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Market Volatility: A Day Trader’s Dream July 16, 2022

Posted by Tom in Thoughts.
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July 15, 2022 – This market decline has turned into a day trader’s dream, they thrive on volatility in both directions.  Witness what we saw on Wednesday morning (below, a 4 day 30 minute bar chart).

From the market open on Tuesday down to the low on Wednesday, back up to the close on Friday was a “round trip” of over 30 points on the SPY (S&P 500 ETF).  That move (if perfectly timed) would be worth $15,000 with one e-mini futures contract and $75,000 on a full sized futures contract.  Now I’m definitely NOT an advocate for day trading, but my purpose is to bring forward just how volatile this market can be, especially around major economic announcements.  For position traders and investors, volatility signals caution.  When moves quickly appear in the market, they can easily disappear, and quickly too.  My last point is that these types of moves feed on themselves.  i.e “Buying begets buying, & selling begets selling.”  The futures and options markets do move the stock markets as the writers of these contracts react to lower their risk by buying/selling the underlining stocks.  There is a lot of portfolio hedging using leverage contracts out there right now.  Hence, volatility as people scramble to adjust exposure on the fly.  We’ll see more of that as “the big guys & gals” cover their short positions (hedges) driving the markets up . . . for awhile . . .  then . . .   Our task is to evaluate and respond to investment trends, not short term volatility.  I’ll feel a lot better when I see the amount of Put contracts decrease.

One other point to bring up is the 30 year Treasury Bond auction this week.  With the FED raising interest rates one would think that the prices would be going down (interest rates rising), but . . .  that did not happen.  The auction was quite successful.  There was demand for the US bonds and prices went up (buyers willing to accept a low interest rate).  Why would anyone want to tie up money for 30 years at this low interest rate?  Two ideas:

  1. Investors assume that the FED has reached a near term peak of increasing rates.
  2. Major concern about the world economies; a flight to safety.

As the old saying goes, in times of economic stress, “investors are more concerned about the return of their money more than the return on their money”.  The rise of the US dollar compared to the world currencies does not help these concerns either.  It makes US exports more expensive, thus a strain on the US economy.  And it really throws a “monkey wrench” into the world markets.  The US$ is now worth more that the European Euro and that’s very unusual indeed; not a stabilizing factor.

These are interesting times.  There are some signs of a market trying to at least find a base.  The question is: is this a sign of the re-accumulation of shares or just a pause below another down leg.  Watch the volume on up bars (& down) for clues, especially on market stalwarts.  Are investors buying or selling?

The Short Term Sector Strength table is shown below-

Have a good week, but be careful out there.   …………  Tom  …………….

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

Summer Doldrums July 9, 2022

Posted by Tom in Thoughts.
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July 8, 2022 –  Since last week not a whole lot has changed.  My opinion is that we’re in a trading range that is building a base for the next significant move and that move could go either way.  Hence my reference to the Summer Doldrums (the “Doldrums” refers to the area in the Atlantic where the wind just stops blowing and sailing ships have to wait for a change in the weather).  The chart below shows my thinking going forward in that back-and-forth price structure (blue lines).

click on chart to enlarge

Why do I think not much is going to happen?  Well 3 questions (and opinions):

  1. Is the FED showing signs of slowing interest rate increases?  A: No
  2. Are there indications that inflation is under control?   A: No
  3. Is the stock market (which anticipates change) trending up?   A: No

So, until at least two of these show signs of resolution . . . “not a, whole lota” is likely to change in a significant way.  Our next action point is coming on Wednesday with the release of the Consumer Price Index (CPI) numbers; an indication of inflation.  Slowing inflation will be a plus for this market, no doubt, but keep in mind that inflation is a worldwide issue not just in the USA.  A bunch more good news on that front over weeks will be needed to confirm a trend, it’s not going to “turn on a dime”.  If the economy really gets into a recession with negative GDP and increasing unemployment we could see another leg down, likely this Fall. 

I haven’t shown the pie chart of stocks in the S&P 1500 Index relative to their 20 day Bollinger Bands so that’s shown below.  We’re seeing more green and a lot of yellow and that supports the hypothesis of a possible base building phase.

