foxex: Wall Street Wonders if Trump is Bluffing

Chart Advisor | Focus on the Price

By John Jagerson, CFA, CMT

Tuesday, May 21, 2019

1. Trump's Huawei reversal creates a sea of green

2. S&P 500 avoids bearish support break

3. VIX shows Wall Street's underlying bullishness

Major Moves

If you are feeling a little whiplash today, you're not alone.

Just as quickly as the Trump administration imposed trade restrictions against Huawei last week, it has removed them – at least temporarily – this week.

Traders learned last night that the Trump administration has granted Huawei a reprieve from its trade restrictions until August 19.

This news sent stocks across the board higher for the day.

AutoZone (AZO), DISH Network (DISH) and Xilinx (XLNX) were the top performers in the S&P 500 – with gains of 5.57%, 5.29% and 4.63%, respectively – but they weren't the only stocks enjoying buying pressure today. The S&P 500 saw 448 of its component stocks close higher today.

Of course, there were a few bearish exceptions – like Kohl's (KSS), which lost 12.34% after missing earnings expectations by $0.06 per share and downgrading its earnings guidance for the year – but even a bullish surge of momentum can't be expected to rescue a stock that is experiencing fundamental growth issues.

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You can see by the sea of green (the brighter the green, the larger the price gain) on the S&P 500 heatmap below just how excited traders were to see the Trump administration flinch today on Huawei. They are starting to wonder if the administration might flinch on its tariffs with China as well.

It's too early to tell, but Wall Street certainly seems hopeful.

S&P 500

The S&P 500 rebounded a bit today, but we're not out of the woods yet.

Yesterday, I talked about the potential head-and-shoulders bearish reversal pattern – with the left shoulder forming in late-March, the head forming in late-April and the right shoulder forming in mid-May – the S&P 500 might form if it drops below support at 2,816.94.

While today's bounce higher certainly moved the index a little farther away from that crucial support level, it didn't take the S&P 500 out of the range of the potential right shoulder of the pattern. The index is still consolidating in a tight range, and we have seen time and time again how fickle Wall Street can be with surprisingly bad news.

To really get out of the danger zone for this particular price pattern, the S&P 500 will likely need to climb back above 2,900.

I'm confident the index can make that bullish jump, but I know I'll be sleeping a lot better once it happens and the renewed bullishness is confirmed.

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Risk Indicators - VIX

Portfolio managers are starting to tip their bullish hands this week.

Earlier in May, portfolio managers started buying put options on the S&P 500 to protect the bullish equity positions in their portfolios. Put options are often viewed as insurance policies because when the value of the underlying index, or stock, that the option is based on goes down, the value of the put option goes up.

For instance, if you buy a put option on the S&P 500, and the S&P 500 goes down, you will actually make money on your option position because the value of the put on the S&P 500 will go up.

Portfolio managers typically buy put options on the S&P 500 because it is easier to buy insurance on the entire S&P 500 than it is to try and buy insurance on each individual equity holding in the portfolio.

When portfolio managers start buying more and more put options on the S&P 500, it pushes implied volatility levels on the S&P 500 options higher, and that is exactly what the CBOE Volatility Index (VIX) measures.

When the VIX is moving higher, it tells you that traders – portfolio managers especially – are buying an increasing number of options – typically put options – on the S&P 500. In other words, it tells you that traders are nervous about a pullback on the S&P 500 and want to protect their portfolios.

When the VIX is moving lower, it tells you that traders are pulling back on their S&P 500 option purchases. In other words, it tells you that traders are not as nervous about a pullback on the S&P 500 and they don't feel the need to spend the money to buy insurance on their portfolios.

Today, the VIX closed at its lowest level since May 3rd. This is a bullish sign and tells me that the support level at 2,816.94 on the S&P 500 has a better chance of holding than it did yesterday.

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