Todd Salamone, Benzinga Talk Retail Sentiment Analysis [VIDEO]
Let stock price action guide you in your trading in this environment
Schaeffer’s Senior Vice President of Research, Mr. Todd Salamone, joined Benzinga’s All Access show today with a solid plan to educate retail investors on technical and sentiment analysis in the current market landscape. For the full media spot, please check out the recording here.
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The event, recorded on Friday, June 3, at 11:40 a.m. ET, is fully transcribed below.
BENZINGA
Todd Salamone is the Senior Vice President of Research at Schaeffer’s Investment Research, and he’s going to try to bring all of us back here into the markets, because I haven’t been able to really keep track of things these last two hours. So, Todd, good morning! How are we doing? First of all, tell me I didn’t butcher your name too badly.
TODD SALAMONE
Salamone is how you pronounce it, but you can’t win them all.
BENZINGA
All right, Todd, you are the SVP of Research at Schaeffer’s Investment Research as I just said. Tell us your quick take on the state of the markets right now.
TODD SALAMONE
Okay, you know, unless you’re on a different planet, you probably realize that the market has sold off heavily in 2022. And it all began really back in late November when the Fed pivoted and this whole concept of easy money potentially going away scared some people. Then we have we have now where the Fed is in liftoff mode.
What I’ve noticed is, as we kind of came into the year, there was many predictions for how many times the Fed might raise rates and it is steadily going higher. So, I think the market is okay with the raising rates. I’m not sure the market is really comfortable with it, though. This market is trying to sort out now at what point they will quit raising rates. The market is neutral, you know, we know there’s inflation out there, we realize the Fed has to do something, and I think there probably have been some points where the market participants might be saying, “Hey, wait a minute.” As we project out and as the Fed talks more, inflation might go overboard and then we have the recession worries. Then again, if the Fed doesn’t do enough, we’ve got serious inflation worries. So where is that perfect balance? Until we get clarity on that, I think we’re gonna see this this volatility that we can see.
BENZINGA
I believe you and I agree with you wholeheartedly. And the reason I do agree with that take is, frankly, you can see it right because every time anyone on the FOMC committee, any Fed President, everyone that come out and they give any inkling of how far the Fed should go, how much more they can raise rates, or when they’re going to be done. Is this like a two-quarter process? Is it a four-quarter process? Is it a one-quarter process? Anytime we get any whiff of a hint of a detail, the markets, you know whipsaws right? Because that that’s what that’s what everybody wants to know if we can pinpoint one point of anxiety for the stock market today. I agree with you it is probably Federal Reserve. When are you going to be done? Right, right.
TODD SALAMONE
Yes, so you know, it is interesting is that anybody who follows my market commentary, which I write weekly (it’s Schaeffer’s Monday Morning Outlook and it can be found at https://www.schaeffersresearch.com), knows that. In a way, this whole buying process from the COVID lows in early 2020 was orderly and what I mean by orderly is for a market technician like myself. All it takes is connecting higher highs and higher lows. Ever since we went in that easy fiscal, easy monetary policy. The market was on a very sustained uptrend following that channel. Yes, there were a couple of times where we moved outside of that channel. And there were some key moving averages that came into play and sometimes that was around expiration week when things can get exasperated.
But, again, going back to what I said before, when the Fed began pivoting in November, that’s when we began moving outside that channel and now we’ve been in this channel that began in January, that is downward channel now and we’ve had these these higher, lower highs, lower lows and we’re moving within that. I just find it interesting that when the Fed pivoted, that’s when the the up channel was broken and ever since we’ve been in this raising rates and there may be more we don’t know how much more we’re in this down channel. So, it is orderly even though it sounds like market mayhem. There has been some order to it.
BENZINGA
I actually want to ask you about your post, not from this past week but from a couple of weeks ago. The headline on it was S&P 500 Nears Trendline With Historic Buying Opportunity.
TODD SALAMONE
Yes, yes.
BENZINGA
Oh yeah. And those words, perked my ears up a little bit. So, and I want to bring up a chart just to give you an idea. Todd was talking about this on May 14. So, Todd is really talking about this area right here. What made you say that?
