EB Special Report - Tuesday, November 15, 2022

I don't want to take the time to write an entire DMR as I want to get key trading information in your hands as quickly as possible. Also, I'll be prepping for the Max Pain event later today.

Let's get to it.

First, I absolutely LOVE what's taking place in the stock market and completely believe that we are resuming the secular bull market that began in April 2013. HOWEVER, we need to be aware of short-term warning signs and I'm seeing them right now. There are 3 warning signs, as follows:

Max Pain

We know the impact that short-term expiring options can have on market direction as we approach the 3rd Friday of the month (this Friday). After the massive run that the market has been on, we now show considerable net in-the-money call premium. For instance, in Erin's weekend report, the QQQ was shown to have max pain at 275. At this morning's gap open, the QQQ stood at 292.21 as it moves further and further away from the level at which market makers would pay out the least amount of option premium. This NEVER provides us a guarantee of lower prices, but it is a directional clue.

Negative Divergence

Again, this is just a short-term signal, but I'm seeing 60-minute negative divergences EVERYWHERE! Here are quick 60-minute charts on the QQQ, the ETF that tracks the NASDAQ 100 ($NDX), and a couple key component stocks:

QQQ:

Apple (AAPL):

NVIDIA Corp (NVDA):

Alphabet (GOOGL):

Divergences again just provide us directional clues. It's about managing risk, not about whether the call is right or wrong.

I am VERY BULLISH long-term, just cautious near-term, probably through early next week.

Volatility ($VIX) and Interest Rates

The VIX is starting to turn higher, while prices set a new high. It's only a day or two of this, but I'm taking notice. Fear is elevating, even though prices are rising. That makes me take a step back and pause. Also, the 10-year treasury yield remains close to 3.80%, despite another cool inflation report (October Core PPI was +0.0%, while market was expecting +0.4%). That might be suggesting the bond market thinks we take a pause as well.

But let's focus on the VIX and check this out:

The HUGE gap up last Thursday saw the VIX tumble. But as the S&P 500 has continued pushing higher, the VIX has stubbornly refused to go lower. Today's slight move lower in the VIX is a warning sign, in my opinion, as prices SURGED higher. Why isn't the VIX cratering today?

Here's the bottom line. I remain FULLY INVESTED in the QQQ in my retirement accounts. I am not trying to time the market in those accounts any longer. When we formed what I believed was the bottom in June, I went long in retirement and I plan to stay there. Getting out at the top and back in after a 30% decline is good enough for me in retirement. In my trading, I've stuck mostly with the QQQ, but I sold it this morning because of these subtle warning signs. I STILL LOVE THE STOCK MARKET, but given the concerns above, I'd rather not risk my trading capital. The stock market could very well continue higher, but I believe the RISK has grown substantially in the VERY NEAR-TERM and I'm most comfortable watching for now.

Happy trading!

Tom