AT40 = 59.8% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 59.1% of stocks are trading above their respective 200DMAs
VIX = 10.7
Short-term Trading Call: cautiously bullish

Commentary

“Time is ticking away for the bears and sellers as the period between Thanksgiving and Christmas is typically a very mild, even bullish, period for the stock market.”

This is what I said in the last Above the 40 post for November 17th when I described a bullish divergence that signaled more gains ahead. That bullish divergence did indeed resolve to the upside as the S&P 500 (SPY) made a new all-time high this week. However, a massive stock rotation today threw an intriguing twist in the unfolding bullish picture.

The S&P 500 closed the day, yesterday, essentially flat after bouncing from a small gain to a small loss. The Nasdaq lost 1.3%, and the PowerShares QQQ ETF (QQQ) took a 1.7% dive. The money that bled from big cap tech essentially rotated into small caps, retail, and financials. To a lesser extent, the energy and agricultural sectors also benefited from the rotation. Bio-techs could not hold onto earlier gains.

The S&P 500 (SPY) took a shallow breather from the previous day’s run-up and still closed above its upper-Bollinger Band (BB).

Selling on the Nasdaq only came to an end once the tech-laden index hit its uptrending 20DMA.

The PowerShares QQQ ETF (QQQ) sliced right through its uptrending 20DMA on the way to a 1.7% loss on the day.

Small caps followed through on the previous day’s breakout. The iShares Russell 2000 ETF (IWM) ended the day with a 0.3% gain and another close above its upper-BB.

The Financial Select Sector SPDR ETF (XLF) broke out to a 1.7% gain on top of the previous day’s whopping 2.6% jump off 50DMA support.

So while the likes of Apple (AAPL), Alphabet (GOOG), Facebook (FB), Nvidia (NVDA), Netflix (NFLX), and Amazon (AMZN) experienced deep losses of 2.1%, 2.5%, 4.0%, 6.8%, 5.5%, and 2.7%, a large part of the market moved higher just fine.

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, confirmed the market’s overall bullish action by inching higher from 58.2% to 59.8%. Another test of overbought conditions (above 70%) is within sight. My trading call stays at cautiously bullish until I see the market’s behavior at or near overbought conditions. The caution now also makes sense given the steep losses in big cap tech. In particular, FB closed right at its 50DMA support and 50DMA support gave way decisively for NVDA and NFLX. The volatility index, the VIX, also managed a gain of 6.7%.

The volatility index, the VIX, jumped but is still at an extremely low level.

Although I wrote up a new plan for hedging using volatility, I decided to roll into one more set of call options on ProShares Ultra VIX Short-Term Futures (UVXY) expiring on December 22nd. While the current low levels are bullish indicators for the market, the VIX itself looks ready for another (brief) run-up. I will be quick to lock in any profits on this latest tranche of UVXY call options.