EB Daily Market Report - Tuesday, May 18, 2021

No DMR on Thursday/Friday

I will be out of the office later this week, so I will not be publishing a Daily Market Report on Thursday and Friday. I'll be back to a normal schedule on Monday.

Event and ChartList Update

Today's Event:

Later today, at 4:30pm EST, we'll have our monthly Max Pain webinar. Last month's selections didn't turn out so well, but we know the history with options expiration week. Be sure to join me this afternoon as I discuss possible market scenarios and individual stocks that could gain or lose ground later this week to line the pockets of market makers. Here's the room link to join (the room will be open by 4:00pm ET):

https://earningsbeats.zoom.us/j/83884996012

Updated ChartLists:

The Strong AD ChartList (SADCL) and Raised Guidance ChartList (RGCL) have been updated and are available for viewing/download on our website.

Executive Market Summary

• Futures were slightly higher overnight and we opened in positive territory
• The NASDAQ has maintained a bit of a relative advantage today
• Housing starts and building permits both came in below expectations this morning
• Home construction ($DJUSHB, -1.29%) is one of the worst consumer discretionary (XLY, +0.09%) groups
• Health care (XLV, +0.44%) is the best performing sector thus far, while energy (XLE, -2.06%) shows relative weakness
• Options expire this Friday, so we could just be beginning some short-term manipulation as a result
• Renewable energy ($DWCREE, +3.95%) is the best performing industry group; Enphase Energy (ENPH) is the top performing S&P 500 stock

Market Outlook

It's options expiration week, so this is when it's not all that unusual to see big reversals of what's been transpiring in the market. Of course we know that growth stocks have been weak, so this growth vs. value ratio (IWF:IWD) bouncing would likely aid market makers this week into next:

The hourly relative PPO just turned positive and key overhead resistance lies directly ahead (red arrows). I've also reflected the QQQ:SPY chart in the bottom panel, highlighting similar relative resistance. Breakouts on one or both of these ratios would quite likely enable market makers to profit to the tune of BILLIONS of DOLLARS as options expiration approaches. Therefore, we shouldn't be too surprised if it occurs.

Sector/Industry Focus

The winning industries today mostly include areas that have been weak over the past few weeks to few months. Are we seeing a rebound in these groups because of upcoming options expiration? It's hard to say, but most of today's weakness is within energy and materials, two recently strong sectors. So the options madness may well be underway.

On an hourly chart, renewable energy ($DWCREE) hasn't looked better in the past 3 weeks:

Renewable energy, beaten up badly for the past few months, is seeing some relative strength after recently printing a positive divergence. The same thing happened in April - just after options expiration. If you recall, PLUG was a stock that we were looking for a rebound last month. We saw a rebound, but it came in the week following options expiration. Looking ahead, I believe the DWCREE could potentially move up to challenge the 215-235 resistance area. The 215 level (one red arrow) represents the breakdown in early May. Lost price support becomes initial price resistance. The two red arrows mark a gap resistance level to keep an eye on in the event that price resistance is cleared. Of course, there's also a trendline resistance to watch as well.

ChartLists/Strategies

I know many of our members like to short stocks, though I stay completely away from shorting when I believe we're in a secular bull market. I just believe there are many more long opportunities. While I won't short stocks into options expiration, that might be one exception to consider if you enjoy shorting. I'll talk more about this tonight during our Max Pain webinar, but stocks that make huge moves higher could be subject to short-term market maker manipulation and selling, particularly if such stocks are heavily traded in the options market. First, here's the top 10 Strong Future Earnings ChartList stocks (SFECL) over the past month:

Let me be clear - anything can happen. Just because market makers would benefit from a stock heading in a certain direction into options expiration is no guarantee that it will happen. So always trade with caution and with money you're willing to risk.

But holding a stock like AMC Entertainment Holdings (AMC) the balance of this week and into next week would be uncomfortable. It's now testing key price resistance and there are a TON of net in-the-money call premium, millions of which could be wiped out by a simple "profit taking selloff". Here's the chart:

While I'm expecting short-term weakness, a breakout should still be respected as market makers can protect themselves by buying the stock and then selling calls to options buyers. It's just that they have the opportunity to make MORE money if the stock were to suddenly reverse lower. There are so many calls that could be wiped out as you can see below (open call interest is the far left hand column, while open put interest is the far right hand column):

The "in-the-money" puts (open put interest > current price) total maybe 5000 contracts. The "in-the-money" calls (open call interest < current price) total close to 150,000 contracts. That's a LOT of net in-the-money call premium on the table. Again, it doesn't guarantee we'll see lower prices, but that premium has to look like a big, fat, juicy steak to market makers. It'll be interesting to see how this plays out over the next week or so.

Earnings Reports

Here are the key earnings reports for the next two days, featuring stocks with market caps of more than $10 billion. I also include a few select companies with market caps below $10 billion. Finally, any portfolio stocks that will be reporting results are highlighted in BOLD. If you decide to hold a stock into earnings, please understand the significant short-term risk that you are taking. Please be sure to check for earnings dates for any companies you own or are considering owning.

Tuesday, May 18:

WMT, HD, SE, NTES, BIDU, TCOM, TTWO, STE, IQ, KC, M, DQ, DOYU

Wednesday, May 19:

CSCO, LOW, TGT, JD, TJX, ADI, BEKE, SNPS, CPRT, KEYS, LB, ZTO, FUTU, VIPS, GDS, CAE, EXP, SCVL

Economic Reports

April housing starts: 1,569,000 (actual) vs. 1,705,000 (estimate)

April building permits: 1,760,000 (actual) vs. 1,780,000 (estimate)

Happy trading!

Tom