Can Crash Fixated Put Buyers Push Stocks Even Higher?

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Holding $s


The stock market closed strong enough last week for some to question their market outlook from the start of the week. The selling ahead of the long Labor Day weekend was heavy enough to reverse the positive technical readings from the summer rally. As we are now learning it was enough to trigger a surge in bearishness.

In last week’s comments 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 a lower close on Tuesday, stocks turned higher on Wednesday as the S&P 500 closed 4.7% above week’s low.


Tom Aspray –

All of these markets were higher led by 4.1% gain in the Nasdaq 100 and the iShares Russell 2000. On a week-to-week basis, the S&P 500 was up 3.7% just a bit better than the 3.6% rise in the Dow Jones Utility Average.

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

Given the negative momentum at the start of the week what might have contributed to last week’s solid gains?

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

The heavy buying suggests many are fearful of a crash which has become the view of banks like Morgan Stanley and Goldman Sachs as well as several high-profile hedge fund managers who seem to be competing for whom is the most bearish.

The volume was the most pronounced in single equity puts which is likely in response to the unexpected action this year in the VIX. In May and June, some analysts felt a bottom could not be formed until the VIX hit 40. In my view, dogmatic stances can impede one’s market analysis.


Tom Aspray –

Over the past several months I have frequently pointed out that the VIX was making lower highs, line a, while prices in the SPY or QQQ were making lower lows. The VIX was expected to make higher highs and this divergence I felt was supportive for stocks.

On July 8th (point c) and the uptrend in the VIX, line b, was broken which was a positive sign for stocks. The break was consistent with the negative reading from the MACD-HIS which had dropped below the zero line in late June.

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

It is possible the heavy put buying will overcome or offset September’s negative seasonal tendencies. The market makers who sold the puts hedge their positions but if the underlying stocks rally too much they may be forced to buy the stocks to protect their positions. In August 2020 the $billion call buying spree by Softbank helped extend the market’s rally.

The turnaround in the market internals was also impressive. The prior week 598 issues were advancing and 2871 declining. This past week there were 2432 advancing issues and 1000 declining.

NYSE Composite

Tom Aspray –

Though the buying was not as strong as the prior week’s selling it was enough to move the NYSE All Advance/Decline line back above its WMA. The A/D line turned higher from converging 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, line a, would be a clear sign that the uptrend from the summer lows is not over.

Invesco QQQ Trust

Tom Aspray –

The Invesco QQQ Trust (QQQ) had a low last week of $290.87 but then closed at $307.05 and back above the QPivot at $306.24. The close on Friday, September 2nd was below the QPivot so this flip back 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 acting well as it closed the week back above its WMA and has so far held the important bullish divergence support at line b. The rally in the weekly A/D line from the June lows was stronger than the move in prices which is consistent with an intermediate term low.

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

TSLA Weekly

Tom Aspray –

Several high-profile stocks are looking much stronger after last week’s action. One is Tesla Inc. (TSLA) which turned up on the weekly scan from July 18th (see arrow) at a price of $272.24. It closed strong last week at $299.68 up 10.9% for the week.

The weekly volume confirmer which includes the OBV flipped back to positive last week The relative performance analysis in the AsprayInsight signaled that TSLA was a market leader at the end of July and it has been outperforming the SPY. The Status label shows that the RS & Vol are bullish. The close was above the monthly pivot at $287.26 which is now first support. The weekly starc+ band is at $350.64.

There were over fifty stocks that showed up positive my combined stocks scans after last week’s action. There were a number of ETFs, out of the 120 that I monitor that are now positive on the multi-timeframe analysis. A strong close this week will further support the bullish case and justify heavier buying. Conversely, heavy selling early in the could reverse some of last week’s positives. For analysis during the week, follow me on Twitter.