Daily Rundown: November 7

BOB LANG: Good morning, Action Alerts PLUS subscribers. It's Monday, November 7, 2022. It's time for our rundown. Lots to cover as usual, so let's go ahead and get rolling here. So as we kick off trading today, I'm seeing a lot of divergences starting to develop, a couple more important than others, as the NASDAQ remains near its October lows, while the oscillators remain rather high. 

So let's talk about what those divergences mean. Simply put, the price action is not supporting what is happening with the indicators in the oscillator. So we always talk about price action being king. Volatility is secondary, as well, and some of the other indicators too.

But we've been seeing a lot of volatility in these markets for the last several days, but these divergences are starting to pile up over here. And eventually, 1 of these is going to be right. Is it going to be the price action? Or is it going to be these indicators which are showing overbought readings?

 So the price action not necessarily is breaking out here, and that's the divergence that we're seeing with the rest of the indicators, which are super bullish. Actually, if you took a look at the oscillators, the relative strength, the MACD and some of these other ones that I follow, pretty much showing that the bull market, at least for the short term, is going to be raging on. But, again, we don't have price action really confirming that just as of yet.

When we have a trending market, though, we usually see these big indices like the NASDAQ and S&P 500 and the Russell 2000, to name a few, moving together, basically in sync. We're not seeing that either happen. Money flows always tell the story though. When it's coming in heavy, it seems markets are running strong for days and even weeks.

However, that has not been the case recently. For instance, the NASDAQ is not keeping pace with the rest of the market. And as we mentioned earlier, the NASDAQ is down near these October lows. Should that surprise us? Not really. The tech-heavy index seems to be showing more outflows, and it has been since the beginning of spring.

Why is this important? Well, it's normally that the NASDAQ names in this index, like Apple and Amazon and Meta and Google and Microsoft and so forth, often show leadership. And without leadership, we see the rest of the market kind of wandering aimlessly around trying to find some direction and trying some-- find some movement.

So that's why we could have days when the Russell 2000 is down, the Dow industrials are up, the NASDAQ is down, and the S&P 500 is up. So we see these divergences pop up. That's not generally what we like to see. If you're bullish or if you're bearish as well either, we'd like to see a trend going-- affecting all markets.

So what is that a function of? It's a condition of ill liquidity. Liquidity is very poor in the markets. We've seen a lot of distribution in bonds, which has been happening from the Fed's QT program. What is a QT program? Basically, they're selling treasuries and selling mortgage-backed securities back into the market. Rates are starting to climb as they distribute bonds off of their balance sheet.]

The QT is basically Quantitative Tightening, which tells us that the Fed is reducing their balance sheet, or making efforts to do that. And somebody has to be there to pick up the slack and buy those bonds. In effect, they're not dropping a lot of liquidity into the markets, say, for instance, as they did back in March of 2020. So it's basically the question is this, how do you fight it? Well, you don't. And you acknowledge that the condition is what it is, and you adjust your portfolio accordingly until things change. 

So markets are really uncertain here right now. And until the election, until some of the data that comes out and is dispersed later on this week, we're going to have a lot of back and forth action. We've seen a lot of volatility already this morning. 

Futures were up sharply early today and backed off a bit. We actually did go negative for a little while this morning. The NASDAQ, being the weaker of all the indices today, and, as I mentioned earlier, this is the one that has been lacking the leadership in the markets for the past several months.

Again, markets are pretty uncertain. But once we get that election behind us tomorrow, and then we have the CPI number coming out on Thursday, we could get a little bit of a relief off of that, certainly with volatility coming down. We've seen the VIX up a little bit this morning. It's up about 2%. It was up about 3%, 3 and 1/2% earlier. It's backed off a little bit.

 We're seeing a bit of a rise in volatility today. And, again, that is normal in front of this uncertainty. We might see that VIX fall, though, sharply after the election results are in and then after that CPI number prints on Thursday. We do have the bond market closed on Friday for the Veterans Day holiday.

And finally, on the subject of uncertainty, as we had talked about some of the names in our portfolio, Amazon and Apple, for instance, we've seen some layoff news from Amazon, from other companies like Meta and Facebook, which talked about some ginormous layoffs coming out probably being announced today. And then, of course, Apple came out and said that they're going to lighten the load on their guidance with Apple-- with the iPhones, IPhone 14, the new product that came out in September 

These are themes that market players are starting to get used to now. And with so much potential downside to go, stocks have really not priced this in. It's time to step back and wait and see how things unfold. And while we're not seeing much data to support the markets turning bullish, the charts do reflect bearish sentiment as well too. Again, another divergence that we talked about from earlier.

We like the other AAP portfolio position, though, with plenty of cash, some defensive inverse plays, and a well-diversified portfolio of leading stocks. So that's going to be it. Thanks, everyone, for spending a little bit of time with me. Great to be with you, and we'll be back with you on Tuesday.