Transcript:
Tom Vaughan:
So I’d like to start off the show with kind of a summary of what I saw happening in the market for the week. And of course, this is another interesting week, as usual, we are actually down for the week right now we’ve had four up weeks in a row. And I have been talking about all week, the fact that we probably pull back. And the main reason is because we’ve just had so much Run in such a short period of time. And there’s several different indicators that I look at for that. One is called the relative strength index, and I use the Wilder’s version on a 14 day basis. And that’s up above 70. It’s at 75. Earlier this week, usually, that means things are stretched out, I’m going to pull back, I always use the rubber band analogy where you know, things get too high, and they come back. And so that’s definitely what’s happening this week, markets down today. But today is a really unique day, this is the end of the options expiration day for August $2 trillion worth of options are expiring today. Obviously, you get a lot of volatility. On a day like today, I’d be careful to assign any real data to what’s happening here to see what happens. Maybe next week, although next week is going to be interesting to just because you have very light volume right now, probably light volume next week because of vacations and you know, I’m going to be gone. There’s a lot of people that are out there. And so maybe we’ll see some better information coming, you know, in September. And that’s a normal cycle that we kind of see all the time.
There are some interesting things that happened to the market this week. And I think this week, as well as last week has been really about kind of the technical side, looking at the chart and what’s happening with the chart. Because it seems like there are some very important things happening number one, this a little hard to see here. But that blue line that you see coming across there is the 200 day moving average, the red line connects the high points that have happened for this downward trend. And so the price actually got within one point of that blue line, the 200 day moving average on Tuesday. And it turned down really immediately, if you look at the minute by minute chart like I do during the day, it just hit near there and came down. And so what happens is that there is an awful lot of basically short interest that tends to gather around a big number like the 200 day moving average. And so when it gets there, a lot of people are, you know, shorting the stock. And when you short a stock, you borrow it from a brokerage firm, you sell it, and you hope that you’re going to get it be able to buy it back at a lower price, and give it back to the firm. And they you get to keep the disc difference. And so there’s a lot of selling that comes on. Now the one thing that’s very interesting here is the exact opposite will happen. When we break through that 200 day moving average, a lot of those shorts will have to start to cover. And when you cover, you’re actually buying the stock back. And so you can give it back to the brokerage firms and all that buying obviously causes even more run up.
Right now, we still have a lot of short interest in the market, a lot of it has been covered in this run up. And it’s probably the main reason we’ve had this run up, hedge funds still have a very low amount of, you know, exposure to the stock market. And they’ve been shorting the market very heavily. So if the market breaks through that 200 day moving average, and if it breaks through that red line, you know that trendline I think you’re gonna see a pretty big jump and some real power coming through that as far as that goes. But we couldn’t do it this week. And I didn’t think we would. And I mentioned that even in my daily videos at the beginning of this week. Because we don’t have enough power, we use that power up over the last four weeks, we broke through a very important barrier. I’ll put that up there right now actually where this yellow line is. And you can see going back to the middle of June, we actually hit that line 16 times right, right in that zone. And it finally got through. And then we had that nice little run up to the 200 day moving average. But we used up a lot of the energy in the stretch that I’m talking about is really what happened, we kind of hit that and now we’re coming back. That’s very normal. We, in my opinion, we should be going sideways, down, maybe even come all the way back down to that yellow line, and that kind of thing. And that’s a healthier market, in my opinion than just breaking through. Because you kind of stretch and stretch and stretch. And eventually, it’s like a rubber band. The more you stretch, the more resistance you have, the more it’s going to snap back. So I’d rather see a period of time where the market just kind of goes sideways. And essentially some of that stretch comes out of the market. And then we maybe blow up to the upside, hopefully, but this is the key right now is just watching what’s going on.
