Above The 40 (May 19, 2017) – The Nut Job Stock Market: Nutty By Nature

The definition of nut job (also spelled nutjob) from Merriam-Webster: “a mentally unbalanced person: a crazy person”…

When the New York Times reported that President Donald Trump labelled fired FBI Director Comey a “nut job,” look-ups of the term surged on the on-line version of the Merriam-Webster dictionary.

📈’Nutjob’ is our number 2 lookup right now. https://t.co/bpGxeCtpSr

— Merriam-Webster (@MerriamWebster) May 19, 2017

While the 173,750% increase is very likely the result of starting from an extremely small base, it occurred to me that the use and interest in this term present a perfect monicker for the times and this stock market. On Wednesday, May 17th, the S&P 500 (SPY) broke down below its 50DMA and lost 1.8% as the stock market all at once decided to care about the political headlines. The losses essentially ended there as sellers once again proved unable to follow-through on their advantage. In two days, the index traded above Wednesday’s gapped open and closed above its 50DMA. In parallel, the volatility index, the VIX, imploded. On Wednesday, the VIX soared 46.4% and tied August 21, 2015 for the 6th highest one-day change on the VIX (since 1990). No matter the starting point, such a rapid move is a likely sign of “flash panic.” The 17.9% loss on Friday to a 12.0 close placed the VIX right back in the middle of the area of congestion that prevailed before the French Fly although the VIX is still above the extremely low levels that immediately followed the French Fly.

The S&P 500 (SPY) quickly recovered from its 50DMA breakdown and for a brief moment even made progress on closing Wednesday’s Trump-inspired gap down.

The volatility index, the VIX, once again met its match at the all-important 15.35 pivot.

When I sold my put options on ProShares Ultra VIX Short-Term Futures ETF (UVXY) on Thursday, I thought my small profit was a good win. UVXY went on to lose another 14.4% as a result of Friday’s VIX implosion. I also failed to re-establish a hedged call/put option play. I am primed to do so on Monday morning.

A casual observer could be excused for looking at this seesaw and concluding a bunch of nut jobs are behind the curtain spinning the dials and emotions of the market. The trading action makes little sense from a “rational” sense, but it tracks with sentiment and technicals. In other words, the harder one tries to make sense of this kind of nut job action, the less sense it may make. So, as usual, I start with the technicals, and in particular my favorite technical indicator AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs).

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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