Stock Market Sentiment: What the Indexes Are Telling Us! | Podcast Episode #352

0:07
Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market and I’m ready to show you how. Hey everybody, this is Ryan Mallory with Swing Trading the Stock Market. In today’s episode we’re going to talk about some top down trading action. We’re also going to talk about the importance of the QS. One person asks me today, what is the importance of the QS versus the SPY.

0:42
What do I find important about I WM instead of just using spice, we’re going to talk about all of that. We’re going to talk a little bit about the volatility index and also a little bit how I incorporate all of that into my top down trading strategy. But first, make sure that you like and subscribe. If you’re watching on YouTube, and if you’re listening to me on one of the major podcast platforms like Apple or Spotify, leave a 5 star review.

1:04
Even if you’re not, go there and leave a 5 star review. It helps me out quite a bit and I do greatly appreciate it. So today’s e-mail comes from a guy who wants to be called Ricky. He’s a second time emailer to the podcast he writes. Hey Ryan, second time you mailing in, I thought I’d like to be called Ricky this time if you will.

1:19
Could you go into more detail on your top down trading strategy? More specifically, could you elaborate on the different charts that you look at on your update videos? What are the QQ, Q’s, I, WM VI, X that’s the volatility index and what is their role in importance? I understand SPY as the ETF that follows the largest companies and gives an idea of market sentiment and direction across the board, but the others I’m not as familiar with.

1:45
I’ve been in the crypto markets for a while now and view SPY as the BTC or the Bitcoin of the stock market world for the most part, and except for a few outliers, if Bitcoin isn’t moving, most other crypto projects aren’t moving as well. Am I missing anything else with SPY? Also, how do you navigate changing sentiment in the market?

2:02
I’ve been trading a small account $600.00 since May and had a few really good winning trades that had my account up around 11% at one point. It was safe to say I was feeling good at this point and confident and what I learned thus far. I also kept my wrist tight and would never have any big losers, 2% or less.

2:18
That’s pretty impressive. After last week that account has dropped back down to just over my starting account size. So I’m still in the green but feel like I should have known when to exit when I was up. I also realized that there are ups and downs in the market that it can’t go up forever. Should I have seen some of the signals from SPY and others that the bullish sentiment was getting weaker and exited my positions then until I saw strength return in the market?

2:42
Or is it one of those things that you will never really know until you look back on it? Good question, Ricky. We’re going to go ahead and tackle that. So first, what is the Q’s? What is the I WM, what is the VIX? We’ll go through each one of those real quickly. NASDAQ 100 is represented by QQQ.

2:58
It pays a dividend every quarter. It also represents some of your biggest growth in tech names. Now you have some of them in there that you might be surprised about, like Costco or Starbucks. But a lot of them are really your big tech names. Companies like Apple, Microsoft, Google, Amazon, NVIDIA, Meta, Tesla, Broadcom.

3:18
You can go through Adobe or Comcast, Netflix, AMD, T-Mobile, Qualcomm, Honeywell. So you have a lot of big name companies in there and a lot of them are more growth plays than not. Now with the S&P 500, you have your top 500 companies in it and it covers all the different sectors.

3:35
So you have about 11 sectors. You have materials, you have communications, financials, energy. You have industrials, technology, discretionary, staples, utilities, healthcare, not real estate. I don’t think I left any of them out.

3:52
There’s about 11 of them. And then you have the industries below those that fall into each one of those sectors. The S&P 500 represents most of those sectors in a lot of those industries as well. So with the queues, you have a lot of your growth plays in it. The S&P 500 is a little bit less volatile and also has a blend of value and growth combined.

4:10
Also has some really big dividend plays in the S&P 500 as well. So on a typical day, if you’re seeing a lot of panic in the stock market, you’re likely to see the Q’s lead the way to the downside because of the growth place taking a bigger hit than your value plays that are mainly found in the S&P 500.

4:29
So the Q’s would be down more than the S&P 500 to the upside. If the markets rallying really hard, it’s likely that the Q’s are going to outpace the S&P 500. So from a risk standpoint or from a beta standpoint or from a volatility standpoint, the queues is going to have more of that.

