Happy Friday, Evolvers!
As I warned about a few weeks ago, the ‘chopfest’ in the markets has continued…
The S&P 500 ETF Trust (NYSEARCA: SPY) has gone up and down over and over again, ending the week near where it started.
This trading environment is incredible for experienced short-term scalpers — a day trader’s paradise.
On the other hand, this sort of roller coaster volatility can be overwhelming to newbie traders.
If you’re in the former category, it’s time to press your edge. Look for perfect setups and be aggressive when you find them.
But if you’re in the latter category — which most of you probably are — it’s best to sit on the sidelines for now. Watch, study, and learn!
As the SPY struggles near a crucial level of resistance at $400-$405, the market is at an inflection point.
Personally, I’d rather wait for a clear break below $390, or a strong boost above $405, before trying to make an overall market bet.
But for now, it’s time for our Friday Q&A. Let’s answer your questions!
“I saw your recent tweet about the bottom not being in yet. Can you explain your thought process behind that?”
Don’t fight the fed as I emphatically stressed @timothysykes trading conference a few weeks ago… we are nowhere near the bottom of this market!
— Mark Croock (@thehonestcroock) November 17, 2022
Although no one knows where the market is heading, I’m basing my thesis on some basic historical indicators.
(I’ve said it before and I’ll say it again … you must know your history to be a competent trader!)
So, here’s the thing … bear markets almost always end with a duo of indicators:
- A massive flush to the downside in the overall markets
- A huge spike in the Volatility Index (VIX) to $45+
Out of all the bear markets in history, only one has ended without these events occurring (the bear market of 1982).
I think it would be foolish to ignore this historical precedent.
Could this bear market end without a VIX spike to $45+? Sure, anything can happen in the stock market.
But options trading is a game of odds. And based on the history, I think the odds that the market heads lower before bottoming are very high.
Aside from the technicals, the fundamentals of the economy look negative…
Even with the cooler CPI reading from last month, inflation remains out of control.
Additionally, mass corporate layoffs, earnings contractions, record-high credit card debt, and multi-year high mortgage rates lay headwinds on stocks moving forward.
All this to say … I do think the SPY will eventually breach through the October low of $348 to the downside.
I don’t know when, but I’ll be ready to load up on puts when I see those indicators bubbling up.
“What’s behind the market surge over the past month? Is it all about the lower inflation numbers, or am I missing something?”
Last month’s CPI reading gave bulls a “positive” catalyst to run with. That definitely gave the rally more juice.
That said, I think another factor has led to the near-term rise in stock prices — the easing of uncertainty.
The market hates uncertainty more than anything … more than war, scams, poor earnings, and record-high interest rates combined.
So while it’s true that there are currently a lot of negative indicators for markets, I think those negatives are acting as double-edged swords in this case.
Think about it…
The majority of 2022 was filled with trader anxiety around what might happen on a variety of issues.
How bad will inflation get? How far will the Fed go to fight it? And how badly will all of this affect individual companies?
While we don’t have all of the answers yet, some parts of these questions have now been answered.
It seems like inflation is at a near-term peak, the market has priced in an approximate Fed funds rate, and we have a much clearer picture of how corporate earnings are reacting to this challenging macro environment.
In other words, there are fewer unknowns today than there were in at the beginning of the year … and that’s something the market tends to react positively to.
Have a great weekend, Evolvers!
Study hard over the weekend so you’re ready for anything come Monday morning.
Next week could be a big one. Keep your eyes on the prize.