EB Daily Market Report - Special Report - Tuesday, October 3, 2023

This will be a relatively quick update to point out one very important development in the stock market today. We first saw the S&P 500 lose what I felt was very important price support at 4305. Many of my intermarket ratios continue to suggest that this current bout of selling will not evolve into long-term selling. I'm not expecting a retest of the October 2022 low.

However, we've got more serious problems developing near-term and we should respect that until the market tells us otherwise.

Sentiment has moved into extremely dangerous territory. Yes, the equity only put call ratio ($CPCE) remains elevated and both the 5-day and 10-day SMAs are high enough to mark a major market bottom. But today, we're seeing two key breakouts in Volatility. Here are quick charts to illustrate:

Volatility Index ($VIX) - tracks S&P 500

Volatility Index ($VXN) - tracks NASDAQ

This is what I consider to be the beginning of what could be a capitulatory phase to mark a major bottom. The problem is when the VIX and VXN break out to new highs, it tells us that market makers are pricing options much higher, expecting more volatility ahead. If we confirm breakouts today on both the VIX and VXN, selling could accelerate rapidly. Personally, I don't take any chances when this occurs. Right now I'm in the primary ETFs - SPY, QQQ, and IWM, with no leverage. If we have a weak finish, I'll be 100% cash.

My strategy would then be to get aggressive on the long side at some point if I see capitulation. It could be in an hour, tomorrow, or next week. I don't know. But the next 75 minutes will be important. A massive rally could mark a MAJOR bottom. But further selling into today's close sets up further selling ahead, in my opinion. This comes as we'll get the latest ADP employment report tomorrow morning and just three days before Friday's jobs report.

I've said for the last 2-3 months that I felt the worst-case scenario was a drop on the S&P 500 to test 4305 price support. Well, that's been violated and now we're seeing both the VIX and VXN potentially breaking out. As I said, today's close will be important. The part that worries me short-term is that when the VIX breaks out, many times market makers go "on vacation" and normal liquidity is not provided. As a result, the market can drop very rapidly in a very short time frame.

I believe the final hour today is very important, as far as what to expect through the balance of this week. VIX 20.00 and VXN 23.75. Watch those two key resistance levels. Nothing provides us guarantees, it's always about evaluating risk. But risk increases significantly if these two sentiment indicators break out on the close.

Happy trading!

Tom