And lastly the Short Term Sector Strength table –

Have a good week and watch how the market (thinks that the FED will) react to the CPI data.  It has the potential for a good indication of where we go over the next 4-6 weeks.   ……..  Tom  ………

Basing and “Going 4th” July 2, 2022

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July 1, 2022 – OK folks . . . a little play on words 4th of July style but my feeling is that we’re getting close to stabilizing the selling in this market.  Heck, if you’re not ‘out’ it’s just a tad late to be think ‘bout it now.  That said I’m seeing signs of capitulation or at least slowing of the selling in here.  That’s the first step in building a base so that the market can have a chance to go higher over the long run.  The old saying: “When everyone that’s going to sell, sells, the market will (recover and) go higher.”  So when everyone that wants out, gets out, the next step is building and stabilizing for the next run.

click on chart to enlarge

The big question is whether and base building is just that or only a pause before another round of selling.  And that, no one knows the answer right now.  IF we’ve hit an economic bottom then the answer is basing and up.  If things continue to deteriorate further then the answer is no, we’ve got some problems ahead.  Buyers will come in if they see value / growth potential ahead and a glimmer of light at the end of the tunnel.  We’re not there yet, but let’s take it a step at a time . . . first building a base.

This all depends on the FED and interest rates (we’re expecting 2 more increases this year at least), how the consumer reacts and to some extent the war in Ukraine / oil / food prices.   All of these are important to the economy and hence the stock market.  But one should not wait for the economy to lead.  By then it’s too late because the stock market will already be ahead of the economy.

The Short Term Sector table is below –

The fact that we’re seeing some early signs of strength in other than 100% defensive sectors and Energy falling down is encouraging. It’s early to be excessively Bullish, just hopeful and watchful for now.  Make no mistake, all of my trend indicators show a Bear market currently, but some have soften over the past week.   Have a good week & Happy Independence Day for those in the USA.    ………  Tom  ……….

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

A Good Week June 25, 2022

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June 24, 2022 –  Last week was a good week for the stock market with some hopeful signs beginning to show.  The markets are oversold so that nice bounce on Friday was somewhat expected.  What is interesting was the very high volume on Friday.  This was likely caused but “short squeezes”, that is people who were short stocks and then having to buy them back to cover their short positions (to avoid losses); a.k.a. “buying begets buying”.  But another factor is there remains billions of dollars in Put options and some of them expired on Friday.  The question is: did these contracts “roll forward” (in time) or did they cover/close?  Lastly, we are approaching the end of the quarter and many funds will begin to rebalance their portfolios per their charters.  We’ll have a better idea on Monday.

click on chart to enlarge

There has been extreme investor pessimism and there are very early signs that the Technology and growth stocks are beginning to at least stabilize. I still favor a possible bottoming and basing formation over the next 6-8 weeks.  That process could be a positive if strength returns, or . . . if economies don’t show some improvements, a set up for another leg down that would be a flushing out and capitulation phase.  That basing area could be between 12290 at the top and 10560 at the bottom (NASDAQ Composite Index).

The Short Term Sector Strength table shows what a difference a week makes.  Energy at the bottom and select Technology sectors moving toward the top.  Note the strength in Chinese stocks.

The bottom line is really no change, we continue to be in a Bear market but we must also be open to that will eventually change.  The question is when, and it will likely take time over months.  I’m watching for a base and “stopping action” to form.   Have a good week.      …………  Tom  ……….

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

OK . . . What Next? June 18, 2022

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June 17, 2022 –  Interest rates are going up (no surprise) and will continue to go up (again, no surprise).  The question is how much and how fast, but really the bigger question is whether it will lead into a recession and just how deep and long it could be.  Oh yes . . . inflation is a major factor.

In general, a news item typically causes a minor short term effect on the stock market.  What REALLY concerns investors is a recession, because that has a major effect on profits, hence earnings.  Over the long run, it’s really all about earnings and the future growth of earnings.  Stock prices just reflect the “future hopes” (i.e. bets) of investors.  I’m NOT predicting, but I do like to anticipate possible market structural scenarios.  The idea is not to act on them now, but to be open to the possibility of movements so when they begin to unfold (or don’t) one can react quickly.  So, here we go:

click to enlarge chart

The Green lines represent a bounce up from where we are about now going way back to late September, 2020 (note the red arrow; this is a weekly chart).  The idea is that this level is a logical support level and then we spend the next 6 weeks or so in a trading range (then possibly another leg down).

