I know everyone’s focused on earnings right now, but I’m going in my own direction here. I’m looking at the overall market trend because that’s where the biggest profits are.
So, in the pursuit of big money, it’s the trend we’ll look at today. It’s becoming clear, and not just for a single sector, either.
See, for the past several months my sector heat map has been all over the place, with the sectors all moving erratically. For a moment we could literally watch the money in the market move from sector to the sector right alongside the headlines.
But now we are seeing a more uniform shift in the market. Stocks are “reorganizing.”
The reorganization started after the “shockwaves” we got this week – the FOMC minutes and consumer price index (CPI) data came in.
If you have been with me for more than 10 minutes you know exactly what direction the market is going and there is one thing you should be watching right now that will determine when the market will have its day of reckoning.
That reckoning looks increasingly like it’s going to come as a 15% plunge in the biggest, most important index there is.
My heat map says it all – let’s take a look.
Do you notice anything different about this heat map from earlier this week?
There is uniformity in this chart. This is something we have not seen in quite some time.
It is telling me that the market is no longer confused, and all of the sectors are moving in unison.
When the market moves in harmony like this, it either means something really good – like we are finally at the bottom – or something very, very bad, and the floodgates are about to be opened, in which case we are in store for a bumpy ride.
Everybody knows which direction they want to go, and unfortunately, everything is going down.
This is rock-solid proof that we are in the acceptance phase of the sentiment cycle, where people are truly starting to realize we are in a bear market and there is no pulling up from this. It’s really a shame that it took the CPI data coming in hot again for the market to tip over the edge.
Let’s zoom out a bit and take a look at the S&P 500 to see how the synchronicity of the sectors helped to form the trend that will continue our “acceptance-phase descent,” even as we head into earnings.
I explained Thursday morning that you should be watching SPDR S&P 500 ETF Trust (SPY), [KO1] as it has a mixed bag of sectors – all of which are dropping.
SPY was teetering on its bottom Bollinger Band, and the market was setting up for a bit of a bounce as it approached that level faster than normal, causing it to become oversold and find a point of support.[KO2]
Boy was that on the nose. I told you that SPY was sitting right below $350, and by the next morning, the dead cats came out to play and we jumped up to almost $370.
Don’t be fooled.
This is just a bounce, and the reversal is already underway as it is currently below $360 at the time of writing this and well on its way back down to the $350 to retest the bottom Bollinger Band.
I don’t see us getting another bounce off that bottom Bollinger Band. As a matter of fact, I said during our Live Trading Alliance Roundtable on Thursday that I am looking for a target of $300 on SPY, and I stand by that.
One difference I expect to see on the next big drop is how long we stay there. This time is not just going to be a sharp V-bottom. It is going to take some time and pressure for this market to lift itself back up.
In situations like this where we have a trend that is accelerating to the downside after a bounce in the market – and this goes double as we head into earnings – I start to look at the back month.
I won’t be looking to buy any October options. There isn’t enough time for these trends to play out.
I’m looking at the November, and even the December, options on the companies that are about to report earnings.
Just think about it for a second… Let’s say XYZ company comes out and drops a good earnings report. How long will that be good for any upside activity in a market where people are looking to sell into the strength and take whatever profits they can from these all-too-frequent bounces?
Yeah, not very long…
That is why IF I am going to trade earnings, I’m happy to play cleanup crew. We buy time in the market so we can avoid turbulence and allow for the established trend to follow through and come to us.
Be my guest, trade through earnings – Kenny is your guy for this, without a doubt.
As for me and you, we are going to be letting this market work for us, and not the other way around.
I’d rather be able to sleep at night knowing the noise from earnings season is just a speed bump for our trades – not the edge of a cliff.
October 15 2022