EB Daily Market Report - Special Report - Thursday, July 28, 2022
I'll be unavailable most of the day, but I wanted to give you a few quick thoughts and observations about what I'm seeing.
Sentiment
It's hard to believe that after the recent break above the 20-day EMA and the HUGE rebound yesterday off the now-rising 20-day EMA that the 5-day moving average of the equity only put call ratio ($CPCE) would be at .70. This is in the upper range of 5-day readings over the past decade. If you recall, the resetting of sentiment was my biggest concern as we headed into 2022. The options world was SOOO bullish at the end of 2022 and had been extremely complacent for an extended period of time. Many of these new, post-pandemic options traders had no clue what a correction looked like, much less a cyclical bear market that ranks in the top 10 of bear markets since 1950!
From May 2020 through May 2022, this 5-day moving average NEVER reached .70. Now the secular bull market is resuming and no one believes it. PERFECT!
Resumption of Secular Bull Market
I've discussed recently the look of cyclical bear market bottoms and how quickly prices can rally in the first year off such a bottom. If you haven't seen my table of bear market bottoms and subsequent rallies, check this out:
You may disagree with me about the June low being a MAJOR bottom and that's fine. Markets are made up of bulls and bears and we all must choose a side. I've provided my reasoning and you can agree with me or not. As I've stated many times in the past, this is not a right or wrong decision. It's all about managing risk.
When I believe the risk landscape has changed, I change my trading strategies. It's that simple. If I'm wrong, I can live with it and the money lost. No one cares about my money as much as I do. So I get extremely involved in managing it. I have put thousands of hours into stock market research and I believe I'm better equipped to make financial decisions than the media.
Look up at that table again. If we've bottomed, history tells us that we have a MASSIVE recovery in store. While the bottom call was based on rotation and not the price action in the benchmark S&P 500, we're now seeing confirmation of that bottom call with the bullish S&P 500 price action. The cyclical bear market CANNOT resume unless our major indices lose 20-day EMA support, so that's where I'd focus my short-term attention. We'll have up days and down days, but if we continue to trend above the 20-day EMA, view that as extremely bullish.
Next Up: Deflation
Q2 GDP was released this morning and it was -0.9%, the second consecutive quarterly contraction. That was the old definition of a recession and is good enough for me. Currently, the National Bureau of Economic Research determines when the U.S. economy is in a recession. Job growth is one factor that argues against this being a traditional recession. I'm in the camp of "call it whatever you want". Our economy has contracted for 2 straight quarters, so clearly the economy has weakened.
The hawkish Fed and the confirmation of negative economic growth for 2 straight quarters suggests inflation will have difficulty keeping its upward momentum and trajectory. Inflation is caused primarily by too much demand and/or too little supply. The negative GDP tells us that there's PLENTY of slowing demand, which is giving companies plenty of time to catch up on supply. In fact, I believe we'll see an upcoming build in inventories. That, combined with less demand, will send prices lower and start the deflationary discussions. The result? A much more dovish Fed that will begin lowering rates later in 2022.
It's the stuff that secular bull market rallies are made of.
QQQ Trading Strategy
Lastly, I just want everyone to be aware of how the QQQ has traded throughout 2022. From December 31, 2021 through yesterday's close, the QQQ fell from 396.60 to 306.81. That's a drop of 89.79. But here's the breakdown of how the QQQ has traded during various times of the day:
- Opening gap (prior day's close to opening price): (50.72)
- 9:30 to 10:00am: (58.17)
- 10:00 to 11:00am: (8.81)
- 11:00am to 2:00pm: (14.57)
- 2:00pm to 4:00pm: 42.48
This is not a misprint. While the QQQ has dropped nearly 90 bucks in roughly 7 months, it's actually GAINED 42 bucks in the last two hours of all trading days this year. That is how the AD lines continue rising. Market makers have been buying in the afternoons for institutional clients (and themselves), taking advantage or retail traders who follow the news stories and opening gaps lower - that trigger further selling in the mornings. That's why the early market hours are referred to "amateur hour".
Anyhow, that's all for today.
Happy trading!
Tom