How To Predict The Next Rollover
Dear Trader,
Do you think interest rates are about to go back down? Or is the market just getting ahead of itself…
This Past week during our massive Night Trader Stream, somebody asked me “if the Fed raises interest rate faster than expected, is that going to crush the markets all together.”
Here was my response:
If the Fed isnt what Knocks the market on it’s a** something else will.
Sector Signals Showing Something Special
There is something special to note about one of last week’s signal summary. We are saw 143 bullish signals and every single hotspot we are seeing in the market has one thing in common. Everybody is running to them because they got smacked down over the last 5 months of trading. These are new additions to the discount bin.
The big one of the groups is of course the health care sector, a majority of these are going to be Bio-Tech companies. Bio-Tech is getting a HEAVY dose of earnings reports this past week resulting in some nice volatility to the upside. If youre feeling a bit cheeky, keep an eye on the chart for XBI it was up another 3% this morning!
There has been a problem that’s been the bane of my existence for the past 6 weeks in the market. I’m going to reduce it a bit but, we have not gotten a clear sign like this lately. The spread between the bullish and bearish signals has been much smaller, the market had been indecisive as to who will win the Bull vs. Bear Tug-O-War…
One thing has started to change this.
The market is kind of like a game Rock, Paper, Scissors and somewhere along the line the FOMO traders have started to break the rules and started to play the dynamite hand and blowing the market up.
Now that might work for a while… until it dosent and somebody calls shenanigans.
Now we can take advantage of the movement we are seeing in the short term but here is the real secret behind the sector signals. Take a look at the other side of the chart, over 25% of the bearish signals are coming from a single sector. ENERGY!
Now many of you are not going to be happy about what I’m about to say but, the energy sector is starting to look A LOT like it did in early June from a signal perspective. We were jumping around from 7 signals to 15 then back to 10. All of a sudden it skyrocketed to 30-40 signals and my Night Traders really racked up some gains in this sector when that happened.
Make sure you don’t miss out on the oncoming downturn of energy I have a special deal for you, call Gabe and you can get into my Night Trader for $999 a year! If that isnt good enough and you are still on the fence ask about a monthly deal I’m sure he can work something out for you. But I can only offer this until Friday at 5 PM any later and you may have already missed the boat on positioning your portfolio for energy’s next leg down. Give him a call ASAP (877) 212-9163
The big story as to why this happens falls on the demand. Garrett talked about it this week actually. Demand for gas is DOWN to the levels we saw during the pandemic. The easy answer is people are buying less gas because it costs more right now, but it’s not that simple. Just follow the signals and youll see this turn around hit hard in the coming weeks.
Sentiment Survey
We’ve been talking about this rally in all kinds of forms… FOMO is the word that keeps coming to my mind. We are really almost past that and marching right into Bizarro world territory…
I walked you through the “other” use of the equity put/call ratio a few weeks ago. Let’s look at that and a few of the other sentiment tools I watch to focus on “how long” this rally can last.
The Equity Put Call Ratio, in my opinion, is one of the best sentiment indicators you could ever lay your eyes on. It tells you where people are putting their money on the table on a day by day basis using a ratio of calls and puts traded on the Chicago Board Options Exchange. Now that chart will make you go crazy so, I make it a bit simpler for you by putting it in a spreadsheet to simplify it to look like the chat shown above.
Now, this chart shows you everything that has happened in the last year I do this so we can see what we have already gone through because it allows us to properly assess where we are going.
Stick with me here this may be the most important thing you read today. When the EQPCR is above one it means that there are more puts being traded at the CBOE on the equity side. Historically readings above one are almost unambiguously bullish for the market. That’s right BULLISH. When you take a look at my sentiment cycle chart we have discussed recently, this is a sign that we have officially hit the despair phase.
In this phase people start to lose faith in the market, prices are at their bottom, and as 8-ball would say ‘it’s time to buy the blood.’
Looking back the ratio that the market likes to sit at is somewhere between .3 and .4 that’s where the market finds it equilibrium. Now for this chart I don’t show you the single day movement, we are looking for the trend and if you notice, back in May the 10-day moving average (orange line) spiked up to .75 and dipped back down. The 20-day of course followed the course it just dosent move as fast.
That pull back in the EQPCR trend shows a short term change in sentiment that lines up with my sentiment cycle chart perfectly, that’s when we entered the disbelief stage. Now as soon as we start to see these two trend lines start to move higher, that is when you will find the market rolling back over and moving into the next phase, acceptance.
Watch this chart with me over the next few days is we break past that .68 level and you start to see that 20-day line start to move higher we are going to be getting out of our long positions and start adding more put exposure because the market will be telling me to do just that.
Enjoy your weekend, take notes on this, and let it be your guide to the market. I will be here every step of the way.
Remember: The market can stay irrational longer than you can stay solvent.
Talk soon,
Chris Johnson
Quantitative Specialist, Penny Hawk
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August 08 2022