TODD SALAMONE
Yes. And actually the chart and I don’t know if that’s the correct one necessarily… One thing we do at Schaeffer’s is we look into moving averages now. As contrarians, one concern we have with that is most technicians do look at moving averages. So, what we tend to look at are what moving averages have mattered historically. And our eyes perk up even more if it’s something that we see outside the realm of most people.
In this case, it’s the 24-month and 36-month moving averages and if you look at a monthly chart, it 24-month if you think about it, just kind of an orderly moving average. It represents two years of monthly closes. So, there’s a 24-month moving average you will see over the years not only not only this century, but go back to the ’70s, ’80s, ’90s There have been pullbacks contained at that two-year moving average.
Now, does that mean they’re always buying opportunities? Absolutely not. In fact, when that breaks, we key on the monthly close. When there’s break, sometimes you’ll see that three-year moving average mark the bottom events. You know the one thing I’ve said in my commentaries. I’m not I’m not necessarily saying we’re in a bear market. We don’t know, we don’t have a crystal ball. What I posted you know back in March in April, my point was, man, I’m seeing some things in markets not doing things it had been doing it’s not expected in that channel.
But then I looked at I’m like, man, the risk though at the time was a move down this 24-month moving average. So now what do you do? But now it’s more like Okay, on a monthly closing basis in May. We held above that. So maybe maybe you want to trickle back in the market. I’m not sure. Because there’s levels overhead that I discussed in these commentaries that I’d like to see the S&P to take out to to more or less confirmed that these long-term averages could be a trough.
We’re not there yet. I mean, the market the S&P in fact closed above a key level yesterday, but here we are lower already again today. You know, that was the June 21 low in the March 21 low which ducked its head above that yesterday and that was that was good. But we need to see you know, some sustainable move above that level. And that’s just one of several that I’m keen on new overhead. And as they take these levels out, then you can put a little more money and a little more money back then. But you know, again, I’m not here to say whether a trough is in place or we’re in a sustained bear market. I’m just saying let the market guide you based on where it’s trading.
BENZINGA
And this is the NASDAQ’s a little bit different. But this is the NASDAQ and this is kind of the point you’re making though because the NASDAQ is more sensitive right now anyway, and the green line is that 36-month moving average, okay, and the red line is the 24-month moving average.
TODD SALAMONE
So, as you can see, sometimes that 24-month moving average has been a great buying opportunity. But when it breaks is it did… notice how that 36-month moving average marked last month’s trough now. Is this just a bounce? Are there some other things I like to see? Absolutely. I’d like to see that 24-month moving average be taken out. I’d like to see the March lows taken out on the NASDAQ 100 I think that’s 13 I think 13,015. We haven’t done that. So, is this a bounce? Or is this a prolonged trough? I’m not ready to say anything about that because I need to see the NASDAQ do a little more than it has. I think it’s encouraging that the six-month moving average held, but now I need to see some more confirmation.
BENZINGA
And this is the S&P version of that same chart. So I just am curious, actually Todd, what your take is on the the month of May specifically ended up right back where you started? After all the hullabaloo and all the fussing, we ended up right. I mean, I told you that Russell 2000 ended up down .003%. Yeah, might as well be nothing right.
TODD SALAMONE
Yeah it was interesting in the final days of that month, last couple of days. You could see the S&P just kind of acting like a magnet to the last month’s close.
BENZINGA
So what do you make of that kind of price action, does it and I know, I know, you just said that. You know, you like measuring things against the moving averages, whether we hold or not. But yeah, right. But like in terms of just the overall price action and the fact that we settled we’re started I guess you know, we are still typically in a downtrend on a monthly basis, especially if I go back. It’s been more pronounced there. What do you make of this fact, though?
TODD SALAMONE
Well, I think it’s it’s encouraging if you’re a bull that we were hoping to after all that downside we saw in May rally bac. You’ve got to have some people looking to buy the dip. And I think it’s just all the investors just trying to digest a confluence of events, whether it’s the Fed, whether it’s Russia, Ukraine. I think there’s some longer-term investors that may have come in and looked at this as a huge opportunity.
And that brings me to another another point. You know, it’s interesting because, as I said, in last week’s commentary, we really look at sentiment and you know, if I look it up, buyers are going which are very short term oriented. In fact, a lot of option buyers, they’re buying three-week options. They’re as negative they have been. As a contrarian, especially when you see these long-term levels hold, that’s encouraging because when those short term speculators have an extreme bias as a doubt, looking back over the years, they’re extremely negative. That sets the market up for some short-term rallies as we’ve seen the past couple of weeks.