4:46
Now the volatility index that’s going to measure the volatility in the market at the lower it gets, the less volatility there is in the market. So as the market goes up, the volatility tends to go down. When you get into the summer months like what we’re in right now, volatility also tends to go down unless there’s a major catalyst taking place in the market that’s causing stock prices to fall dramatically.

5:02
As stock prices fall dramatically, the VIX tends to rally significantly. So you go back to like March of 2020, we were seeing VIX readings up in like the 90s, big time there, OK. We saw it back in 2022, we were seeing 30s and 40s. And then as the market recovers, the VIX tends to go back down off of those high volatility levels.

5:20
Now for most of 2023, we’ve seen very low volatility levels. We’ve seen them in the 12th and 13th a lot just in the past few months, which gives a false sense of security at times to traders thinking that everything is fine. And then all of a sudden you get a huge volume spike. You go back to 2018. I think in one day, the VIX was up over like 110%.

5:36
It was massive. And a lot of people got wiped out because they were short in volatility. And then that came back to really bite them, especially if they were using leveraged plays as well. But there’s a lot of those out there Now. As for I WM, this is your Russell index. These are your smaller companies. These aren’t going to be companies that you will find on the NASDAQ or on the S&P 500.

5:54
They’re not even considered midcaps. They’re your smaller companies. These are ones that are trading in the hundreds of 1,000,000 or maybe even a couple of them in the low billions like 1 or 2 billion. But they’re very small companies relative to the large caps that are encompassed by queues and SPY.

6:10
So it’s not all that unusual to see the small caps go in a different direction than the queues at times, especially this year. I have seen a lot of times where the NASDAQ will sell off and then all of a sudden the Russell will rally or the Russell will sell off and all of a sudden all the money flows back into the NASDAQ.

6:25
And the reason for that is that a lot of people aren’t getting out of the market. They’re just rotating back and forth between the small caps and the large caps. And so when the Russell 2000 is benefiting by moving higher, a lot of your large caps are moving lower. Now there’s also a lot more companies in the small caps.

6:42
So I like to look at the breadth of the market, seeing how many stocks are going up relative to how many stocks are going down. If you have a really bad breath reading in the market, but you’re seeing the S&P 500 in the NASDAQ trading one or two percent higher and you look at the rustle and it’s down in the red.

6:57
There’s a good reason that why the breadth is so negative is because there’s so many smaller cap stocks. There’s more small cap stocks than large cap stocks. Those small cap stocks are struggling and they’re not catching a bid, while the large caps which are fewer in number but greater in size are moving the markets higher.

7:13
So because they don’t really have overlapping exposure like the S&P and the NASDAQ guys like the NASDAQ for instance will have Apple. So the SP500, Microsoft stock symbol, MSFT is in the SP500 just like it is in the queues. But you’re not gonna see Microsoft in the Russell 2000 cuz it’s not a small cap.

7:32
And while we’re looking at the NASDAQ, that’s 100 companies and then when we’re looking at the SP500, that’s 500 companies, but the Russell 2000, that’s like 2000 companies and then there’s a Russell 3000. You can just keep going on and on. There’s a lot of companies, but the further you go down the list, the more sketchy some of those companies on the Russell 2000 can get.

7:48
But what’s not sketchy? swingtradingthestockmarket.com. That’s going to be the patron site that goes along with this podcast. You’re with it. You’re going to get all of my stock market research each and every day. You’re going to get updates on the market. You’re going to get updates on the different major big tech stocks.

8:04
That’s going to be like your Apple, Amazon, Microsoft, Google, Netflix, NVIDIA, Tesla. And I don’t know if I forgot 1:00, but you get the picture then you’re also going to get my bullish and bearish weekly watch list that I send out every Sunday night or Monday morning. And then also there’s daily watch lists to a different setups that I’m watching as well.

8:22
So check that out swingtradingthestockmarket.com. I don’t think you’ll be disappointed. Now with that little plug out of the way sentiment, Ricky wants to know about sentiment. Like how do you notice sentiment? I judge sentiment the most by looking at the technicals.

