Happy Friday, Evolvers!

It’s difficult to overstate how historic yesterday’s head-spinning market reversal was…

After opening at $349, the S&P 500 ETF Trust (NYSEARCA: SPY) immediately started surging, reaching a high of $368.50.

To put things in perspective, that’s the third-largest intraday SPY reversal in the history of the stock market.

And while this was a remarkable move — one certainly worth noting — it doesn’t change much in the big picture. 

Yesterday, I mentioned that I thought the reversal would lead to further upside but that I didn’t think it would form into a full-blown bear market rally. 

Let’s say I was half right. There’s been no follow-through as the SPY has done nothing but tank since opening today, down 1.8% at the time of writing. 

Fun fact: Looking at previous bear markets, the single-largest reversal day has never before marked the bottom. The indexes have always traded lower following the huge reversal day. Keep this in mind when assessing whether you think the market’s headed lower.

If you’re confused about yesterday’s price action … join the club. Yesterday’s financial news programming was filled with ‘experts’ trying to make sense of the move. You’re not alone.

But it’s Friday, so it’s time for our Q&A. Maybe together, we can make sense of what’s going on in the markets.

“In your opinion, what was the main reason for yesterday’s historic market reversal?”

You and every other market participant are asking this question right now, so let’s try to answer it the best we can…

First, I’ll say that yesterday’s price action was undoubtedly affected by a variety of factors. It’s never one single event that causes such a rare move.

That said, I think the most likely cause for the upside move was a textbook short squeeze.

Let me explain…

Over the past several weeks, traders have been rapidly buying downside insurance on their equity portfolios.

As I’ve mentioned in a few recent letters, more put options have been sold in the past month than during any other period in the past 15 years. 

This puts pressure on market makers (MMs) — the individuals who sell us options — to make sure the market doesn’t drop below a specific price. If it does, they get smoked.

On the other hand, the MMs can guarantee they pocket their premium by squeezing the indexes higher.

By buying the SPY hand-over-fist immediately after the open on Thursday, MMs forced bears to start covering their shorts, saving themselves huge losses (and potentially earning enormous gains) in the process.

Bottom line: Retail traders and hedge funds got caught with their hands in the cookie jar. Too many puts were sold, creating a mechanic within which MMs were motivated to violently boost the indexes.

“Does yesterday’s crazy move change your overall view of where the market is headed?”

Not really, but we shouldn’t ignore how unique it was.

When single-day market moves break decades-long records, traders should be paying attention.

That said, consider the big picture…

We’ve seen plenty of euphoric green days amid this brutal bear market … and every single one has eventually had its gains erased to make new lows. 

So why should we think yesterday is any different?

As I said earlier, I think yesterday was more about short squeeze mechanics than a positive reaction to the CPI report.

Additionally, there are several market events on the horizon that could pose major headwinds for stocks (depending on their outcomes).

Here are a few of the upcoming catalysts for the overall markets:

• November 2 — Federal Reserve interest rate decision
• November 4 — October jobs report
• November 8 — Midterm elections
• November 10 — October CPI report
• December 2 — November jobs report
• December 13 — November CPI report
• December 14 — Federal Reserve interest rate decision

I can’t imagine any of these impending reports or Fed decisions bringing positive news for stocks, which is why my game plan remains the same for now. 

But my strategy is dynamic and fluid. I roll with the punches and try not to predict things too far in the future. 

If you wanna learn everything there is to know about my trading strategy, read my brand-new ebook for free right here. 

Final Thoughts

Think about this…

If you traded yesterday’s wild upside reversal, you were a major part of stock market history. 

Pretty cool, right?

Have a great weekend, Evolvers!