From the desk of Willie Delwiche.

“This Is A Test. This Is Only A Test.”

The S&P 500 this month and last undercut its June low but it is now back above that key level. The same can be said from a sentiment perspective. The NAAIM Exposure index and the Bull-Bear spreads for Investors Intelligence and AAII in recent weeks dipped below their Q2 lows but have since recovered.

Why It Matters: Important lows often get re-visited one last time before trends turn and rallies become sustainable. It will be a lot easier for stocks to build on recent strength if optimism is increasing. It does indeed take bulls to have a bull market. Confirmation that this was just a test is twofold: staying above the Q2 lows and continued improvement beneath the surface (including seeing more stocks make new highs than new lows). 

In this week’s Sentiment Report we take a closer look at how investors are feeling and how (if at all) we can take advantage of it.

This is the video recording of our October 26, 2022, Inside Scoop Weekly Strategy Session.

We continue to be handcuffed by earnings season. Some of the best setups we like right now are in stocks slated to announce earnings over the next week or two. As an options trader, I don't like to position ahead of imminent earnings announcements. That is tough binary risk to control.

Today's trade has earnings coming up in a little over a month from now, so that'll have to do. At least it gives us some time to build a little cushion. Because if we're wrong in this trade, it's likely we'll find out pretty quickly over the next two weeks.

We retired our "Five Bull Market Barometers" in 2020 to make room for a new weekly post that's focused on the three most important charts for the week ahead.

This is that post, so let's jump into this week's edition.

This week we're looking at the stock from the capital goods sector. Stocks from his sector continue to show strength in a consolidation type of market setup.

We had a resting GTC order filled in the Paid-to-Play portfolio:

From the Desk of Ian Culley @IanCulley

The dollar is dropping!

It’s finally time to bet on some sustained downside action, and the euro is my vehicle of choice.

I laid out the conditions that would flip my outlook on the euro earlier this month. Three weeks later, the pieces have fallen into place for a bullish position.

Let’s take a look.

We've adjusted a position in the Paid-to-Play portfolio today:

This is still the one folks.

I've been in the camp that we're only getting bull markets in stocks around here if the Dollar is falling.

And well, a funny thing happened last month: The Dollar started falling, particularly against the most important crosses.

This happened once the journalists finally realized the Dollar had been so strong. And you know what tends to happen when they finally get the memo ;)

Take a look at the Dollar rolling over vs both the Euro and British Pounds:

I was talking with a relatively new day trader last night at my twice-monthly trader meetups here in Colorado. We were chatting about stop losses. Or more specifically, his inability to stick to his “mental stop loss levels.”

As you can imagine, this was leading to him taking occasional big losses – which were wiping out good runs in the market.

He’d make a few hundred bucks several days in a row. He’d then lose it all (and then some) on one bad trade.

A lightbulb went off in his head when I reframed the importance of not taking big losses. No doubt many of you are shaking your heads and uttering – duh!

But for this gentleman, it took me breaking it down this way for him to get the picture: 

We came into the week anticipating some volatility expansion out of this range, which could potentially be playing out given yesterday's action.

This was the largest daily price change for most coins over the last month. Ethereum's broken out of this short-term trading range, with Bitcoin following closely behind.

From the Desk of Kimmy Sokoloff

Two heavy hitters, $GOOGL and $MSFT, reported last night, and they both traded lower after hours.

Futures seem to be holding steady.

The largest insider transaction on today’s list was reported in a Form 4 filing by the Swiss investment company BB Biotech AG.

The biotechnology-focused fund reported a purchase worth roughly $2.2 million in MacroGenics $MGNX.

Many stocks are no where near their all-time highs.

The S&P500 still needs to rally 25% just to get back to its former highs. And that's after the 10% rally that we've already seen in October.

The Nasdaq100 would need to go up another 43% from here just to get back to its highs. And again, that's after it already ripped 12% off its lows this month.

Remember, the average Nasdaq stock fell 44% from its highs during the bear market. The average small & micro cap stock dropped about 50%.

And since most stocks are so far from their highs, investors are having a hard time calling this a bull market.

"They need to make new all-time highs for it to be a bull market", they say to me.

So ok, let's play that game.

None of these prices here below were new all-time highs. So was this a bear market then?

From the Desk of Kimmy Sokoloff

That was a nice follow-through day for the indices.

The SPX hit resistance around the 3,850 level, and you have the 50-day moving average at roughly 3,868.

From the desk of Willie Delwiche.

Stocks and bonds are enduring one of their worst years on record. Yet the St. Louis Fed’s Financial Stress Index dropped to never before seen levels. It’s off its lows but still indicates less stress in the financial system than at any previous point in the past quarter century.   

Why It Matters: Aggressive tightening by central banks around the world has pushed sovereign yields higher and kept interest rate spreads subdued. That has made financial stress less apparent. Until this changes, there is little impetus for the Fed to pivot away from its intense focus on bringing down inflation.    

In taking a Deeper Look we see how the specific characteristics of this cycle may be masking signs of stress that are present just beyond the headlines.

We've adjusted a position in the Paid-to-Play portfolio today:

It's nearly that time when we get a fresh batch of monthly candlesticks.

We only perform this exercise once the candlesticks are completed. But, sometimes, you want to cheat and peep a few days early.

What's great about monthly candlesticks is that it takes us a mere half hour to get through them all, which is only six hours a year.

We can't emphasize enough the level of value-add for such a brief amount of time.

It forces us to take a step back, and it gives us no choice but to identify the direction of the primary trends. We use them to put shorter-term trends into context, which is especially important in this choppy price action.

So, no matter your time frame, identifying primary trends and then working from there is a huge advantage over a blind bottom-up approach.

In the current state of the crypto markets, the overwhelming majority of names are in greater than 80% drawdowns.

Solana is down 90%.

Cardano is down 90%.

Fantom is down 95%.

Harmony is down 96%.

These are substantial drawdowns, and this is one of the most severe crypto bear markets by drawdown, loss realization, and capital...

From the Desk of Kimmy Sokoloff

The market held overnight, which is a good sign.

We're now back to the levels seen in early October on the SPX. Support for the $SPY is at 374.8, with resistance at 380, then 386.

The largest insider transaction on today’s list is a Form 4 filing by FB Financial Corporation $FBK Chairman of the Board James Ayers.

Ayers reported a purchase worth roughly $1.9 million.

How do we know if we're in a bull market or not?

Generally speaking, more stocks are going up than going down in bull markets.

And sure, there are a lot of different ways to quantify it, but this is really the gist of it: Are more stocks going up or are more of them going down?

It really is that simple.