8:38
Okay, You can look at fundamentals that how do you really judge a stock based off of fundamentals. When it comes to sentiment, you can’t really tell. You’re just looking at numbers at that point. But the technicals can show you a lot of that. One of them is volume. For instance, today I was in PSQ, I was up about 1.6% at one point, maybe almost 2%.

8:57
I can’t remember exactly how high it got, but it was doing Okay. It was off to a good start, got into it yesterday and you’re just not seeing a lot of strong downside to the market. And so PS: Q. For those who don’t know what that is, that’s essentially A bearish inverse ETF of the Q.

9:13
So if the NASDAQ 100 goes up 1%, PSQ is going down 1% and vice versa. In this case, NASDAQ has been pushing a little bit lower over the last couple days, and as a result, PS: Q has been going up. So I got into PS:, Q and it’s just wasn’t moving like I like I expected to.

9:29
You could see there’s a little bit of a lethargic action. Typically when you’re getting heavy sell offs, you see a lot of volume come in. People are willing to sell their panic selling. Even not seeing that, there’s a little bit of sentiment there that I’m seeing on the charts with the low volume, with the lack of price action, with the lack of conviction in the movements that told me that, OK, sentiment may be changing here.

9:48
We may see a bounce early on next week and so I went ahead and got out of it. So a lot of it comes down to reading the technicals. I was in a lot of different stocks here up until about a few weeks ago. I was in Starbucks, I was in, I can’t remember them all, but I was even in PayPal before their earnings.

10:04
I was in Tesla, so I was in a lot of place. They were doing pretty good and I got out of a couple of them because of earnings. But then there was also this lackadaisical price action and the queues that started about mid-july where you just start seeing it trade sideways and you would get a couple of heavy days to the downside.

10:21
And because I was raising my stop pauses, I was taking profits along the way. It naturally got me out of those positions and then when I’m trying to get back into the market, there was never a reason enough for me to get back into the market on new long positions. I did try a couple of them, but I went ahead and got out of them before it became a problem for me and My Portfolio.

10:38
So I even tried to get into IWM another time. It just didn’t work out the way I wanted to see it work out. So a lot of times you see it over the course of time you see that sentiment start to change and really the sentiments been changing in the NASDAQ for over the past month. You’re seeing that some technical patterns like a double top forming in the short term on the queues that would suggest that the sentiment is changing.

11:00
And so when it comes to trading overall, you want to be looking at the chart, You want to see is the sentiment changing, for instance, on the queues going back to March back when the Fed billed out the regional banks. Again, we’ve been on a good consistent trendline ever since just about three or four days ago we tested that trendline look like we’re going to hold it for a day or two and then we broke below it.

11:20
That’s a sentiment change because when the sentiment was much more bullish, we would have bounced off of that level. But now because it’s shifting a little bit to the downside, it got a little bit more bearish. And so as I saw that, I wasn’t going back into new long positions. I was holding off there and then I got into PSQ. But now I’m seeing PSQ where it’s just not giving you the kind of follow through that you would really like.

11:40
And so as a result, I’m not going to necessarily hold it. I’ll take the small game that I had in the trade and move on to the next stock, stay in cash and wait for the next opportunity. Maybe it’s to the long side, maybe we get a much bigger move to the downside on in the weeks to follow. And I can take advantage of that, but I don’t have to necessarily be in that stock or in that ETF when the sentiment doesn’t feel favorable.

12:00
So that goes to when you’re looking at sentiment, what is the strength of the move? Are you seeing big bodied candles? Are you seeing where when the market tries to open up higher, it immediately gets sold off? Are you seeing big moves to the downside of 1 or 2%?

12:16
Are you seeing the dip buyers when they’re trying to buy the dip, are they getting squashed? That could tell you that the buyers do not have control of the market When the markets rally into the upside, what kind of candles are you seeing to the upside? Are you seeing a lot of volume? Are you seeing a lot of strength in those moves? When the market does sell off, are you seeing the dip buyers immediately come in and push it right back to the green, almost like in an automatic fashion.

