I'm not trying to be overly dramatic, because most of you know how I feel about the stock market's long-term direction. We're going higher. Fight that at your own risk. However, short-term, we have a major storm brewing. To fully understand the possible effects of this storm, you need to understand history. Over 80% of the S&P 500's gains over the past 75 years have been earned during the 26th to 6th of ALL calendar months. It's due to (1) legalized front running as Wall Street firms and hedge funds begin buying stocks ahead of big money inflows at the start of each month, and (2) those inflows. Obviously, the rest of the calendar month accounts for less than 20% of the S&P 500 gains.
Just as there's a very strong bullish period during the month, there's also one very nasty period during calendar months and it typically coincides with the week of monthly options expiration. The 19th through the 25th has produced annualized returns of -7.58% over 4232 trading days since 1950, or the equivalent of 16 years. How would you feel if I told you that the S&P 500 would drop 7.58% over the next 16 years? It would be pretty depressing, right? Well, that's exactly what's happened during this part of the calendar month, which is why we need to be aware.
I believe the stronger the market has been leading up to monthly options-expiration Friday, the stronger the potential of a decline and 75 years of stock market data backs me up on this. Is it a guarantee that we'll see selling? Of course not. But one key to trading success is understanding when stock market risks are elevated. I can say, without a doubt, that short-term stock market risks are elevated right now.
Technology (XLK) has been leading the stock market higher over the past week and month. Here are the numbers:
1-Week Performance:
1-Month Performance:
After looking at these two summaries, is there any doubt what's been leading this market higher? Unfortunately, that's the problem. The large-cap technology names that have had such a strong run to the upside, especially in the semiconductors area ($DJUSSC), have also seen extremely heavy call buying. That's led to many key stocks like Apple (AAPL), Microsoft (MSFT), NVIDIA Corp (NVDA), etc. having current prices WAAAY above their respective max pain levels. The SPY and QQQ alone show more than $13 billion of net in-the-money call premium - the highest levels of net call premium that I've ever seen. Beware a sudden drop to the downside over the next week to 10 days.
I'll discuss much, much more about this dramatic increase in call premium at our next Max Pain webinar, which will be held this Tuesday, June 18th, at 4:30pm ET. If you're not currently a member at EarningsBeats.com, you can join for FREE by starting a 30-day trial. CLICK HERE to get your membership started and to join me on Tuesday!
The XLK, in addition to max pain issues, also is now dealing with a negative divergence on its hourly chart. The last time we saw a similar negative divergence, the XLK fell roughly 5% in less than a week. Check this out:
The bottom panel shows the rate of change (ROC) for the past 65 hours, or 10 days (2 weeks). Note that the only other time in 2024 that we've seen the XLK's 2-week ROC hit or approach 10% was back in mid-January. A negative divergence was also present then and the XLK promptly fell roughly 5% in a week. From the current level, a drop of 5% would be $11 and would take the XLK back to the 216 level. I'm not saying we're going to drop 5%, I'm only pointing out that the short-term risks are elevated currently.
If you'd like to listen to my current thoughts on the market and last week's stock market recap, check out my latest Weekly Market Recap video at YouTube, "Max Pain Sending MAJOR Warning For Stocks!"
Happy trading!
Tom
