Think of something that you enjoy, like really enjoy.
I don't care what it is. Maybe you like to drive, ride a bike, sail a boat, play golf, or anything.
Now, think about the "sweet spot" of that thing you like to do. When it's on, it's on. Nothing can go wrong, and you feel almost invincible.
For me, it's feeling the sweet spot just after striking a golf ball just right. You can feel it in your swing and the club. You can hear it as the club strikes the ball perfectly and whistles through the air. And you can see it and see it in the flight of the ball as it lands exactly where you were aiming.
The market just got done with its own version of the "sweet spot", which means it's time for a reset.
Just a little more than a month ago Investors were preparing for earnings season. The appetite for risk was insatiable. Investors were buying shares of everything and anything.
Carvana (CVNA), through the roof.
Weight Watchers (WW), the same.
Anything Artificial Intelligence (MSFT, PLTR, GOOGL), to the moon!
Just like anything, too much of a good thing can be bad, and that's the situation that the market finds itself in today.
Let's look at the market from my Expectational Analysis approach to give you bearings on where things are heading over the next few weeks.
If you're unaware, my approach is based on combining three forms of analysis to provide a unique perspective that gives traders and investors an edge.
Fundamental, technical, and sentiment analysis are the three pillars on which market rallies and sell-offs are built. On their own, each form of analysis can provide some insight, but when combined the insight turns to a true performance edge over the rest of the market.
Fundamentals: Bullish
We're 85% of the way through the earnings season and things have gone better than expected. If there were a grade card for the season it would boast a solid "B".
Heading into the season we were expecting to see year-over-year earnings decline by -7.2%. So far, S&P 500 companies have posted a 5.2% decline, better than expected.
So far, 74% of the S&P 500 companies have beaten their earnings per share targets and about 65% have bested revenue expectations. The trends are averaging better than last quarter's results.
Outlooks are still tepid as 40 companies gave negative guidance and only 30 positive.
We'll get a look at the most recent Consumer and Producer Price Indices (CPI & PPI) over the next few days which will set the backdrop for a look at the broad economy. I'm expecting results that may be a little more inflationary than the last few data points. But so is the market.
Current Technical Analysis: Neutral
The market's technicals were stretched as we headed into the seasonally weak period that extends from August to September.
Two charts tell the tale of the technicals.
First, the percentage of S&P 500 companies above their 50-day moving averages (MA50).
I'm not beating a dead horse here, this chart is one of the most important technical reads on the market right now.
This momentum/breadth indicator peaked in the closing days of July, indicating that we were likely to see some changes in the market's momentum higher.
So far, this indicator remains "healthy" as the selling has been slow and contained. It is natural for the "froth" to clear from the market in this manner, but it's critical that we don't see a spiraling of this indicator.
Maintaining a level of 50% or higher over the next two weeks will be critical to avoid a washout selling situation.
Also critical is the actual 50-day moving average of the S&P 500 and Nasdaq 100 (QQQ).
The market is enjoying a bullish backdrop as both of these trendlines are moving higher. That said, we're heading for a likely test of both of these trendlines.
The Nasdaq 100 (QQQ) is within one percent of its current 50-day. This is the closest we've been to this critical support level since March when the QQQ traded below its 50-day. A similar situation is in place with the S&P 500 (SPY).
This week's reaction to the CPI and PPI numbers may force a test of the "trend", revealing an opportunity to "buy the dip" or to add puts to a portfolio to brace for another few weeks of increased selling pressure.
Longer-term, the technicals remain long-term bullish.
Current Sentiment Analysis: Bearish
Investor sentiment reached a peak just weeks ago as earnings season kicked off.
Everything from low readings on the CBOE Volatility Index ($VIX) to extremely bullish readings of the Investor's Intelligence and AAII sentiment survey polls indicated that investors may have become too bullish for their own good.
One month ago, the CNN Fear & Greed Index was registering some of its highest readings of the year. This was a timely warning that the earnings season and August seasonality could easily trip up the market and cause a "healthy correction" of 5-10%.
One of the components of that index, the VIX, was reflecting extreme optimism or greed as readings fell to their lowest in more than two years. The VIX is now trending higher and approaching a test of the 18 level.
Summary:
The word "test" is the word that comes to my head as a summary of the current Expectational view of the market.
The SPY and QQQ will likely face a test of their respective 50-day trend lines possibly as early as Thursday or Friday of this week. This is where we need to see the market react with immediate and determined buying. A lack of buying volume on this critical test will signal that it is time to position for a deeper correction.
In addition, all eyes should remain on the Russell 2000 Index. The IWM is preparing to test two critical levels that we will break down in detail tomorrow along with a way to position your portfolio for either the bullish or bearish scenarios to play out.
The post The Market is Going Risk off... appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.