But at this time, longer term, you got shorts on the S&P and on these NASDAQ components and multi-year lows. So, I think there’s there’s this battle going on between short term and long term. You know, and then I can’t answer this question, but one risk to the long-term case here is that the longer term those are the larger view now that the market has is taken a hit and the Fed put, if you will, is no longer in play, you know? It will become a headwind over the next several months. That brings me back to where you bring the technicals back in play, at some point it make it uncomfortable for the shorts.
BENZINGA
I don’t know how well, last week was for the shorts.
TODD SALAMONE
Right, yes. How do they view this or do they view this rally opportunity? You know, it’s hard to begin shorting the market after it dives 15% into two- or three weeks territory.
BENZINGA
You’re a trader, Todd. What do you trade and you approaching this and what do you buy and what do you sell and
TODD SALAMONE
As I explained before, I let the price action move me in one direction or the other. I’ve been heavily trading calls. The options been cheap, and has been strong, right? You know, we’re in this this horrible market. Energy’s performed well, and I’ve bought what are called call options on pullbacks on energy stocks. Exxon in the mid-80s. I was recommending call options to our subscriber base around $98–99 right now. We haven’t hit my target yet, and that trade is still open. But I have been buying puts on technology. And you know, admittedly, I got blown out of some some technology puts but I’ve also made some major money from buying technology puts on the downside.
So that’s the advantage of options. It’s leverage in during these uncertain times. You can use options to reduce your dollars at play. And you can do that because you can leverage the upside. A 20% move might result in a 100–200% profit. So why put a lot of dollars at risk when you’re talking about those type of profits? You define your risk by the premium you pay for the option. And, you know, again on this rally I just occurred, you know, I’d rather be I’d rather be in a put option on a stock and this happen and I can cut my losses. Even though I’ve already defined my risk. cut my losses, I can get out of that point where I want so I’m not taking 100% losses. But I can also have that exposure to what has been the defining action this year and that’s the downside.
That said, in this upside move, I recommended Advanced Micro (AMD) calls now it’s changing a trend right now it in fact yesterday closed above the trendline and one of their highs since its peak last year. Now would I buy the stock here necessarily? Probably not that’s too much money to invest in a stock that’s experienced downside. Is a call option with reduced dollar outlay perhaps worth a shot? Absolutely.
BENZINGA
Interesting. I happened to have just day traded this yesterday. I don’t do many day trades but I happened to catch that wave stumbled backwards. So funny that you brought that up. Todd Salamone, Senior Vice President of Schaeffer’s Investment Research… Todd, great conversation that we just had, just to wrap it up here. What would be your your last piece of advice? Let’s call it for short to intermediate term traders. Right now.
TODD SALAMONE
I’d say you know obviously you have uncertainty, I would use options. If you’re not using options already. It’s as I said, it’s a great way to reduce your dollar risk. You’ve got the leverage, and I would look to diversify. I’d have my my calls and I’d have my puts out there and just let the market take you. You know if you maybe diversify your call options and some beaten down names that are mostly showing different patterns that they weren’t able to decline, but also some of the momentum names like the energy stocks, diversify on that side but also have your put exposure out there. Stocks that were in a defined uptrend and and now they are they’re showing evidence of breaking down. Take a shot at those but all the weaker names you know. Have had some put and call options up out there and not only diversified through puts and calls, but also diversify yourself. So I think it’s a great way to play this uncertainty and it’s a great way to play what has been a very rotational market over these past several months.
BENZINGA
We got we got Mighty Soldier. He’s in the chat. Good to see you, Mighty. He says Todd just put Schaeffer’s at the top of his list. Thank you guys. Thank you. Mighty. Thank you, Todd.
TODD SALAMONE
I appreciate the feedback.
BENZINGA
Yeah, Schaeffer’s Investment Research. He’s the Senior Vice President of Research there. Todd, have a great rest of your week. Have a great weekend and good luck, man. And it ain’t easy out there.
TODD SALAMONE
It’s not easy. But I appreciate it and you enjoy your weekend to pleasure being here.
BENZINGA
Have a good one.
Originally published at https://www.schaeffersresearch.com on June 3, 2022.
