EB Daily Market Report - Monday, July 24, 2023

Just a few quick takeaways from today as I'm preparing for today's Q2 Earnings event, scheduled to begin at 4:30pm ET. Room instructions will be sent out in a separate email.

Market Update

I received a very interesting question from a member and feel it serves as a solid foundation for today's update. The question, paraphrased, was what do I think about the recent poor performance in my favorite sustainability ratios and do I view that as a major warning sign?

First, the really quick answer: No, the recent poor performance does not change a thing about the Big Picture.

Now, the longer answer, though not too long. Everyone needs to keep in mind that there are LOTS of signals, not just my sustainability ratios. Also, we need to keep historical trends in mind. We're in a historically-bearish period right now. Options expiration creates mirages, in my opinion. Many of the strong stocks that support those sustainability ratios faced a very difficult short-term environment, because many of these "aggressive" stocks had TONS of net in-the-money call premium. This is one example of short-term inefficiencies in the market related to our market maker system. It's manipulation and I try to avoid conclusions based on this manipulated period.

I don't trust today's S&P 500 rally, primarily because the Monday after options expiration (and even the next few days) can be brutal and we still have another hour to go in today's trading. Also, as the S&P 500 tries to move higher, you can see that Wall Street is not exactly piling back into aggressive stocks just yet:

While the S&P 500 is trying to turn back up, it's only likely to go so far without the support of growth over value. Therefore, I still believe the ODDS are greater (no guarantee) that we move down further before this period of selling/consolidation is over.

Don't lose sight of the negative divergence on the daily chart. The negative divergence on the hourly chart has played out, but not the negative divergence on the daily chart. POTENTIALLY, we could see a 50-day SMA test. I'm not saying it's going to happen. I would simply remain cautious, meaning that I would continue to avoid leveraged ETFs on the long side. Also, the further we drop near-term, the less advantageous it will be to short stocks, if that's what you're currently doing. Consider taking profits off the table on any short positions that you might have, if the market does in fact weaken.

Happy trading!

Tom