Ukraine, All Time Highs, Biotech Bubble – What it All Means + OI for SPX, IWM, QQQ, & XLF

Note that the following market conditions I write about can easily be trumped by news (i.e. Ukraine/Russia).

The market has been tricky and has felt stuck at old highs acting as resistance. However, even with the violent drop late Friday due to the Ukraine/Russia news, we still managed to close the day, the week, the month and forever at all time highs. We can look for divergences everywhere and we will always find some, but closing at all time highs is bullish. Add to that, late in the week financials started to show some  life. We are shot term overbought based on the percentage of stocks above their 20-day moving averages. Typically that exhibits confirmation of momentum, but when it gets excessive (see red), the market often takes a few days to digest before accelerating higher. 

There is no denying that biotech’s have been HOT. Late last week they began to exhibit signs of exhaustion and we may start to see some rotation out of  biotech and into other sectors. I am not calling for a biotech crash or of a “biotech bubble” popping. However, a slow down would be healthy and welcomed. Start to make a list of those stocks that you have wanted to buy, but that have gone straight up with no pause. Once the sector can work off being overbought (likely thorough both time and price), it will be back to being HOT. 

One thing I am seeing a lot of is calls for a pullback again. This to me is a positive because if everyone is looking for a pullback from here then odds are we will keep going higher. I admit it myself, it does seem like how much higher can we really go before we pull-back? The answer is I don’t know so I will continue to go with what is working. One scenario I can imagine playing out is spending the next few months chopping around and frustrating both the bulls and bears. If that is what takes place in the indices then reverting to what worked last year should work again: continue to look for sector rotation and follow the stocks in those sectors.

Open Interest on Indices

SPY: Just as last week we looked for 184 to hold, this week we will look to the high puts at 185. This should hold as support, but if it doesn’t watch for a possible dramatic move to the down side (see here for explanation).

IWM: Also encouraging for the bulls is the high puts in the IWM at 117. I would consider that to be strong support next week. A break of that without a swift recovery would be troublesome. 

QQQ: Last week we began with a ton of calls on the 90 strike. That probably helped keep the index glued to 90 all week where it also closed very near to. This time around we see the 89.5 puts being dominant albeit not quite as pertinent. We could easily see another week of consolidation here and even a dip below 89.5 would not shock me. This graph is less convincing than the two above. 

XLF: Continued strength would be welcomed and this should help. 

See here for open interest on AAPL, AMZN, BIDU, CMG, FB, GOOG, LNKD, NFLX, PCLN, SCTY, TSLA and TWTR.