EB Special Report - Wednesday, November 16, 2022
I'm beginning to prep for Thursday's "Portfolio Draft", where I'll announce the 10 equal-weighted stocks in each of our 3 portfolios - Model, Aggressive, and Income. So I want to be somewhat quick with today's Daily Market Report (DMR). We still need to be careful on the long side, because it's options expiration week and there remains net in-the-money call premium. That tells us that short-term downside risk remains a real thing. However, there are definitely bullish forces at work as well. The most important of those currently is the continuing drop in the 10-year treasury yield:
We've now broken beneath the 50-day SMA and the recent low near 3.80%. While a move back up to test the now-declining 20-day EMA could occur at any time, I believe we're now seeing treasury yields trend LOWER. A MAJOR test will occur near the 3.50% level. But dropping to that level would be a significant bullish development for U.S. equities, especially more growth-oriented equities that were crushed by the rising TNX throughout 2022.
My biggest issue to start 2022 was sentiment. The 5-day moving average of the equity-only put-call ratio ($CPCE) remained below .50 for an extended period of time - a first historically. EVERYONE that wanted into the market was IN. Retail options traders believed that there was ZERO chance the market could drop, which is exactly why I was so bearish. When the masses have piled in on one side of trade, I'll take the other side, thank you very much! It's how the market works.
I want to show you two CPCE charts, the first highlights the 253-day moving average. Think of this chart as the freight-liner. It doesn't change direction very often, but when it does, you need to heed its warning. Check this out:
Reversals in this 253-day moving average (the freight-liner) have suggested significant trend changes that we need to be aware of. The bearish argument right now is that there's no confirmation that the peak is in. However, I believe we can anticipate that it will be changing very, very soon. Each day, this calculation includes the current day's CPCE and eliminates the corresponding CPCE from one year ago. So if I show a daily chart of the CPCE, we can begin to get a sense of what is about to take place:
We bottomed on these daily readings at the beginning of November 2021. And we just topped with our daily readings in early-November 2022. If we look at what happened from mid-November 2021 into year end and the early part of 2022, the CPCE began trending higher. I believe the CPCE now is trending lower. We will see the momentum to the upside in the 253-day moving average slow significantly over the next 30-60 days and I believe over the next 1-2 months we're going to see a very significant top in the 253-day moving average that will IGNITE the stock market. I see all-time highs in Q1 2023. Think about that for a second. If I'm right, you need to begin thinking NOW how you want to be positioned. If you disagree with me, that's completely fine. I've been wrong plenty of times before and I may be wrong again. But I did call 2022 perfectly and I believe I'll be right heading into 2023. I don't lack conviction.
Sentiment is a VERY, VERY IMPORTANT component of stock market performance. You should be able to clearly see that with the 253-day moving average chart above. Those red vertical lines provided us warnings about an impending consolidation, correction or bear market. The blue vertical lines suggested something much different - big upside advances. When I see that rising 253-day moving average roll over, I want to be LONG stocks. I don't care what CNBC is saying. And I don't care what economic news is being released.
I remain fully invested on the long side in my retirement accounts. And I've begun building long positions (QQQ mostly) in my trading account. We could see a short-term move back to 279-280 on the QQQ, but if that happens, I'll be fully loaded on the long side heading into the balance of 2022 and into Q1 2023. If I'm wrong, I can live with it.
Happy trading!
Tom