, within easy reach just 7.64 points away since seasonal strength should continue well into December. On any unexpected pullback expect support near 3550 and then around the 50-day Moving Average at 3446.36.

iShares Russell 2000 ETF (IWM) 184.37, up 6.87 points or +3.87 last week and now tentatively labeled the new "decider," a the role previously played by the Invesco QQQ Trust (QQQ) before Pfizer's vaccine news.

Invesco QQQ Trust (QQQ), 299.01 advanced 8.63 points or +2.97% closing just short of the November 9 intra-day high of 299.14 coming in second behind IWM. However, the September 2 intra-day high at 303.50 and closing high at 302.76 remain the levels need to reach to declare new highs. Should profit-taking in big cap growth stocks continue, it could continue lagging. While well above support at the upward sloping 50-day Moving Average at 283.18.

CBOE Volatility Index® (VIX) 20.84 dropped 2.86 points or -12.07% 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, lost 2.11 points or -10.98% ending at 17.11  well into the bullish zone.

The IVXM and SPX charts.

VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts as of last Friday.

With12 trading days until December expiration, the day-weighted premium between December and January allocated 60% to December and 40% to January for a premium of 13.27%, back into the green bull zone as the futures returned to a more normal upward sloping curve without any difficult to explain abnormal humps.

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.

Setting the Stage – Rotation

Lost in the rotation activity out of the highly valued so-called FAANG secular growth stocks, the same can't be said for the VanEck Vectors Semiconductor ETF (SMH) 206.42 up 6.44 points or 3.22% last week. Now well above its September 2 high at 184.61, gaining just slightly less than the iShares Russell 2000 ETF (IWM) up 3.87%. Until the semiconductor sector turns lower, equities are likely headed higher especially with the help of a seasonal tailwind.

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 chugging higher adding another 201.33 points or +34.24% last week ending at 789.35 and still trending higher.

Top 5 Idea 

In the “Rankers and Scanner” section about half-way down our home page on the right side, we feature a ranker sample showing the Top and bottom 5 stocks in four categories.

For ideas, we often look at the top 5 stocks based on the Implied Volatility Index Mean vs. the 30-day Historical Volatility (IV Index Mean vs. 30D HV) and the top 5 stocks with the greatest IV change from yesterday.

On Friday the top-ranked stock by IV/HV ratio spot went to Hyliion Holdings Corp. (HYLN)  24.49 down .61 or -2.43% last week.

In the popular EV sector, this company plans to capture the electrification market for Class 8 trucks – those big trucks that pull all those big cargo trailers on the motorways. The story begins on June 19 when Tortoise Acquisition, a SPAC (Special Purpose Acquisition Company) began trading just above 12.  After reaching a high of 58.66 on September 2 in anticipation of combining with HYLN, it pullback and made a pivot at 18.09 on October 30. At completion of the deal on October 1, it has about $520 million in working capital. Now it's trending slightly higher with expensive options unrelated to earnings since it reported on November 12.

With a current Historical Volatility of 90.02 and 85.24 using the Parkinson's range method, the Implied Volatility Index Mean is 209.46 at .81 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 2.46 so option prices are expensive relative to the recent movement of the stock. Some new entries in the EV sector s lack sufficient options volume, but that's not the case here as Friday’s option volume was 48,846 contracts with the 5-day average of 64,760 with wide bid/ask spreads. Often implied volatility raises before earnings reports, but they reported a loss on November 12 so earnings, or the lack of earnings, doesn't seem to be the reason for the high implied volatility.

Consider this put sale idea.

Using the bid for the sale the credit was 1.35 on Friday. As a speculative development stage company without earnings, the current modest price advance could be an Elliott 4 wave countertrend move, soon to be followed by another leg down. Should it close below 19 on December 18 stock assignment of the put would have a basis of 17.65 and below the pivot made on October 30 at 18.09. If so, use a close back below 17.65 as the stop. Should it pull back before December 18 use 22 as the stop.

Strategy

In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing. As of Friday, our indicators were bullish with no signs of an imminent pullback, although select excessive profit-taking still poses some risk. With the S&P 500 Index just 7.64 points away for testing test the November 9 intraday high at 3645.99 be aware of a intraday reversal on unusually high volume while considering these alternatives.

1. Attempt to form a double top or

2. Exceed the previous high, and start forming a potential H&S Top pattern or

3. Resume trending higher.

Summary

The relative outperformance of the iShares Russell 2000 ETF (IWM) continued last week with the help of the energy sector closely followed by the VanEck Vectors Semiconductor ETF (SMH) while market breadth continued to improve. So far, the rotation activity looks more like value hunting rather than widespread sector rotation. Year-end seasonal strength suggests the odds favor higher equities until at least mid-December unless derailed by unexpected negative Covid-19 news.