Weekly Review - Trading week of 12/7/20

weekly review example Jan 14, 2021

Not long ago fin-twit was bemoaning the 'narrow leadership' driving markets inexorably higher. The general warning issued was that FAANG and "covid" stocks were the only names carrying the market as an alarming lack of participation came from small caps, energy, and financials. Now we have IWM, energy, and financials helping drive the indices to fresh all-time-highs as FAANG lies mainly dormant in deep consolidation patterns. 

The current warning sign is that bullish sentiment is overheated, and there is no denying that fact.  CNN's popular "Fear & Greed Index" is reading 89: Extreme Greed. If you are unfamiliar with this admittedly commercialized index it is based on very sound market measurements of breadth, volatility, demand, and momentum. Read more here.

I follow price-action, which is certainly bullish. My way of acknowledging the overheated sentiment is to cap my total open risk. Usually I have a maximum of 600 bps risk at any given time; more often that range is 300 - 400 bps. Currently I have 7 open positions, but due to several names with break-even stops, I am carrying less than 250 bps of open risk. This way if there is a quick shakeout the maximum loss to my trading account is limited to my open risk. So I remain long until proven wrong, but use my open risk to manage the bullish sentiment risk accordingly.

Weekly closes:

  • IWM: +2.33%
  • QQQ: +2.18%
  • SPY: +1.70%
  • DIA: +1.12%

The SPY weekly chart shows price closing at new all-time-highs after breaking above prior resistance at $364.

Link to chart: Weekly SPY

The daily SPY chart shows the breakout in Tuesday's session, followed by a re-test the next day, and the subsequent move higher. Price closed at the highs of the day and the highs of the week.

Link to chart: Daily SPY

QQQ had been showing relative weakness in early November but pushed past key resistance at $297 and onward to new all-time-highs in the past two trading weeks.

Link to chart: Weekly QQQ

The daily chart shows QQQ closed positive in each of the past eight sessions. Price has been putting in narrow range days near all-time-highs for the better part of last week before finally closing out at $305.52. Going forward it will be key to see if $303 now serves as support if it is tested again.

Link to chart: Daily QQQ

Perhaps the biggest story of the week was the resurgence of small caps (IWM). After putting in a tremendous four week 22%+ run starting October 30th the index consolidated through time and broke higher once again. By all accounts this move appears extended, but that doesn't mean it can't go higher.

Link to chart: Daily IWM

We revisit the percentage of S&P 500 stocks currently trading above their 200 day SMA's in the chart below. Currently reading 91%, this is the highest this index has registered since May of 2013. Obviously this tells us there is broad market participation accompanying these new highs, soundly putting to rest the previous argument pointing to narrow leadership, while at the same time drawing attention to lopsided bullish sentiment.

Weekly % of SPY stocks above 200 Day SMA

Sector leadership last week came from basic materials, energy, and industrials. XLE once again powered higher on the week gaining 4.42%. The daily chart below shows price seemingly poised to test $42, a level not seen since June.

Link to chart: Daily XLE

With the EV and solar names pulling back after enormous runs there has been rampant speculation in SPAC names: FEAC SNOW SUMO etc. Meanwhile we saw huge earnings moves in names like CRWD ZS and ESTC.

While it would not be surprising to see a market-wide pullback come at any time, simply because bullish sentiment is so pronounced and a level of complacency has surely set-in, it is hard to argue with the bullish price action we are seeing across multiple sectors. My strategy is to stay "long until proven wrong" with careful management of my total open risk. 

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