Can Crash Put Buyers Push Stocks Even Higher?

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The stock market closed strong enough last week that some have questioned their market outlook since the start of the week. Selling ahead of the Labor Day long weekend was significant enough to reverse positive technical readings from the summer rally. As we now learn, that was enough to trigger a downward push.

In comments last week, I said, “It would take a very strong rally this week to reverse this deterioration as a drop below the last low will create a new downtrend.” After closing lower on Tuesday, stocks rose on Wednesday, with the S&P 500 closing 4.7% above the week’s low.

All of these markets were up, led by a 4.1% gain in the Nasdaq 100 and the iShares Russell 2000. On a weekly basis, the S&P 500 rose 3.7%, just slightly better than the rise 3.6% of the Dow Jones. Average utility.

The Dow Jones Industrial Average and the Dow Jones Transportation Average posted solid gains of 2.7% and 2.6% respectively. SPDR Gold Trust also managed a slight gain of 0.4%.

Given the negative momentum at the start of the week, what could have contributed to last week’s strong gains?

Several sources, including Bloomberg reported that “institutional traders paid $8.1 billion to initiate equity put option purchases last week, the highest total premium in at least 22 years.”

The massive buying suggests many fear a crash that has become the view of banks like Morgan Stanley and Goldman Sachs as well as several high profile hedge fund managers who appear to be vying for who is more bearish.

Volume was most pronounced in individual stock put options, which is likely in response to the unexpected action this year in the VIX. In May and June, some analysts believed that a bottom could not form before the VIX hits 40. In my view, dogmatic positions can hamper market analysis.

Over the past few months, I have often pointed out that the VIX is making lower highs, a-line, while SPY or QQQ prices are making lower lows. The VIX was expected to reach higher highs and this divergence, in my view, was supportive for stocks.

July 8e (point c) and the uptrend of the VIX, line b, was broken, which was a positive sign for stocks. The break was consistent with the negative reading of the MACD-HIS which had fallen below the zero line at the end of June.

The VIX’s rebound from the August lows was not impressive as it failed below resistance in the 28 area and reversed sharply late in the week. The MACD-His turned negative on Friday.

It’s possible that the big put option buys will overcome or offset the negative seasonal trends in September. Market makers who have sold the put options hedge their positions, but if the underlying stock rallies too much, they may be forced to buy the stock to protect their positions. In August 2020, the Billion dollars in call purchases by Softbank helped prolong the market rally.

The turnaround in market internals was also impressive. The week before, 598 numbers were up and 2871 were down. Last week there were 2432 numbers up and 1000 down.

Although the buying was not as strong as the previous week’s selling, it was enough to move the NYSE All Advance/decline line back above its WMA. Line A/D rose from convergent support, lines b and c. The A/D numbers will need to be bullish this week in order to keep the A/D line positive. For the NYSE Composite, a move above 15,893 a-line would be a clear sign that the uptrend from the summer lows is not over.

The Invesco QQQ Trust (QQQ) bottomed last week at $290.87 but then closed at $307.05 and climbed back above the QPivot at $306.24. The close on Friday September 2 was lower than the QPivot, so this return to positive may be significant. The September pivot is at $310.71 and a daily close above this level would be positive.

The Nasdaq 100 Advance/Decline line is also performing well as it closed the week above its WMA and has so far held the important bullish divergence support at the b-line. The rally in the weekly A/D line from the June lows has been stronger than the price movement, which is consistent with a medium-term low.

The relative performance (SR) which is the ratio of QQQ to SPX is holding above support at line c. The August rally was strong enough to indicate that RS had bottomed, which favors QQQ over SPY.

Several leading stocks look much stronger after last week’s action. One is Tesla Inc. (TSLA) which appeared during the July 18 weekly analysise (see arrow) priced at $272.24. It closed strong last week at $299.68, up 10.9% for the week.

The weekly volume confirmator which includes the OBV turned positive again last week. Relative performance analysis in AsprayInsight reported that TSLA was a market leader at the end of July and outperformed SPY. The status label indicates that RS and Vol are bullish. The close was above the monthly pivot at $287.26 which is now the first support. The starc+ weekly strip is at $350.64.

There were over fifty stocks that tested positive in my combined stock analyzes after last week’s stock. There were a number of ETFs, out of the 120 I monitor, that are now positive on multi-period analysis. A strong close this week will further support the bullish scenario and warrant larger buying. Conversely, strong selling early in the month could reverse some of the positives from last week. For weekday scans, follow me on Twitter.

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