Last week's headline proclaiming a high for the S&P 500 Index jumped the gun since it continued advancing making new closing and intraday highs every day. Despite the Invesco QQQ Trust with all the big cap stars also doing better, breadth narrowed and the VIX correlation indicator began flashing a warning. The Market Review explains along with an update for VanEck Vectors Gold Miners ETF (GDX).

S&P 500 Index (SPX) 3508.01 steadily climbed higher adding 110.85 points or +3.26% last week making another new intraday high on Friday at 3509.23 as it continued tracking above the upward sloping trendline from the March 23 low. On any pullback, the trendline just below at 3450 should provide support, followed by the 50-day Moving Average at 3258.74.

Invesco QQQ Trust (QQQ), 292.53, called "the decider," gained another 10.66 points or +3.78% last week making a new intraday high on Thursday and a new closing high on Friday. On any pullback, the first support should come from the upward sloping trendline at 285 followed by a previous high at 275 and then 50-day Moving Average down at 264.40.

CBOE Volatility Index® (VIX) 22.96 gained .42 points or +1.86% 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, added .39 points or +2.36% ending at 16.94%.

Based upon regression to the mean theory, its continuation below 20% supports the bullish view. However, both measures advanced last week as the SPX continued higher creating a divergence explained in the VIX 10-day Correlation section below. The IVXM and SPX chart showing the advance into new high territory follow.

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VIX Futures Premium 

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts as of last Friday.

With 12 trading days until September expiration, the day-weighted premium between September and October allocated 60% to September and 40% to October for a premium of 25.40%, with October and November futures bid higher while the VIX advanced a fraction. The October and November futures likely reflect increased hedging.

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The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at the next monthly futures expiration on Wednesday, September 16, 2020. 

The relationship of the futures curve to the VIX, as measured by the premium, makes a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

Foremost Indicators

VIX 10-day Correlation Indicator

Typically, SPX and VIX are inversely correlated meaning when SPX advances VIX declines. Occasionally they move in the same direction or become positively correlated when SPX option prices are bid higher anticipating a price decline. In late April 2019, the correlation reached +.65 just before SPX made a significant pullback lasting until June 3, 2019. However, on December 27 of last year, it reached +.57 and SPX continued higher until finally pulling back on January 23. On Friday it closed at +.65 down slightly from +.71 the day before. While not perfect as an indicator, when it rises this much above zero, it suggests odds for a pullback have increased dramatically.

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, declined another 128.22 points or -15.97% last week ending at 674.73 with a downward slope and well below the 50-day Moving Average at 778.23. In the past, advances above and declines below, the moving average have been a good leading change of trend indictors.

U.S. Dollar Index (DX) 92.39 declined .88 or -.94% last week.

After trading as low as 92.12 on Tuesday, August 18, it rebounded to form a possible double bottom or even a Head & Shoulders Bottom pattern.

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After Federal Reserve Chairman Jay Powell announced a new more permissive long-run strategy targeting average inflation over a long period, the dollar index closed the day unchanged then declined on Friday. If interest rates are destined to remain lower longer, arguments for a stronger dollar seem out of sync. However, in a fiat money system currency values are relative and expected economic growth in the Euro area and Japan play an important role. DX should reveal its intensions in the next few days, so watch the downward sloping trendline just under 94 and the 50-Day Moving Average at 94.80 for signs of a possible trend change. 

Gold Miners Update

VanEck Vectors Gold Miners ETF (GDX) 41.96 gained 1.07 points or +2.62% last week after declining down to support at the 50-day Moving Average on Tuesday and then rebounding modestly.

COMEX cash gold closed the week at 1964.05 gaining 24.54 points or +1.25% making a possible symmetrical triangle continuation pattern.

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With GDX above 39, both trade plan suggestions in Digest Issue 30 "Invesco QQQ Trust Breakdown [Charts]" and Digest Issue 31 "U.S. Dollar Index & Gold [Charts]" remain open, however, both will be closed if it closes below 39. 

Strategy

Although overbought as defined by the 14 day Relative Strength Index the S&P 500 Index seems to have defied the odds that a pullback would begin last week. How much longer it will be able to continue higher remains unclear, but noteworthy indicators such as the 10-day VIX correlation and deteriorating market breadth suggest hedging some positions with collars or opening new out-of-the-money put spreads with defined and limited risk before implied volatility increases as the inevitable pull back gets underway.

After all, for even a select group of big cap Nasdaq 100 growth stocks that act like perpetual motion machines, everybody know trees don't grow to the sky.

For clues, watch the SPX and QQQ for a gap open lower, a key reversal (a new intraday high with lower close) or a wide trading range with a lower close on increased volume.

Summary

Both the S&P 500 Index and the Invesco QQQ Trust continued making new intraday and closing highs last week while some futures and option indicators remained bullish the VIX 10-day correlation indicator and market breadth suggest an increasing probability equity markets are overdue due for a pullback. After consolidating, the U.S. Dollar Index could go either way with major consequences for both equities and gold. Since equities bucked the typical August seasonal tendency, perhaps they will play catch up and more closely follow the script in September, another seasonally weak month. With extremely high economic uncertainty, increasing hedges before implied volatility increases seems prudent.