Analysis, Perspective, Trading Strategy
It’s a News Driven Market Juiced by Robot Traders
By Joe Duarte on May 21, 2018
Given the general state of the world, the old adage
“sell in May and go away” may or may not be the way to go this year.
Moreover the key to price movement may have more to do with news headlines
and how robot traders respond than to internal market events.
There is a certain feeling in the air that something meaningful is
about to happen and given the Trump administration’s penchant for unpredictability
and showmanship it should not be a surprise if something that they
do moves the markets in a big way. I certainly don’t want a political
discussion here, but generally speaking from a market perspective,
it’s best to acknowledge the presence of political influences while
focusing on how the market responds to them. In that vein there are
several major issues which could deliver surprises and lead to big
price moves. One is the China trade situation, where it seems as if
both sides may have reached a truce of some sort. If the robots react
as they normally do to this type of thing we may witness a significant
price rip to the upside in the short term.
Other external trends to watch are the situation with Iran, and the
possibility that Europe decides to fully side with Iran and not the
U.S. on the nuclear deal and the fallout from Trump’s pulling out of
the arrangement. In this case we may see further volatility in the
currency and oil markets. Finally there is the wildcard known as the
Mueller investigation which is impossible to handicap and could be
full of unexpected twists and turns over the next few weeks.
With that background in mind, let’s fully circle back to the markets
where last week was for lack of a better word, pretty lame - with the
big news being the new all time high by the Russell 2000 (RUT) index
of small stocks. The bright side is that at least one major index confirmed
the new high in the New York Stock Exchange Advance Decline line. Even
though it’s not as impressive as the S & P 500 or the NASDAQ delivering
a new high to confirm the advance decline line, a new high by the Russell
200 is better than no new high at all. The flip side is that traditionally,
small stocks tend to outperform large cap stocks near the end of bull
markets. Of course since the markets, to some degree, presently function
differently than in the past due to the presence of robot algorithms
and their programs it’s difficult to gauge what the new high in the
small stocks may mean, beyond the fact that it happened.
Small Stock Rally is better than no Rally
The New York Stock Exchange Advance Decline line (NYAD), the most
accurate indicator of the stock market’s trend since the November 16
U.S. presidential election made a new high last week which was confirmed
by, of all things, a new high in the Russell 2000 Index of small stocks.
There are three key points on the NYAD chart to note:
1) The RSI for NYAD is still below the overbought line
2) ROC still has room to rise
3) Note the new high in RUT –bottom panel- making new high.
The bottom line here is that the market’s trend remains up and that
we are not overbought, yet, which means stocks can still move higher
in the short to intermediate term if the algos like what they read
in the headlines.
Large Stocks Took the Week Off
While the small stocks moved decidedly higher last week, the large
stocks stalled slightly. And while that may all change in the next
few days, this is what we had at the close of business on May 18. Certainly
that was a bit of a negative when seen as a snapshot of one day’s trading.
But since that’s history and new headlines will develop, it makes more
sense to watch the charts than to make big bets on what we saw last
Nevertheless, it’s good to explore the details. Indeed, the S & P
500 (SPX) and the Nasdaq 100 (NDX) indexes both showed slightly negative
Accumulation Distribution (ADI) and On Balance Volume (OBV), both signs
that money was starting to move out from the index components. This
was confirmed by rising volume bars when the market fell on Friday.
So the key here is to see what the entire market
does as the news flow develops in the next few days. If the majority
of the market picks up the trend blazed by the small stocks we may
get at least one or two more weeks to the up side. 2800 on SPX is still
an important chart resistance point to monitor.
It’s a News Driven Market
Summer markets are traditionally thinner than other market periods.
That’s because traders go to the beach. As a result, under normal circumstances
during the summer months, news headlines often influence prices more
dramatically than when more trading desks are manned. Furthermore,
when you add the influence of robot trading algos to the mix, there
is the potential for even more pronounced price movement in response
As a result, I continue to recommend sticking to strong sectors while
using smaller position sizes and using options, especially via income
generating strategies such as covered calls and spreads. In the end,
traders who manage risk appropriately will make it to the fall with
more money in their pockets.
Successful trading is more about the return of your money than the
return on your money.
Joe Duarte is author of Trading
Options for Dummies, now in its third edition. He writes about
options and stocks at www.joeduarteinthemoneyoptions.com.
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