I have a saying “Nothing motivates sellers like lower prices.” Today it’s very clear sellers are in control. As we discussed on the recent short interest webinar, short interest is down and not a factor for a squeeze. Geoff Garbacz and I looked at a lot of stocks and sectors that showed sellers in control. It was clear. What is happening today is a deep move sparked by rates moving higher combined with the big banks getting whacked due to higher wage expense and softer than hoped earnings. Tech doesn’t like higher rates and alarm bells are going off with the 10 year nearing 2%. It’s also the rate of change with rates and several of the spreads exhibiting what happens with a slowing economy.
One other saying I mention every so often is “markets crash only when oversold.” Many of the usual indicators to measure oversold conditions are moving in that direction yet nothing is desperately overdone. Indexes are starting to break support levels with air pocket potential below. I bought some trading longs on Friday thinking the two weeks down could see a relief bounce today. I exited those on another note earlier. When I see breadth as negative as today, I’m not going to debate holding weak conviction longs.
If the mood in the market is to sell stocks that miss or have soft guidance or some other concern, this market is now in a higher risk moment. Could you imagine if one of the big mega-cap stocks gets whacked? In Q4 2000 after some turmoil in the Spring and Summer earnings warnings in the leading tech stocks started to hit the tape daily. Investors sold and asked questions later. The Nasdaq was down 30% which also had an election dispute which poured fuel on the fire. Do you think the market could handle Russia and Ukraine going at it with CNN’s Wolf Blitzer live in Kiev?
On the other hand, inflation is raging with likely another hot CPI on deck in February with higher crude prices leading to the increase. Biden’s SPR release didn’t quite help just as nobody knew it would do much for more than a week. Then there’s the Fed with members signaling four rate hikes possibly starting in March. Bill Ackman tweeted out his thought that the Fed should shock and awe with a 50bps move to restore credibility. Someone said on Twitter that would be “apocalyptic”. Keep in mind the Fed Funds rate is at 0. Powell’s 50bps is the new Volker 1000bps rise. It’s becoming more clear the Fed is way behind the curve and will be hiking into higher inflation with earnings and margin growth slowing.
Finally, there is a huge amount of investors who I have called “future sellers” that poured their money into the markets in 2021 the largest amount ever in a year. I don’t believe they are motivated at this point but more downside will motivate them to call time on their stock market experience.
I expect bounces of the face ripper variety which is typical of markets that stair-step lower. Stay nimble and patient. I expect to get squeezed out of shorts and long ideas with increased volatility and tomorrow could see a continuation or a face ripper. I don’t know. My work suggests there is more risk lower. With that in mind, I suggest lowering exposure and sizing.
TRADE IDEAS
I am selling between now and the bell VZ with a 2.1% gain and a couple of quarters of dividends and I am selling PYPL with a loss of 7.7%. Both were small 2% weighted longs. All of my recent long ideas have been only 2% sized by design with the current volatility in the markets. I am adding SMALL SIZED February 18th expiration put spreads with SPY and QQQ. My size is going to be small as vol is higher and the prices have already seen deep moves. Think of these as small hedges that might not work. SPY Feb 450-425 put spread for $4.7, REF: $458 QQQ Feb 365-350 put spread for$3.95, REF: $372.75.
US MARKET SENTIMENT
Here is a primer on how we use Daily Sentiment Index charts. S&P bullish sentiment and Nasdaq bullish sentiment was mixed. Nothing matters under 50% breaks and the Nasdaq will likely break 50% later today with the S&P getting closer.

Bond bullish sentiment is under 50% and going lower

US MARKETS
Here is a primer on the basics of the DeMark Setup and Sequential indicators.
S&P 500 Index with little support here.

S&P 500 percentage of stocks above the 10, 50, and 200 day moving averages do not have these down enough to call a bottom.

The Nasdaq 100 with some lower highs and lower lows.

Nasdaq Composite Index (the big index) percentage of stocks above the 10, 50, and 200-day moving averages are down at ~30% and considering the index just broke the 200 day it’s quite divergent and if the mega-cap which has held up this index and the NDX give way a solid bottom could develop. I heard today from Sentimentrader write over 39% of this index is down more than 50% off the highs.

Russell 2000 IWM daily has the Sequential buy Countdown 13 and needs a little lower level to qualify the Combo 13

The Russell 2000 percentage of stocks above the 10, 50, and 200 day moving averages are under 50% but not yet fully oversold. This too is looking over the cliff right now.

Dow Jones broke 50 day like a hot knife through butter and is targeting the 200 day and perhaps the late November low at 34,000. Below that and it’s also a cliff with a long way lower to support

Tech and energy sectors percentage of stocks above the 10, 50, and 200 day moving averages.
Tech is starting to move lower and has lost the relative strength market leadership.

