EB Daily Market Report - Special Report - Thursday, June 16, 2022
I know I've had several of these "Special Reports" of late, but it's the nature of the market. Normally, it takes me a couple hours to write the entire report, including my research and preparation that goes into it. When things are extremely volatile and I want to get a quick message out, this is the form it needs to take. So, while I do plan to eventually return to our regular Daily Market Report (DMR) on a consistent basis when things settle down, hopefully you understand the need occasionally for this type of quick report.
I have stated on MANY occasions that bottoms are marked by extreme sentiment readings. Price support, trend lines, etc, can be thrown out the window. Fear knows no boundaries and extreme fear is what we're seeing right now. On Tuesday, when I suggested the bottom was in place, I added the caveat that Wednesday after the Fed and/or the Thursday Fed hangover could see a move lower to ultimately mark the key low. I still believe that and I want to share with you why.
First, let me show you the 5-day moving average of the equity only put call ratio ($CPCE):
As you look at this chart, the first thing to realize is that the CPCE won't update for today's action until well after today's closing bell. Therefore, the S&P 500 decline today is not shown at the bottom. But I just want you to understand that when the CPCE tops, the S&P 500 nearly always bottoms. So the clear question is....when will this CPCE 5-day moving average top? I don't know for sure, but I can tell you that a 5-day moving average reading at .80 or above is EXACTLY what I was looking for at the end of 2021 to "reset" sentiment. The overwhelming majority of traders now have grown so bearish that they do not believe the market has any chance of moving higher. This is what bottoms are made of. It's just one signal though.
The bigger picture in rotation tells us a bottoming story too. While the S&P 500 is moving considerably lower intraday today, the sustainability ratios remain quite strong. This suggests to me that this very well could be THE final low that we see. Timing an exact bottom is always dangerous and missing it by a day or two can get extremely painful. But I am convinced this is the bottom. Here's the S&P 500 chart for 2022, followed in the underneath panels by the 6 sustainability ratios that I like to follow:
This is a year-to-date hourly chart. My sustainability ratios are all down TODAY, but the big picture shows obvious rotation back towards growth stocks on this latest price decline. Unless this changes, I'm looking for a MAJOR reversal in S&P 500 price action.
Here's the last thing I want to show you. On this new low, the S&P 500 is printing a positive divergence on its hourly chart:
Rotation and sentiment are SCREAMING to me that the bottom is either here RIGHT NOW or rapidly approaching. I have held a hefty number of positions into the close the last two days for really the first time in 2022. I am ADDING today and completely filling my portfolio. Let's not forget that tomorrow is options expiration Friday, so there is further short-term financial incentive for prices to rise as well.
Listen, I could be wrong. At the top in December, I said it didn't matter to me if I was right or wrong. My signals were issuing a warning that risk was increasing significantly to be on the long side. Well, my signals are now telling me that the risk to remain in cash is increasing off the charts. At the beginning of this cyclical bear market, I gave my "worst case" bear market prediction of a low of 3500. We're not quite there yet, but I'm seeing the signs of getting long now. Could we hit 3500? Sure. Don't think for a minute that we can't move below 3000 - maybe even test the pandemic low at 2191. The market can do anything it wants. But what I'm saying is that the things that are important to me are now saying, "the coast is clear". All of the road blocks in late 2021 have been removed and the market is free to resume its secular bull market.
I'm calling the bottom RIGHT HERE and RIGHT NOW and am fully invested. Am I right? I'm comfortable letting future action prove me right or wrong.
Happy trading!
Tom