Don here...
The S&P 500 rallied 60 points this week. The expected move for next week is still 105 points.
That combination should terrify you.
I recorded this breakdown Friday afternoon because the volatility stayed elevated with markets up. That rarely happens. When it does, experienced traders get uncomfortable heading into the weekend.
Here's what most people missed while celebrating tech earnings:
The materials sector (XLB) moved nearly three standard deviations to the downside. That's between 2.5 and 2.8 standard deviations outside its expected move.
The Russell 2000 hit the lower edge of its expected move. Utilities broke below theirs. Healthcare touched the bottom. Financials did the same.
Only two sectors held the entire market together. Semiconductors (SMH) and technology (XLK) both broke above their upper expected moves. But strip those out and you're looking at Nvidia, Google, Amazon, and Tesla carrying everything.
Amazon hit a two standard deviation move on earnings. Its expected move was $15. It hit $30 this morning before pulling back.
The concentration is extreme. Four names are masking broad market weakness.
Now here's where it gets dangerous. The market rallied this week. The Fed already cut rates.
We're past the biggest earnings week. Next week has no Fed announcement. No Amazon, Google, Microsoft, or Apple earnings to anticipate.
The expected move should be contracting. Instead it's sitting at 105 to 107 points. Volatility refuses to crush back down even though the obvious catalysts are gone.
The market sees something coming.
I closed three trades this week while this played out:
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XLU position closed for 55% profit
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SPY in-out spread closed in two days for 30%
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Microsoft earnings flip closed for 297%
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Google earnings flip closed for 203%
I executed the Microsoft and Google trades live on Wednesday. Anyone could watch. Two out of three hit. The third went worthless but only cost 63 cents.
But those winning trades don't change what's happening underneath this market. The S&P is up. Most sectors got destroyed. Volatility stayed high. That's a recipe for serious trouble.
The 30,000-foot view matters more than celebrating today's 40-handle rally. Markets don't crash from all-time highs. But you need to pay attention to what's moving beneath the surface right now.
Define your risk. Keep it under control. Another pivotal week ahead.
π Watch the full market breakdown and trade reviews here
To your success,
Don Kaufman
Chief Market Strategist, TheoTRADE
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