12:37
We’ve seen a lot of that in 2023. So that would be a sentiment that would show you that the markets more bullish and you can see that on the charts looking at volume, looking at price, looking at how easily it’s breaking through resistance levels overhead on individual stocks and then in the sectors and also on the indices.

12:52
And so much of the top down trading strategy exists on understanding the sentiment of the market, understanding the sentiment from where the overall embassy stand, that includes the S&P 500, the NASDAQ 100 and the Russell 2000. Where did the individual sector stand?

13:08
Which ones are bullish there? Because not all of them are going to be bullish all the time. Usually in a very strong bull market, you may only have like 7 to 8 of them that are very bullish. And the others you kind of want to avoid. And then you want to see which industries are rallying because in the tech, you may see the semiconductors and software applications rallying, but software infrastructure is not rallying.

13:26
Or in the energy, it may be one part of the energy equation that’s rallying but not the other. Maybe it’s not natural gas, but it’s oil. And then after you are able to judge the sentiment there and do the technicals there cuz a lot of technicals is understanding sentiment and you’re using the technical analysis to figure out that sentiment.

13:43
And then when it comes down to the individual stocks, you want to find the stocks that represent that sentiment that we just talked about in the sectors, the industries and the market as a whole. And finally, Ricky talks about how he should have exited earlier and not let his profits go back to potentially like break even or slightly break even.

13:59
We’ve all been there. We’ve all felt that way. I feel that way all the time about different traits. I was like man, I probably should have taken more aggressive profits in some of these traits or I should have maybe not have been as aggressive or I should have had that stop loss a little bit tighter. Or sometimes I even tell myself I shouldn’t have had it that tight to begin with. I should have had a little bit looser.

14:15
I was too tight on the stop Los. And so hindsight is always gives us that ability to look back and say what we should have done because with hindsight you can trade perfectly, you can’t be wrong. So keep that in mind. You’re going to be looking at it from the lens of perfection when you’re looking at it in hindsight. But what you can do is look for trends in your trading of where you notice that you’re doing something consistently or habitually And you’re saying to yourself, OK, I’m consistently getting burned when I use a mental stop loss or I’m being consistently burned with when I keep my stop losses too tight, like 1 1/2 or 2%.

14:45
And you’re saying to yourself I shouldn’t be doing that. Because sometimes that’s just noise in the trade and it goes right back up and I could have still stayed in it. You want to be aware of that. You want to be aware of some of the trends that you’re seeing. If it’s one trade here or one trade there yet, that kind of crazy stuff can happen. But when you’re seeing it across the board, you know, week in, week out, month in, month out, then that’s something that you want to maybe start adjusting for in your trading.

15:07
If you enjoyed this podcast episode, I would encourage you to like and to subscribe to my YouTube channel that’s at SharePlanner. Or if you’re watching it on SharePlanner, it’s just down below. Make sure you click that little notification bell so you get all the alerts. Make sure that you’re sending me emails. ryan@shareplanner.com I like Ricky here.

15:22
I read your emails. I make podcast episodes out of them. I need your emails. I need your questions. I need your stories. Tell me your stories. I want to hear about it. There’s a lot of stuff that I can tell you about your trading journey that you just let me know what they are. Also, make sure to leave me a 5 star review. If you’re listening to that podcast on the Apple or the Spotify or the Amazon or the Google platform, there’s tons of them.

15:42
Now just leave a review. That’s great. Make sure it’s five star and technical swingtradingthestockmarket.com. That really helps me out quite a bit. Thank you and God bless. Thanks for listening to my podcast Swing Trading the Stock Market. I’d like to encourage you to join me in the SharePlanner trading block where I navigate the stock market each day with traders from around the world.

16:02
With your membership you will get a seven day trial and access to my trading room including alerts via text, e-mail and WhatsApp. So go ahead, sign up by going to shareplanner.com/trading Block, that’s www.shareplanner.com/trading-block and follow me on SharePlanners, Twitter, Instagram and Facebook where I provide unique market and trading information every day.

16:23
If you have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.