The Red lines represent a continued move lower, perhaps much lower.  Sure, there will be small bounces, but the trend would be continued weakness for the foreseeable future.

The good news is that we shouldn’t have to wait much longer to find out.  I note that billions of dollars of Put hedges expired on Friday, and since the prices did not fall (indicating option exercising) they appear to have been rolled forward (i.e. close out the June contract and open a July one).  Why do we care?  Because the big investment houses are continuing to hedge, thus “buying insurance” in case the market falls further.  The big guys are cautious, I am too.

The Short Term Sector table is below:

China is showing some life and potential but much of the top sectors are defensive.  Note that Energy has dropped down; is it short term weakness?  That’s it for now.  Have a good week, looks like this will be lasting for a while, no V bottoms this time.        ……….  Tom  ………..

Price chart by MetaStock; & table by http://www.HighGrowthStock.com. Used with permission.

Back To Reality June 11, 2022

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June 10, 2022 – At the beginning of this week it appeared that a bottom might be in and a strong rally was underway, but . . . inflation data came out, retailers were reporting that their inventories were up 30 to 40%, consumer confidence continued to be low and (of course) gas prices crept even higher.  That was it, two days of big drops.  I was thinking that we were in-line for a pullback because of the low volume (a.k.a. low commitment) at the higher price levels and besides, nothing has materially changed either.

click on chart to enlarge

So what’s next?  I’m thing lower prices early in the week, then a recovery.  The strength of that recovery will be telling. But since the FED is meeting next week, and will put out a news release on Wednesday afternoon, not much will happen until late in the week.  The market is expecting two more (at least) ½% increases this year.  How Powell phrases ANY activity after the meeting will be an important factor on how the market reacts with anticipation.  Does he sound dovish or hawkish and to what degree, that is the question.  Then we need to evaluate how the market reacts and just how committed it appears.  Is volume increasing?  Is everything being affected or only a handful of sectors?  The bottom line is: Is this market ready to rally?

Looking at the Short Term Sector Strength table below we see the Energy complex and China showing the most strength.

I’ve added a small China position to my Energy & general commodities holdings but still have Cash to deploy IF & When that’s appropriate.  And when it’s time to take a position, scale into it.  Nobody gives you “extra points” for jumping in with both feet.   Have a good week.      ……………  Tom  ………….

Price chart by MetaStock; & table by http://www.HighGrowthStock.com. Used with permission.

Showing Life, but Not Commitment June 4, 2022

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June 3, 2022 – Interesting week, this past week.  In the media I’ve heard: “The bottom is in, time to back up the truck” and then, “An economic hurricane is coming, get prepared.”  Well . . . OK, looks like we’ve got two extreme predictions and the winner is: “Nobody really knows for sure.”  The saying “Even a broken clock is right twice a day” comes to mind.  Let’s look at the chart.

click on chart to enlarge it

What do I see?  I see a market that has many indicators positive and Bullish . . . but two things:  1. Look at the volume last week.  Very low.  You may say it was a holiday week, but in reality big trading firms have a staff on duty every week, regardless of vacations (they rotate throughout the summer) so there is always a trained staff manning the desks; they can’t afford not to.  2.  What has changed?  I mean has the Ukrainian war changed?  Has the economic outlook changed (inflation, interest rates, etc.)?  No and No.

What I’m getting at is let’s see IF the resent rally is anything to get happy about.  Low volume = low commitment; period.  Thanks but I’ll wait for at least some confirmation of a genuine rally before I get excited.  Let’s see what the sector table indicates.

I see the Energy sectors showing continued strength and maybe China is coming out of a funk, but that’s it.  No leadership from Technology or Finance or Consumer sectors.  Not a great vote of confidence.  Unless you’re day trading or in very short term trades, this remains an unfriendly market.  That could change, but not yet.  IMHO.

I remain in Energy and select Commodities, with a bit of Value exposure, plus Cash for the time being.  That could change, but I need to see more.  Have a good week.   ………….  Tom  …………

Price chart by MetaStock;  table by http://www.HighGrowthStock.com. Used with permission.

Bouncing into Next Week May 28, 2022

Posted by Tom in Thoughts.
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May 27, 2022 – First off, Happy Memorial Day (for those in the US).  This is especially rough with the shootings in Texas and a war raging in Ukraine.   We’ve got to do better.

