Analysis, Perspective, Trading Strategy
Never Short a Tranquilized Market – Even One Run by Machines
By Joe Duarte on May 29, 2018
Did someone slip the stock market a Valium? If you
look at stock charts and listen to market chatter in a vacuum, you may
think that we are close to a market top, perhaps – as indicated by last
week’s anemic trading volume - one induced by sheer boredom or perhaps
a tranquilizer. But if you look at the real economy it seems that things
are quietly motoring along. So, which one is correct? And which way will
Although I am focused on the markets, it’s always useful to compare
real life to the action seen on computer screen. Thus, I wanted to
report on things I saw in the last few days on an early summer trip
to south Texas. First, the number of out of state cars from places
such as Florida, California, Missouri, Illinois, Oklahoma and Louisiana
was well above what I’ve seen before. In fact, this particular trend
is something that I have seen rising steadily in Dallas over the last
six months and which may be indicative of a once in a generational
migration of the U.S population based on economic trends such as housing
prices, job availability and political changes.
Second, popular car stops on I-45, such as the privately owned Buc-EE’s
gas station and convenience store chain were packed with customers
who were spending money in a way I haven’t seen in the last few years.
Due to the volume of traffic these stores see and their strategic locations
amidst major routes in Texas, I’ve found these road stops useful as
market and economic indicators in the past. Interestingly, I had to
wait in line to enter the Madisonville store. And once inside the crowd
was thicker than I’ve ever seen with money flowing to non-staple items
such as t-shirts and souvenirs along with the usual drinks, snacks
and other road foods.
Beyond Buc-EE’s, in Galveston, a place I have visited many times
and have over the years developed a general baseline for assessment,
I saw bigger middle of the week crowds full of very relaxed people
on the beach and healthy restaurant volumes at both Mom and Pop and
chain establishments even during off hours. Cruise lines were doing
a brisk business and street level parking near the shopping district
was impossible to find.
Most notable was the fact that I didn’t overhear anyone complain
about the state of the economy as I have experienced on visits to the
same places in the past few years. Instead, I overheard people discussing
their family issues and future business prospects. Furthermore, the
road to Houston from Dallas was full of major construction projects
with heavy truck and automobile traffic despite rising gasoline and
fuel prices. And for NAFTA doubters, I even saw several Canadian trucks
heading to the Barnett Shale with oilfield supplies which suggests
that negotiations on the treaty may work out after all.
I admit that this is all back of the napkin stuff. Moreover, a few
days on the beach and a couple of visits to a few convenience stores
is not a scientific study and that the top of any market is often lurking
around the corner just when the general population is starting to feel
positive about the future. Nevertheless, I found this generally positive
panorama in the real economy worth noting given the general feeling
in the markets that we are near a major market top and that the Federal
Reserve is about to destroy the economy by raising interest rates.
I also wondered whether the influx of out of state people into Texas
indicates that the U.S. economy is about to enter a regional all or
nothing scenario where the coastal and high tax states are about to
crash and burn and states such as Texas will blossom, at least in the
Summer Pause Ahead
If the summer action in the New York Stock Exchange Advance Decline
line (NYAD) last year is any guide to what’s coming in the next three
months, investors can expect sideways action with a slight downward
T Indeed, the most accurate indicator of the market’s trend since
the 2016 presidential election is tracing a similar pattern to what
we saw around this time last year. Note the general indecision in trading
direction and the similar readings in the RSI and ROC indicators. Together
these two metrics suggest a thinly traded market is what may lie ahead.
Indexes Exude Sleepiness
It may be that even robots take holidays, but last week’s volume
was more indicative of the dullness in trading that often takes over
Wall Street during the so called Dog Days of August. Nevertheless,
there were some interesting findings in the charts of both the S & P
500 (SPX) and the Nasdaq 100 (NDX) indexes.
Both the SPX and NDX charts share a lack of trading volume along
with falling On Balance Volume (OBV) and Rate of Change (ROC). Meanwhile
the Accumulation Distribution (ADI) line for both is rising. Together,
these three indicators suggest that there are some buyers out there
and very few sellers.
More buyers than sellers is always a good thing.
But with such low volume, and market breadth that may be ready to roll
over it’s hard to know what’s next.
Never Short a Tranquilized Market – Even One Run by Machines
Summertime usually brings a low volume stock market. Yet, when stock
trading is mostly fueled by robot traders, low volume may mean just
about anything. Furthermore, some traditions are worth considering,
especially the old adage – “never short a dull market.” So while we
may smile at the thought of a robot slumbering in a Valium daze, it’s
not a good idea to altogether turn your back on the market during dull
periods because of headline risk and the fact that machines can come
back online in a millisecond. Furthermore, it seems as if we are now
at that decision point where the economy is visibly and sustainably
strengthening while the market is gauging whether growth is sustainable
in the face of higher interest rates.
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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