If You're a Trader, You're Going to Love the Next Three Months
People have been asking whether the market is topping. That's hard to say, but it's almost guaranteed that traders will have plenty of opportunity while the market makes up its mind.
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The Market
I have been asked by several people if I think we are building a giant top. The answer is I don’t know. What I think we are going to get in the next several months is a market that is a trading market.
Trading markets can lead to tops, and trading markets can lead to basing. One thing I do not think is that we will still be in this range we’ve been in for the last three months on the S&P between 5800 and 6100 (ish) for another three months.
Either the bonds are going to rally and, therefore stocks should rally more, too or the bonds are going to head back down (and I will be wrong), and stocks are going to hate it.
Right now, the intermediate-term indicators are still not overbought. For example, as I noted yesterday I expect the Volume Indicator will get overbought sometime in early February. To get overbought, it needs to get to the mid-50s. It is currently at 52%.
The McClellan Summation Index is still rising. It needs a net differential of -2200 advancers minus decliners on the NYSE to halt its rise. That will take some days of weak breadth to turn it. So that is not negative yet.
We came into this week with the market short-term overbought, and I expected some volatility (due to the low put/call ratio on the VIX) and some chop. That’s pretty much what we’ve gotten with the S&P down/up/down/up. Perhaps tomorrow will break the pattern, but as the days go on, the short-term overbought reading gets used up.
On the sentiment front we have a bit of positive news this week. And a bit of negative news. The positive is that the NAAIM Exposure sunk to 68, the lowest since mid January. I have said before I think these folks are very tied to the index movers so my guess is Monday shook them out. But let’s not rationalize the why, let’s just know they have reduced their exposure.
The bad news is that the put/call ratio was .70 today. That means the ten-day moving average of the put/call ratio is now at .76, closing in fast on that low from November 2021 when it was .74.
There are two prior low readings from 2021 on the chart so I took a look at what happened to the equal weight S&P at those two instances. They were a month apart (unusual) and each time the reaction was not immediate but as you can see we did get a short-term tumble of about 3-4%.
Then there is the fact that once again Wednesday (same day as last week) saw the put/call ratio for the VIX back at .19. Can we get a repeat of this week? Probably not because folks are already alert to that sort of move but I would expect another bout of volatility to come our way in early February.
New Ideas
I was asked about Micron MU in mid December when it first gapped down and I was non-plussed by the action. I am still non-plussed because the stock has been in wide trading range for six months now.
I would however note that it filled that early January gap on this trip down so as long as it doesn’t break 85 we would consider it back to the bottom of the range.
Today’s Indicator
The put/call ratio is discussed in full above along with the chart.
Q&A/Reader’s Feedback
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I expect Intercontinental Exchange ICE will fill that gap overhead but know that earnings are due out next week and earnings can be a gamble with big gaps, up and down so you should prefer it does so before earnings.
The best news I can offer for Super Micro Computer SMCI is that the big top it broke down from measured to 20 and when it got under it it left an island reversal down there. Does it bounce from here? Hard to say. It’s probably short term oversold from that move down but there is a lot of resistance all the way up. And earnings are out any day so it’s a gamble here. I would prefer to see more of a pattern set up. Like at least a higher low or higher high, something it hasn’t done in quite some time.
Vera Bradley VRA has no base to speak of but that small one over the last six weeks is intriguing for a trade to around 4.50. Just a trade.
RH RH hasn’t done anything wrong after that big gap up on earnings in December. Oh sure, it failed to make a higher high but it has made higher lows. Under 400 would be bothersome to me. If it gets up to 460 again and can’t get over I’d worry.
Phototronics PLAB is oversold but that’s the best I can say about it. It would have to gap up over 26 for me to think there is a reason to like the stock. But then I might have said that in December and it did just that and gave it up and more in a heartbeat.
I believe I looked at Palantir PLTR a few weeks ago and did not like it and thought it would fail on a rally to the upper 70s so I’m already wrong on this fan favorite. Earnings are out next week and I shy away from playing earnings so I’ll just say if it gets over the prior highs at 85 it would be a breakout.