So the 200 day moving average, and that red trendline are at about 4350 on the S&P 500. That yellow line, which is now support is at about 4170. So between those two numbers, the market can move up and down. And honestly, it won’t mean much, there’s just not a lot of information that comes out of that movement. Breaking up above, that means something that’s a very big signal actually, for this downturn could signal the end of this downturn. If it breaks below, that could be signaling that we’re going back to a new low. So very important information at the top and the bottom. But in between, not as much information, to be honest, you know, there’s be all kinds of news attached to why things went up or down or whatever. But really, right now, we’re just kind of bouncing around between these two, I’d be a little bit surprised that there’s going to be enough power a next week to break through either one of these, because we don’t have huge volume in the last week of August.
We also have a scenario where the Federal Reserve actually has their big Jackson Hole meeting. And the Federal Reserve has been very much so in their latest interviews, trying to talk the market down, this run up that has happened for the market does not help the Federal Reserve trying to control inflation, the more the market goes up, the more people feel like they can spend. And of course, that’s part of the problem they’re trying to bring demand down to kind of meet this lower supply that we have is we kind of come out of this pandemic on the supply side. And so I wouldn’t be surprised to see a fairly anemic market next week, just because the Feds going to be out there as far as that goes. But the tuner day moving average is moving down closer and closer to the market that trendline is moving down, they’re actually probably going to converge together at some point in time. And so there will be some point in time where it has a chance to break through the upper the down. So I think this is going to be a really interesting timeframe. It’s really important right now to be kind of watching what’s happening. If it breaks above and breaks out, you can maybe be very, you know, fairly confident that maybe if you want to get a little bit more aggressive, or whatever it might be, it’s not a terrible time to do it, it’s a good time to maybe invest some cash or some bonds that you might have that you want to put in the market. If it breaks below that yellow line below that 4170 Then probably want to do just the opposite, get more conservative, maybe even have some of your stock market exposure reduced, use some Treasury ETFs, those types of things. Because, you know, the downside could be tremendous here, too.
So the big battle right now is the same battle we’ve had all along, it’s just one group looking at this and saying the market is going to go up. Because the Fed is already raised rates enough, we’re seeing commodity prices come down inflation is going to come down a lot faster than people expect. And the Feds eventually going to be actually stopping raising rates or even lowering rates. And and because inflation is going to be under control more than faster than people think the other group thinks just the opposite. The Federal Reserve is going to aggressively go after, you know the interest rate increases no matter what it means to the economy. And then of course, that would create earnings degradation and big recessions and those types of things. And so there are more people, in my opinion, especially the big money managers that believe this market is going to go down. The short interest on individual stocks is in the 84th percentile right now, which is very high for you know, that’s way above average. And so there are a lot of people to think the Fed is going to have to raise rates more than inflation is going to be very sticky. So we’ll see who’s right, the price will tell us what’s happening over a period of time.
A lot of this run up has been you know, caused because that big group that thought it was going to go down, got out, they shorted the market. It just left the people who thought it was going to go up because inflation would come down, they start to run it, everybody’s covering their shorts. And man, you end up with a big run here. And is it enough to really continue, maybe, especially if it can break through the 200 day moving average, because all of a sudden they’re going to be more short covering. And pretty soon, people just see this as a big jump. We did get over the 50% retracement last week, which is a big deal. So that means from that top point that you see there in January to the bottom point that you see in June 17. We have made about half of that back. Since World War II, when we made back half of the money. We have not had the market go down to a new low even once during one of these bear markets where you have more than a 20% downturn. So anyway, here’s some good things happening. There’s some you know, things that could be concerning that are happening. The mostly they’re I think good at this point in time, so we’ll have to see how this plays out. But anyway, that’s what’s happening this week. Glad I got a chance to talk Are you looking forward to talking to you again in September.
I won’t be here next week. I won’t be doing the daily videos. I’ve done you know them pretty much every day since the 22nd of March 2020 with a few different breaks here for vacation, so this is another one. So, look forward to talking to you again in two weeks.