The market is beginning to show some signs of strength.  Sentiment is Neutral, Money & Volume Flows are Bullish, Price Strength is Bullish and Volume is low (possibly due to the holiday in the US).

click on chart to enlarge

Next week we need to see a commitment with closes above 12202 (roughly 420 on the SPY), that’s the first line of resistance for prices to move higher.  The next spot is 12985 on the NASDAQ Composite Index.  I’ve drawn in 3 scenarios, Green is the most optimistic, Yellow shows a consolidation phase and Red is a retest of the lows.  I’m favoring the Green right now but the pattern may develop at the 12202 level and not the higher 12985 level.  The question will be does a substantial move higher last for more than a couple of weeks?  I question that.

The low volume last week may be due to the holidays or due to lack of commitment by large intuitions.  We’ll know that on Tuesday.  I continue to see a large number of “protective Puts” in the market most expiring the 3rd week in June.  The big guys have not given up on downside protection yet.

The Short-Term Sector Strength table is below:

It’s encouraging to see sectors other than Energy strengthening, but again, that’s short term.

Have a good week and watch for volume coming back into this market, it will confirm one scenario or the other.    ……….  Tom  …………..

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

A Possible Rally (?) May 21, 2022

Posted by Tom in Thoughts.
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May 20, 20200 – Just when you thought all is lost . . .  comes a (possible) recovery.  That’s my feeling right now that Friday was a possible short term capitulation day in the immediate term.  Market breath is “so bad, that it’s good”; in that so many stocks are washed out that we’re due for a surprise rally next week.  Now that may only be a short-term rally, we’ll have to gauge its strength and breath IF it does come but I’m seeing early signs of divergences in a number of indicators.  My concern is it could just be a brief “got-sha” rally to lure folks back in before we head back down.  That would be more typical than not.

click on chart to enlarge

I note in the chart above a positive “Money Flow” indicator and just average volume.  A true capitulation sell off would be on high volume, but Friday was options expiration day with many Puts expiring so that could mask volume in the background since futures are involved with many options writers.

One thing that doesn’t help is that a couple of large hedge funds are calling it quits and now must liquidate shares to redeem clients back into cash.  Also a sign of extremes are the prices of wheat and corn.  They are at / near all-time highs due to the Ukraine war; it’s not just oil (Thanks Vladimir).

To give us an idea of where we are in the typical stock market cycle I borrowed this chart from Doug Short at Advisor Perspectives.

And the Short-Term Sector Strength table shows us that the more defensives sectors are the strongest ones currently.

And so we will be patient as next week develops and be open to a possible short term rally.  The big question is how long will it last.  J   Have a good week.  …..  Tom ….

Price chart by MetaStock; pie chart & table by www.HighGrowthStock.com & Advisor Perspectives.com. Used with permission.

Drop then Pop May 14, 2022

Posted by Tom in Thoughts.
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May 13, 2022 – Happy Friday the 13th.  🙂 Another interesting week on Wall Street, but since I’m on the road, I’ll make this to the point.  Sure, there are many pundits that at predicting / calling for a bottom here . . . and they may be right.  But what I’m looking at is how “the big money” is positioned, and right now, they remain hedged with large Put positions.  You can say that they won’t pick the bottom (or top), but these are professional money managers and they are quite happy to harvest the middle 80 to 90% of a trend move without taking on undue risk.

click on chart to enlarge it

Keep in mind that in previous bear markets there have been 30 to 50% bounces up within the general a down trend.  What we’ve seen this week is a “drop then pop” which is accentually short covering by those who are heavily hedged.  They buy because they were heavily short speculative stocks . . .  it’s called a “short squeeze”.

The question is: are these stocks “viable companies”, by that I mean do they make money?  One or two days (or more) of a rally in heavily shorted stocks does not mean a new bull market.  I’ll wait for confirmation via the “big money” continuing to buy good companies (those with + P/E’s).  Right now, this is a traders market and unless you are nimble I would just let it go for now.  A near term rally is a strong possibility with volume picking up on down bars (capitulation) so next week could start off on a positive note . . . but will it continue?

The Short Term Sector table is shown below –

Have a good week, but be aware of a possible short term rally in the next few weeks that totally surprises everyone; we’re due for it.   …………..  Tom  ………….

Price chart by MetaStock; & table by http://www.HighGrowthStock.com. Used with permission.

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