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Today


IVolatility Trading Digest™


Volume 21 Issue 22
Rotation Narration [Charts]

Rotation Narration [Charts]

The Bureau of Economic Analysis reported on Friday that the Personal Consumption Expenditures Price Index or PCE for April, excluding food and energy, referred to as the core PCE price index +.7% or +3.1% from April 2020 during the Covid shutdown. This compares to the core CPI at +.9% reported two weeks ago. Unlike the CPI report, this time the markets yawned and quickly relegated it to the "nothing to see here" file as the S&P 500 Index continued trading in a narrow range and the yield on the 10-Year Treasury Note declined 3 basis points ending at 1.58%. The Market Review concludes lower interest rates will help rotation back into growth sectors at least until the release of the employment report on Friday. Next, some additional information about last week's Plug Power, Inc. idea follows.

Review NotesS&P 500 Index (SPX) 4204.11 up 48.25 points or +1.16% on unusual combined volume of 3.3 bn shares on Thursday compared to recent average of around 2 bn shares. After the second successful test of the 50-day Moving Average on Wednesday May 19 before reversing to close the day higher. Upward momentum will likely continue until it retests the previous intraday high of 4238.04 reached on May 7. Just in case a better than expected employment report on Friday shocks the market, support at the 50-day Moving Average closed the week at 4115.23.

Invesco QQQ Trust (QQQ) 333.93 advanced 6.92 points or +2.12% last week after jumping up and closing well above resistance at the 50-day Moving Average on  Monday as the yield on the 10-Year Treasury Note declined 2 basis points to 1.61% followed by another 5 basis point decline on Tuesday to close at 1.56%. News that China intends to crackdown on rising prices of industrial materials declaring zero tolerance for commodity market violations thereby implying a need to control commodity price speculation played a role. Friday the yield on the 10-Year Treasury Note ended at 1.58%, down 3 basis points for the week.

Review Notes
As the largest buyer of many industrial commodities, less demand from China will likely affect all commodity prices, at least temporarily. If so, interest rates could slip further causing more rotation back into growth stocks from cyclicals and increasing the probability QQQ will outperform SPX until interest rates begin rising once again.

Review Notes
CBOE Volatility Index®
(VIX) 16.76 declined 3.39 points or -16.82% 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, dropped 3.20 points or -20.87%  ending at 12.13% , another bullish 52-week low.

table

VIX Futures Premium

VIX futures premium ended Friday at 18.37% solidly back into the bullish green zone vs. 11.00% on May 21.

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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. The chart reflects the distance from the VIX to the futures curve computed from the two front month contracts.

Review Notes
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, improved every day except one last week gaining 56.10 points or +10.47% ending at 591.99.

However, the month of May was not kind to market breadth as "Sell in May and Go Away" took a toll on the Summation Index that declined 146.70 points or -19.86%. Should interest rates stay subdued in June breadth should improve as the S&P 500 Index approaches the previous May 7 intraday high.

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Notice the slope of the 50-day Moving Average (red line) remains slightly negative.


All on one page

Our Sentiment Analyzer included in all IVolLive packages features a quick reference one-page summary including moving averages, relative strength, Chaikin Money Flow, correlation, options implied and historical volatility and more.


Alternative Energy

Plug Power, Inc. (PLUG) 30.70 up 2.81points or +10.88% last week following a 3.31point or +13.47% gain the week before.

Earnings Whispers now shows the 1Q earnings report on the schedule for June 10 with a consensus earnings of -.08 on revenue of $76.93 million. Not yet showing signs of increasing into the report date, the implied volatility index mean, IVXM advanced only slightly to 84.86 from 83.97 the week before.

Last week's long call spread risk reversal idea in Digest Issue 21 "Bitcoin & the S&P 500 Index [Charts]" was booked for a .76 debit as the stock pullback slightly on Monday May 24.

Last week's widely publicized  pressure on the big oil majors to do more to reduce carbon emissions sparked our interest in updating our files on hydrogen as an alternative transportation fuel.

The first and most recent article says Germany will fund 62 large-scale hydrogen projects as it aims to become the world's leader in hydrogen technologies.

The second, dated October 28, 2020 suggests fuel cell electric vehicles could give all electric vehicles a run for the money and includes additional fundamental information on PLUG including estimated annual revenue growth of 40%.

If the stock price continues higher into the earnings report, the short June 18 22 put with only 8 days to expiration should be bought back and closed out since the price will likely decline after reporting as in buy the rumor and sell the news.

Strategy

In bull markets, a good 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.

Rotate back into growth from cyclicals like materials as long the yield on the 10-Year Treasury Note closes under 1.65%, but keep in mind the nonfarm payroll report on Friday will likely include a revision to last month's dismal report of just 266K.

Summary

The Bureau of Economic Analysis PCE report for April apparently confirmed the transitory inflation view as the yield on the 10-Year Treasury Note declined 3 basis points ending at 1.58%. After finding sold support at the 50-day Moving Average for the second time, the S&P 500 Index climbed higher all week in narrow trading ranges reflecting consensus price agreement often seen near tops. China's commodity price control declaration played a role in declining interest rates last week restoring enthusiasm for the growth stocks in the Invesco QQQ Trust. Unless Friday's employment report surprises to the upside equity indices should continue higher.

By Jack Walker

Actionable Options™


We now offer daily trading ideas from our RT Options Scanner before the close in the IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.


“The best volatility charts in the business.”

Next week the Digest will include another Market Review along with another trade idea to consider.

Finding Previous Issues and Our Reader Response Request

PreviousIssues

All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

 

CommentAs always, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com

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