EB Quick Update - Friday, March 10, 2023
I've just returned from vacation and wasn't planning to write anything until this weekend; however, there's some technical damage being inflicted today and the Volatility Index ($VIX) is sending us a short-term warning shot. The stock market loses its most during violent increases in the VIX, which is essentially a "fear meter" for U.S. stocks. The VIX has skyrocketed from 19 to more than 28 in just over 24 hours. We've seen support lost on the Dow Jones and S&P 500. The NASDAQ 100 is trading at its lowest level since January 25th. For me, now is not the time to be a hero. I've said that building a leveraged position in the NASDAQ 100 using the QLD (2x) and TQQQ (3x) made sense so long as 289-290 support holds. Well, today I'm seeing the QQQ below 288. I take ZERO chances when it comes to leverage, ESPECIALLY when the VIX is soaring.
I've moved mostly to cash in the short-term to watch for now.
There is potentially good news building that also should be mentioned. I'm in the process of updating my intraday analysis on the QQQ, SPY, and the relative performance of the QQQ:SPY. I'll be reporting on that over the weekend or early next week. But I can say, based on my quick review of the QQQ:SPY, IWF:IWD, and other growth vs. value charts that rotation is NOT suggesting this move lower will hold. In other words, I believe this selling episode will prove to be yet another opportunity to jump in. But the rapidly-rising VIX can lead to a short-term acceleration of selling.
Barring a big rally in the final two hours, we have to be extremely careful right now. If this breakdown holds, we could see much further short-term selling. It would then get very interesting, because March monthly options expire next Friday.
The 5-day moving average of the equity-only put-call ratio ($CPCE) is at .71 right now, suggesting a bit of fear, but not enough to confidently mark a bottom. Today's CPCE reading will be interesting, along with early readings next week if the short-term selloff continues. A 5-day reading that moves above .80 is what I'll be looking for. That could come early next week, just before options expire.
Volatility could be extreme the next few days. I haven't had time yet to assess all of my signals, but I wanted to point out what I'm seeing right now - before the weekend hits. Perhaps a close today above 290 on the QQQ will help us avoid further selling. A close between 289-290 is a bit more skeptical, while a close beneath 289 suggests MUCH higher risk early next week.
Remember, for me, it's not about being right or wrong sometimes. It's more important that I manage my risk and risk is clearly much higher today. I'm personally guarding against further short-term selling. The stock market is not rational when the VIX reaches 30 or above and we're quickly getting there. The VIX literally just hit 28.97 20 minutes ago and has pulled back to 26.00. If the VIX moves up again in the final hour or two and ends at or near its high, it could signal further selling into the Monday morning open.
Again, I'm not trying to be a hero. I recognize the risks right now, so I'll watch for now and see what happens early next week. The perfect scenario would be a bigger drop into early next week to perhaps hit that 3775 area on the S&P 500 (which is what I had suggested back at MarketVision 2023 in early January), before an options-expiration-related rally mid-week.
Of course, this is all just speculation. I do want to point out that treasury yields are declining BIG TIME. The 10-year treasury yield ($TNX) is down 22 basis points to 3.71%, a huge move off of the recent high. If the TNX continues its descent, that would set up for a big rally into Q1 earnings season, especially in growth stocks.
That's it for now. But I will be continue my analysis throughout the weekend and provide that information to you over the weekend and/or in next week's DMRs. First things first. Where does the QQQ and VIX finish today? That'll be our first clue.
I'm glad to be back (even though it's not a pleasant market environment)!
Happy trading!
Tom