Hello, Power Profit Traders!
Here it goes again!
The market looks as though it’s ready to move to higher ground, and I’m seeing some indications of strength in charts, but we may not want to get excited just yet.
As I consider the bigger picture, I’ve got some doubts about the rally we’ve seen this week. Don’t get me wrong, we’ll take advantage of any solid trading opportunities in any market trend.
But, as I see this market make another attempt at a bullish run, it reminds me of a bad radio ad that has an annoying jingle, and for the rest of the day I can’t get the tune out of my head. It’s like a broken record playing.
Let’s take advantage of the current market trend, but we’ll want to keep in mind that the current bullish bounce along with fundamental considerations aren’t actually meshing.
There is plenty to cast doubt that the market has found its bottom and is ready to launch into the next bull run, but there are also great opportunities ready to be exploited.
As the market makes another attempt to rally, we can expect simmering volatility, but there will be exceptions, because Q3 earnings season is kicking off. This simply means the volatility fire will keep burning in many individual stocks – creating plenty of opportunities for us!
Short Sellers Panic
In August the market began another downturn and, in that environment, short sellers were working overtime. There is a point where short-sellers realize that opportunists are buying into the market, pushing prices upwards, and, therefore, the short sellers begin scrambling to exit their positions, creating additional buying pressure.
You may recognize this bullish trading activity as a “short squeeze.”
Essentially when a short squeeze is in play, it doesn’t always mean that market driving fundamentals are in place, but rather it’s an example of emotional, desperate trading.
We saw short sellers covering at the beginning of the recent rally from June to August, which offered an 18% market increase and gave us some great trading opportunities.
As a new rally now begins to form only time will tell how long it will last and how strong it will be, but let’s look at some evidence that may suggest it’s not the turning point for the market.
Market Volumes
As the SPY declined in the latter part of September, you’ll notice that the largest selling days averaged nearly 123 million in trading volume. By comparison, as the SPY started moving higher, the average buying trading volumes were 87 million – only 70 percent of the selling volumes.
This implies continued conviction in the bearish trend.
The CPI Plateau
It has been a widely held belief, known as “Fed Put,” that the Fed would step in to accommodate the markets by monetary policy. Those days came to a screeching halt as Fed Chairman, Powell, made it clear in his Jackson Hole speech that he was committed to reducing inflation to 2%, even if the cost was a recession.
(CPI: Plateau’s instead of downturn)
The graph above from BLS data suggests a flattening CPI, which tells us there’s a real struggle to rein in inflation, which in turn continues to put pressure on household spending.
The Suggestion of Insiders
There’s something else of note to consider when the market trend appears to be reversing – insider buying.
Just to give you a quick look at what the insiders are doing, consider the image below from the officers at Apple, Inc. (AAPL).
(Top two Insider Transactions for Apple, Inc.)
As I combed through the insider activity at Apple, Inc. this year, I found nothing but a whole lotta selling.
Insider trading can be informative. While there may be a variety of reasons insiders will sell shares, there is only one good reason they will buy.
Global Economic Growth
Finally, the projections for economic growth are anemic according to the graphic below.
(World output expected to slow into 2023)
The combined advanced economies are slowing this year, and the projections are for continued sluggishness into next year as well.
The list of reasons why the attempted market bounce may not lead into a full reversal and recovery of the stock market may be long, there are still opportunities that can be exploited in the market.
Earnings
Despite inflation plateauing, it’s still at extreme levels, which will always impact the bottom line for companies. A lot of the concerns companies are facing have not gone away – bloated inventories coupled with supply chain issues and more.
The outlook for growth seems worse than many think.
As I look at the earnings with a broader scope, the consensus estimate for ten of the 11 S&P 500 sectors is in decline and only four are expected to show growth, and the only sector seeing upward revisions is the Energy Sector.
So, essentially economic fundamentals are painting a picture of uncertainty as the market attempts its rally.
I mentioned earlier, however, that regardless of market trend or the good, the bad and the ugly economic news, I am still seeing opportunities.
This very week my Quantum Scripts software program has identified bullish trading potential on symbols like these:
Additionally, my software I call Brutus has already helped us find trades for Q3 earnings, such as US Bancorp (USB) in the illustration below.
(Brutus Identifies Earnings Opportunities)
Not only does the trading opportunity include double digit returns, but it’s associated with triple digit implied volatility projections.
Despite the gloomy economic outlook the world is facing, the door to earnings trading opportunities is just opening. There may be signs this market has not found its floor quite yet, but I expect to find more triple digit implied volatility surges as well as ROI projections in the coming days and weeks.
There is always plenty to talk about in my live sessions, so be sure to tune in with me Live Monday through Wednesday to find out what’s in store.
Talk soon,
Tom Gentile
America’s #1 Pattern Trader
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