Another way to see sentimental risk is to reduce large-cap exposure while maintaining exposure to small-cap stocks. As I’ve been explaining since December, small caps have greater short covering potential and should be highlighted in your portfolio. The pessimism seen last week among buyers of small cap options on IWM component stocks is starting to turn sharply down as the rate is rapidly unwinding. There is still room, however, to run even lower before moving to an area that is more at risk in this group from a very short-term perspective. ”

– – Monday morning outlook, February 22, 2021

In February, many of my comments related to strong technical backgrounds, but extreme trader optimism implied sentimental risk that made the market ripe for retreat. In fact, the buy-to-open put / call volume ratio for iShares Russell 2000 ETF (IWM – 233.59) components hit an extreme low just a week after I posted the comment above. Up to this point, the ratio was not in the extreme range we saw with the All-Equity and S&P 500 Index (SPX – 3,943.34) component buy-to-open put / call volume Conditions saw.

“… Since the closing highs of the SPX, Russell 2000 Index (RUT – 2,192.21) and Nasdaq 100 Index (NDX – 12,668.51) in mid-February, those indices fell 4.2%, 6.6% and 9.7% respectively on Thursday shut down. ”

– – Monday morning outlook, March 8, 2021

Unsurprisingly, stocks retreated, with most of the decline occurring in the first week of March. In fact, large-cap technology stocks saw the biggest drop compared to the other indices we specifically mentioned last week. Last Monday, for example, the Nasdaq 100 Index (NDX – 12,937.29) closed 10.9% below its closing high on February 12th.

While the NDX rebounded from support from previous highs in October and November, the sustainability of that upswing remains questionable as it quickly resisted at the late January low, which is near the 13,000th or so millennium, declining moving 20- Day average.

Additionally, last Thursday’s closing high was 13,052, just below the 13,053 level, which is a 50% retracement of the February closing high and Monday’s closing high. On Friday, the NDX struggled to stay above 12,888. This is the place where the end of 2020 came to an end.

MMOchart1

I’ve heard several guests and hosts on CNBC say that this isn’t a severely shortened market, and I agree with those statements just looking at SPX components. Despite the short coverage in the Russell 2000 Index (RUT) in the last few reporting periods, I still see the small caps as being severely shortened and thus the greatest area of ​​opportunity if stocks continue to rise. ”

– – Monday morning outlook, February 16, 2021


Following the strength of financial, industrial and energy stocks, the SPX rebounded sharply from its 80-day moving average, which happened to be near its 2020 closing price at 3,756. I find this interesting as an observation I made on Twitter left open that possibly weaker hands were washed out of the market as the SPX closed below its highly regarded 50-day moving average earlier this month.

Not only has the SPX returned to a channel since mid-November that I’ve been showing off in this comment for the past few weeks, but it hit an all-time high by the end of the week. The lower limit of this channel comes into play at the beginning of this standard expiry week in March at 3,890 and is at 3,910 on Friday.

That channel topped at 4,046 over the weekend, interestingly just 10 points below the 4,056 level, which is six times the 2009 closing low. Readers of previous comments are aware of the struggles that have gone on since the March 2009 low have occurred and are two, three, four and five times the low of 2009. I will reconsider this concept when the 4,050 area comes into play in the coming days or weeks.

For now, the SPX is facing a move above potential resistance around its February highs in the 3,930-3,950 range.

MMOchart2

The SPX’s more than 4% gain last week was impressive, but again it was small-cap stocks as measured by the Russell 2000 Index (RUT – 2,352.78) that shone.

The RUT gained more than 9% and closed slightly above its February closing high of 2,298. Just as the level, which coincides with 10% above the RUT’s 2020 closing price, acted as resistance at the end of January, the 2,370 area, which is around 20% above last year’s closing price, represents an immediate potential level of resistance in the short term. Note following last week’s comment that the level, which coincides with 10% above the RUT’s 2020 closing price, served as support for the recent low.

I see the area between 2,260 and 3,000 as potential support for a retreat, with 2,260 being the location of a breakout above a short-term trendline connecting lower highs in February through early March and 3,000 being a round number and the approximate location of the February high.

MMO3

In terms of sentiment, the good news for the bulls – especially given the SPX and RUT hit all-time highs last week – is that sentiment measures that were showing bullish extremes in mid-February are no longer at those extremes, suggesting this That this is the case is less susceptible to a pullback compared to a month ago.

For example, in mid-February, the National Association of Active Investment Managers (NAAIM) weekly poll, which is a measure of equity exposure, came in at 110. Last week it was 65, its lowest level in six months.

Additionally, the rate of put purchases on stocks has increased compared to call purchases over the past month. The 10-day buy-to-open put / call volume ratio for stocks only is back to levels that preceded recent rallies, although far from the massive long-term rallies have preceded. As you can see in the chart below, stocks become more susceptible to short-term selling wars as this ratio pulls back to the 0.30 area.

With that rate still rising, I see large cap tech stocks as the most vulnerable as the NDX is still far from its highs and trading in a resistance zone that starts the week.

Continue to emphasize small caps in your portfolio as there is even more short covering potential in this area, even though the RUT hit a new all-time high last week, outperforming the larger cap names, especially large caps, technology stocks.

By the end of this week, I plan to post some comments on Twitter (@ToddSalamone) regarding the SPDR S&P 500 ETF Trust (SPY – 394.06) and iShares Russell 2000 ETF open interest configurations and how this may affect stocks.

MMO 315 New

Todd Salamone is Schaeffer’s Senior VP of Research

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