Analysis, Perspective, Trading Strategy
Robot Fueled Stock Rally Still Has Legs
By Joe Duarte on January 16, 2018
Global stocks are in the midst of an impressive momentum run. And
as with most things in life there are two sides to the story. Momentum
runs have both a positive and a negative side, as they offer investors
excellent opportunities to make big money over relatively short periods
of time while often leading to their ruin once they end. Moreover,
anyone who remembers the last four months of the dot-com bubble will
testify to that heady feeling of portfolio invincibility of the times.
I still remember the 2000 point – 40 percent – rally in the Nasdaq
Composite which started in early November 1999 and ended in March of
2000. Worse are the memories of the brutal bear market that took the
index down over 70 percent over the next two years.
Should I Stay or Should I Go?
The reason I’m bringing this up is that the current market feels
the same way: downright invincible. And that makes anyone like me,
who’s been around a few decades hum that old song by The Clash – Should
I stay or Should I Go? In any case I hum it under my breath as I push
the button to go with the flow and make another trade on the long side.
Sure, compared to the dot-com bust the current economy features some
fundamental differences. For one during the late 1990s there had a
totally different vibe – irrational exuberance – fueled by the sock
puppet, the Dell dude, and a feeling that nothing could possibly go
wrong. Presently there is the perception of future positive effects
for the economy resulting from the recently enacted tax cuts and an
emerging set of encouraging economic data. Finally, even though interest
rates are rising, as they were during the last few months of the dot-com
bubble, in the present period interest rates are still close to zero
for all intents and purposes.
Can Algos Rewrite History?
Perhaps most important is the market itself where current trading
is dominated by robotic, headline reading trading algorithms- algos
instead of human traders. So, I’m going to write this column based
on the dangerous assumption that, because of the algos this time is
different. More specifically, I’m going to provide some analytical
points based on the empirical assumption that because of the robots
ruling the roost, little, if anything will change in this market and
that the current advance is not just the new normal, but sustainable
beyond anyone’s expectations.
I want to be clear: I don’t believe, in my heart of hearts, that this
time is any different. I think this momentum run will end badly, just
as all the other momentum runs in history have ended badly. But for the
sake of argument, I’m just going on a mind trip. If I’m right and this
market goes to Dow 30,000 in the next two months followed by a slow and
steady consolidation pattern, instead of the crash of all crashes, I
will be the first to admit that I got lucky. Of course, only time will
tell, so let’s have a look at what the robots are doing.
Market Breadth Suggests Higher Prices Ahead
Affirming the bullish side, the most accurate indicator of the last
twenty four months has been the NYSE Advance Decline line (NYAD). This
indicator remains in a rising channel and has robotically traded in
a range defined by its upper and lower Bollinger Band for the past
few months. A tag or a rise above or below the upper band has usually
led to a reversal while a tag of a fall outside the lower BB has reliable
led to a move to the upside.
As of January 12, 2018, the NYAD made a new high and seems poised
to move higher. In a world where the self fulfilling robotic prophecy
is the dominant factor, this suggests the rally has more upside room
There is Something Here for Everyone
There is no shortage of charts depicting market sectors and stocks
that are impressively breaking out. In fact of the thirteen broad sectors
I follow, eleven broke out last week and are in the midst of impressive
advances. Indeed, I offer one in the next few lines. At the same time,
it’s important to have some perspective in this market, which is why
I also have two other charts for review.
First, is the chart of the NYSE Utility Average ETF (IXU). This index
is down 14 percent from its November peak. In other words it’s now
trading in the range between a correction (down10%) and a bear market
(down 20%). This sector is very oversold (see RSI), but the chart suggests
it is nowhere near a bottom as the ROC, which measures momentum recently
This point is best illustrated when you compare the utilities to
the energy stocks (XOI), which are making daily new highs. Indeed,
one is the mirror index of the other. Look at RSI and ROC for XOI and
you see a very overbought market with some, although receding upward
Finally, consider the semiconductor sector (SOX) which is in an uptrend
but has yet to make a new high with the market in January. In this
case, RSI is nowhere near overbought while ROC is starting to strengthen.
Where should you put your money?
It’s always best to trade with the prevailing trend and this is still
a bull market, albeit one in the midst of a very aggressive advance that
makes me nervous. At times such as these, it is important to remember
that traditional traders often sell into strength and buy into weakness.
Still buying and selling is all about timing and asset allocation. Thus,
in this market, it may be too early to buy utilities, although taking
some profits on energy stocks seems reasonable. Perhaps the best bet
at the moment is to explore the possibilities in the semiconductor stocks,
which remain in an uptrend but are lagging the leadership sectors such
as energy while starting to show signs of strength.
Joe Duarte is author of Trading
Options for Dummies, now in its third edition. He writes about
options and stocks at www.joeduarteinthemoneyoptions.com.
JoeDuarteInTheMoneyOptions.com is independently
operated and solely funded by subscriber fees. This web site and
the content provided is meant for educational purposes only and
is not a solicitation to buy or sell any securities or investments.
All sources of information are believed to be accurate, or as otherwise
stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com
have no financial interest in any of the sources used. For independent
investment advice consult your financial advisor. The analysis
and conclusions reached on JoeDuarteInTheMoneyOptions.com are the
sole property of Dr. Joe Duarte.