Energy percentage of stocks above the 10, 50, and 200 day are pegged at the highs again.

Update on a few tech names
ATVI was a nice trade +32%. If asked if I would rather be lucky or smart, lucky 100%.

AAPL does have a pending upside DeMark Sequential yet it’s testing some support. No alarms are going off…yet.

AMZN has been breaking some support level I’ve shown recently and it now has a downside Sequential in play. This could go under 3000 perhaps to the downside wave 3 price objective. Recall they reported a terrible last quarter. Not sure this one was much better.

GOOGL also is at support with a lot of air below.

MSFT is starting to break. Law of big round numbers support at 300

NVDA has been steady on the downside too.

Some erlanger short interest charts of companies reporting this week
The Erlanger charts below highlight the Short Ratio and the Options Rank on the bottom. With the Option Rank, we are looking for extremes in call buying (red dots) and extremes in put buying (green dots). When you see red or green, it often pays to take the other side as those extremes can work similarly to low short interest and high short interest.
AAL has some shorts involved with a short ratio at 2.27 days to cover. One of the highest levels in 2 years. There has been a lot of put buying with the green dots and that has moderated. I’d call this slightly bullish headed into earnings.

UAL has fewer shorts involved with a short ratio of only at 1.26 days to cover. There has been a lot of put buying with the green dots and that has moderated. I’d call this slightly bullish headed into earnings.

CSX has seen short interest moderate in the last quarterwith a short ratio at 2.06 days to cover. There has been a lot of call buying with the red dots and that has moderated. I’d call this bearish headed into earnings.

JBHT has more shorts involved with a short ratio at 2.76 days to cover. One of the highest levels in 2 years. There has been a lot of put buying with the green dots. I’d call this slightly bullish/neutral headed into earnings with potential for a squeeze higher.

UNP has more shorts involved with a short ratio at 3.05 days to cover. One of the highest levels in 2 years. There has been some of put buying with the green dots and that has moderated. I’d call this slightly bullish headed into earnings.

PG has fewer shorts involved vs last quarter with a short ratio at 2.04 days to cover. There has been a lot of call buying with the red dots and that has slightly moderated. I’d call this bearish/neutral headed into earnings.

NFLX has fewer shorts involved with a short ratio at 2.16 days to cover which is steady. There has been some put buying with the green dots but maybe just a few in the short term. Other times we’ve seen significant put buying the stock rallied. I’d call this neutral based on the tech rank at 10% heading into earnings. Under 500 and this could get ugly.

SLB has fewer shorts involved with a short ratio at 1.80 days to cover. There has been a lot of put buying BEFORE the recent rip higher illustrating why we fade the green dots and now there is HEAVY call buying. I’d call this bearish headed into earnings.

BOND UPDATE – higher rates everywhere
The US 2 year, 5 year, 10 year, and 30 year yields overlaid. White is the 2 year, yellow is 5 year, green is 10 year and pink is 30 year. 2 year went from 0.18 to 1.04%. Yowza

Here’s the weekly that is a little easier to see the moves and how much more the 30 year needs to go to surpass last February’s high

2 year

5 year

10 year

30 year

FACTORS, GOLDMAN SACHS SHORT BASKETS AND PPO MONITOR UPDAte
Factor monitor now has a reset YTD performance column. Factor monitor now has a reset YTD performance column. Nearly everything is down YTD. Ugly action today and YTD. Motivating sellers.

This is similar to the above monitor with various ETFs other indexes as I wanted to show the same 5 day, 1 month rolling as well the YTD and 1 year. Commodities are leading today as they have been the strongest of the last 5 days and month.

This is the monitor that has the S&P indexes and the Goldman Sachs most shorted baskets. Today the shorts are down more than the S&P Indexes. A very heavy day and last 5 days and last 3 months.

The PPO monitor (percentage price oscillator) force ranks ETF’s by percentage above/below the 50 day moving average. For information on this monitor please refer to this primer. This monitor is offered to Hedge Fund Telemetry subscribers who are on Bloomberg. A heavy down day that in the early stages started to see some ETFs lift over today’s VWAP levels but that didn’t last.

DEMARK OBSERVATIONS
Within the S&P the DeMark Sequential and Combo Countdown 13’s and 12/13’s on daily and weekly time periods. For information on how to use the DeMark Observations please refer to this primer. Worth noting: Starting to see more Buy Countdown 13’s are starting to appear. We need to see a lot more to signal a decent bottom.

ETFs among a 160+ ETF universe.
