Above The 40 – An S&P 500 Breakdown Helps Drag Market To Edge Of Oversold

AT40 = 25.4% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 43.9% of stocks are trading above their respective 200DMAs
VIX = 19.9%
Short-term Trading Call: neutral (caveats below!)
Commentary

As I feared was likely, the S&P 500 (SPY) wasted no time in breaking its 50-day moving average (DMA) support.

THE S&P 500 (SPY) slipped below its 50DMA with a 1.1% loss. It closed on top of the downtrending 20DMA.

The S&P 500 lost 2.2% for the month. This February was only the second negative February after 2009. The only other loss was a marginal 0.4% two years ago. Moreover the index last experienced a monthly loss in March, 2016! The monthly chart of SPY below shows the smooth (monthly) sailing for almost two years.

Did February just bring an end to what has been a relentless run-up for almost two years in the S&P 500 (SPY)?

While February’s selling may seem and look like an anomaly, a longer historic view reminds me that this performance was not an anomaly. Below is a chart of a given year’s January price change versus its February price change on the S&P 500. The size of the bubble indicates the magnitude of the annual price change of the previous year. White bubbles are negative years. The dashed line is a trendline for the monthly price changes. January’s price change was positive 5.6%.

While January’s price change was historically very strong, February’s pullback following a strong January is quite normal on a longer-term basis.

The tech-laden indices, the Nasdaq and the PowerShares QQQ ETF (QQQ), fared a little better that the S&P 500 with losses of 0.8% and 0.6% respectively. Both indices remain well above tests of their 50DMAs.

The volatility index continued its bounce off the 15.35 pivot with a gain of 6.8% and a close at 19.9. The VIX is right back in “elevated” territory (20 and above). With the S&P 500 cracking the 50DMA barrier, I switched my volatility trade strategy by speculating on call options on ProShares Ultra VIX Short-Term Futures (UVXY). I set a target for a 50% gain, and, much to my surprise, my limit order filled in less than an hour. The bumrush of selling into the market close swept volatility higher. I am still holding my short iPath S&P 500 VIX ST Futures ETN (VXX) as the longer-term positioning.