EB Daily Market Report - Tuesday, January 17, 2023
January Max Pain Event
We'll be hosting our monthly max pain event for January this afternoon at 5:00pm ET. We've seen a very nice rally during the first half of January, so some stocks will be vulnerable - not guaranteeing lower prices ahead. Instead, the RISK of holding increases the longer the rally lasts.
As an example, Goldman Sachs (GS) was listed as the stock with the 13th highest net in-the-money call premium among the 150 or so stocks that Erin provided on Sunday evening in her monthly max pain report. While GS did miss on its quarterly earnings, it was initially down just 2% or so. But it's since fallen another 5% or more and GS now trades 27 bucks lower and beneath its 350 max pain level. That's how quickly option premium can vanish.
Anyhow, hopefully see you this afternoon for a max pain discussion. If you can't make it, we will record the event and send it out to everyone later this evening or tomorrow.
Leveraged ETFs
Two weeks ago, I sent out a quick update, letting everyone know that the Volatility Index ($VIX) was sending us a very bullish short-term signal. I discussed using leveraged ETFs to potentially benefit from any rally that ensued. Well, here's how the QQQ, QLD, and TQQQ have performed since January 5th, the date of that update:
The "expected gain" column represents what the QLD (2x QQQ) and TQQQ (3x QQQ) would have earned if they perfectly tracked the QQQ's gain of 7.78% times 2 and 3, respectively. You can see that there's actually a little extra juice that comes from the constant compounding during a nice rally. This is when it makes the most sense to be in leveraged ETFs.
The problem now, however, is that it's options-expiration week and the QQQ is trading roughly 2.5% above its max pain level of 275. I've said before that one strategy is to keep holding the leveraged ETFs until we see a possible change in direction. One signal to revert back to the QQQ vs. the QLD or TQQQ would be a lower intraday low (vs. prior day). Thus far, today represents the 4th consecutive day of higher intraday lows. Sticking with leveraged ETFs until this pattern stalls makes sense. Personally, though, I've just sold my leveraged ETFs and moved back to the QQQ to eliminate that additional risk. I don't need to be greedy, so I'll happily bank those extra profits. Again, options-expiration week makes me a bit nervous, as does the negative divergence on the QQQ hourly chart:
We certainly could test the upper end of the resistance zone near 284, but I've been able to ride with leveraged ETFs from 261 to 281. Should I continue risking additional capital to get these last 3 dollars on the QQQ? I don't think so, but that's just me. We could blow through 284 and test the mid-December high near 296. But I like to pick my spots with leveraged ETFs, so I'll wait to see if I can jump back in when the reward to risk is more desirable. I do believe the QQQ is trending higher now, so I'm fine holding it as long as it remains above the now-rising 20-day EMA. A test of it would be a possible re-entry point for the QLD or TQQQ.
Happy trading!
Tom