Short-term Breadth Update

In case you were purposefully not watching the market today… there was a bit of a train wreck. Looking at the futures after hours and seeing the continuation of downside pressure thanks to Cisco ($CSCO). Who knows what will happen overnight, but Thursday could be another ugly day, at least until the knife catchers come in. There is quite a bit of economic data coming out on Friday and the weekly claims tomorrow so that data could make it nice and dicey until opex next week. I’ve been net short the whole cycle so today was a nice respite for me as the extrinsic value was sucked out hard the last two days.

I put up a chart of the short-term breadth below and as you can see it’s looking grim. Last time I posted this (4 trading days ago), the $IWM was at 34% the $SPY was at 54% and the $QQQQ was at 51%. Since the 5th every single one of the ETFs is below 5%. I’m not calling for a bounce here, but eventually I’ll see something in the major indices that would cause me to sell some out-of-the-money premium. Perhaps I’ll dip into the new “financial crack” they call weekly options.

ShrinkyLinks

Despite less than favorable news nearly everyday this week the $SPX climbed higher with a near 2% gain for the week. The bears just can’t seem to get any momentum as each drop was met with buying. The broader market looked to have lost the 200 sma early Friday just after gaining a foothold earlier in the week, but nothing doing. Not sure whose buying and really don’t need to know. Enjoy the links and your weekend as we will rally into the FOMC on Tuesday. After that, who knows.

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Short-Term Breadth

Today’s price action saw the small caps ($IWM) and the large caps ($SPY) diverge, especially as the day wore on. I’ve always associated the small caps as the riskier play in equities (as most do) so it stuck out for me and many others today. I thought I’d take a look at the shortest moving average I track, the 4 sma, and see what the divergence looked like under the hood.

The small caps (blue) have been leading the way lower since the end of July. Similar action was seen back in early (7/9) July and by mid July the rest of the major indices were right in line with under 10% of their components trading above the 4 sma.

What does this mean? Could be nothing (but I doubt it) as bad news from Chiner and  jobs is shrugged off. My overall Delta is negative as I was unable to sell an acceptable put spread in $SPX this month (I only have a 10% position) which leaves me leaning heavy on the call side (30%). I’m consider today’s divergence as a shot across the bow for the short-term. One key item I was looking for today was whether or not today’s gap filled as it has every day this week…it didn’t.

Regression

When we confuse or frustrate a particular learned behavior it causes a reversion to an earlier learned behavior. This earlier learned behavior is typically less desirable, but comfortable and familiar. This regression of sorts occurs when we are unable to accept and perform at an expected level. Regression is a defense mechanism and can be a short-lived detour before continuing forward progression.

Various forms of cognitive behavioral therapy are the best way to overcome regression as the catalyst is studied and analyzed so that it can be dealt with accordingly when encountered again. In other words, study the “enemy” to learn of its weaknesses in order to overcome it in the future.

As an example, say that you have a string of losing trades. If you’ve kept a detailed trading journal you can parse the data to better understand why the losses are occurring. If you’ve taken the time to add your feelings/emotions in addition to the trade data, your work will be that much easier. Look for where the regression occurred as it should stick out and be easily recognized. Why? Odds are good that the culprit is something you’ve done in the past in your market participation. Here are some good starter questions to ask yourself as you process the regression data:

• What was the overall trend in the market?
• What economic catalyst, if any, were released?
• Is there a geopolitical issue?
• Earnings?
• Trading larger than normal size?

Once you discover what (over-trading, trading in a trend-less market, lazy with homework) caused the regression your work has just begun. Finding out the why is key. Take a look at the time period leading up to the catalyst and see how your trading was. Perhaps a string of winning trades led to  laziness. Find the why to truly understand.

“Everything that exists, exists in some degree and can be measured” – Edward L. Thorndike

Confluence

After taking a week off I’m truly able to see the market with a fresh perspective. Even though I attempt on a daily basis not to get too set in my approach, it happens. It’s only after an extended break that I’m able to see that I may have been too comfortable in my analysis. What I noticed was that there is a confluence now of the 200 day simple moving average and the year-to-date vwap. Should be an interesting level to watch for August and perhaps for the rest of the year.

With nearly 75% of the S&P 500 having reported earnings and the broader market sitting where it does, it looks like the rest of Summer may be a non-event. As a premium seller that’s fine with me, but there are still plenty of economic events to move the market. I’m waiting for the non-farm payrolls this coming Friday and the FOMC statement on the 10th.

The standard deviation channel (midpoint is white-dashed line) is clearly down even though the broader market is nearly flat for the year. Given the “flash crash” being calculated into the channel I’d be surprised to see a breach of either extreme before the end of the summer and, perhaps, the year. Obviously I’m no fool and will continue to monitor the market as the channel is a dynamic indicator and change as time passes.

Bottom line for me is that I found it interesting that the average market participant that got long at the beginning of the year is slightly under water. In addition, the 200 SMA is there as well and the $SPY closed at the mid-point of the standard deviation channel on Friday.