Analysis, Perspective, Trading Strategy
Time Warp: Why Nothing Seems to Work as it used to
By Joe Duarte on September 16, 2018
I’m almost certain
that all is not well so I trade in small lots in stocks with positive
charts and solid fundamentals, use options, and hedge my bets.
I may be standing alone in the wilderness, but at the moment I am
nervously basing all my investment decisions on one simple and very
contrarian theme: this time is different. Of course
anytime that phrase is uttered on Wall Street it can signal that a
dramatic change in the long term trend is on its way. But because that’s
what history suggests should happen and it is not what’s I’m seeing,
I’m more convinced –and nervous - every day that this time may be the
one time which is different.
And here is why what once worked isn’t currently adding up. Analysts
are caught in a time warp, essentially flying blind. That’s because
after the 2008 subprime mortgage crash the game changed, perhaps irreversibly.
The Fed panicked and here we are.
Indeed the central bank printed an unthinkable amount of money and
then spread it around the world to so many places that it’s impossible
to quantify or imagine the effect or extent of their actions. Furthermore,
as other central banks joined the party they multiplied the cash hoard
that’s still sloshing around the world. Thus because there is so much
money still out there, it’s practically impossible to use traditional
monetary indicators as benchmarks from which to make decisions.
Yes, some of the excessive liquidity has been mopped up, especially
the largesse deployed in the emerging markets which are now suffering
in a major way. But even so, there is no way to measure the real amount
of cash that’s still floating around in the U.S. and the developed
world, or what it’s doing. This is why business is still being conducted
on a fairly normal fashion in the developed world which is further
being spurred further by deficit spending and nearly full employment
in the U.S.
Real People Have Real Money?
Arguably, the clincher, and the fly in the ointment for those making
market bets on traditional data is that because there is still an excess
of cash available in the world, even everyday people are starting to
see more money come their way. This time is different. At the same
time businesses have reduced capacity, which when combined with the
legacy of just in time production and delivery has led to some pricing
power and to some degree a predictable book of business which can be
managed with supply chain software and artificial intelligence.
The net result is steady sales at reasonable if higher prices based
on the current balance of supply and demand. This is evidenced by what
I see in the retail stores that are still open and doing well because
they have discovered how to manage their supply chains and their pricing
and marketing strategies.
Of course some areas of the country are doing better than others
and it’s difficult to know how much of the activity I’m seeing is based
on credit card or in store financing. But what’s different is that
I’m not seeing the madness that was prevalent during the later stages
of the Dot-Com boom or the Subprime Mortgage crisis. I see only steady
commerce between savvy customers and businesses that are doing the
right things. These are not signs of a blow off but of a trend that
could last longer than anyone expects.
Stock Picking is T-H-E T-H-I-N-G
The New York Stock Exchange Advance Decline line (NYAD) remains the
most accurate indicator of the stock market’s trend since the 2016
election. And its current posture suggests the uptrend remains in place
but as I will show below stock picking is the key to success in this
The S & P 500 (SPX) is once again within striking distance of
another new high and is clearly confirming the uptrend illustrated
in NYAD. Note the rising slope of the Accumulation Distribution (ADI)
and On Balance Volume (OBV) on SPX which is signaling positive money
flows into stocks.
But not all stocks are in bull markets. First, look at the chart
of semiconductor equipment manufacturer Applied Materials (NSDQ: AMAT)
which has fallen 37 percent since topping out in February 2018. AMAT
is well into a bear market, trading significantly below its 200-day
moving average with ominous looking Accumulation Distribution (ADI)
and On Balance Volume (OBV) while ROC is still showing no imminent
recovery in its down side momentum.
But not all stocks are in bull markets. First,
look at the chart of semiconductor equipment manufacturer Applied Materials
(NSDQ: AMAT) which has fallen 37 percent since topping out in February
2018. AMAT is well into a bear market, trading significantly below
its 200-day moving average with ominous looking Accumulation Distribution
(ADI) and On Balance Volume (OBV) while ROC is still showing no imminent
recovery in its down side momentum.
How Much More Pain can the Bears Endure?
I understand that my conclusions are not universally held. And I
appreciate the fact that I may be wrong and the whole world may come
crashing down at any time. After all there are plenty of reasons, based
on what up to now seemed to be sound historical perspective to expect
a bear market and perhaps worse; especially rising interest rates,
the turmoil in the emerging markets, and the wild and wooly politics
of the moment.
But here is what I see on Wall Street. Analysts are still fighting
the old war. Traditional benchmarks are not currently as reliable as
they once were, in the markets or in the U.S. economy. Only technical
analysis seems to work because the robots are still buying every single
dip in the stock market. Furthermore stock specificity is the key to
success while the wall of worry grows bigger by the day.
On Main Street well informed consumers and surviving businesses seem
to be operating in a balanced and unusually cautious and responsible
fashion, at least compared to past cycles. Furthermore, some things,
even in this market, remain consistent. Not the least of which the
fact that rising stock prices and bearish sentiment are the combined
lifeblood of bull markets.
Let me put it another way. How many hedge funds with big marquee’
names at the helm have bet on the end of the world and have missed
the huge gains in Microsoft and other bull market stocks in 2018? These
funds, many of which are bracing for massive redemptions are facing
the possibility of having to write yet another “so sorry” letter to
their clients before the end of the year. All of which suggests that
they will have to reverse their bearish stance and buy, buy, buy before
too long in order to save their paychecks.
This time is different because the game has changed. The big guys
have been raked over the coals by the bots and the overkill money printing
by central banks and need to save their gigs. Furthermore, there are
still too many bears banging the table and too many things that are
holding up the wall of worry. Thus, until proven otherwise the odds
favor a continuation of this very nervous, highly selective and unforgettable
Joe Duarte has been an active trader and widely recognized stock
market analyst since 1987. He is author of Trading
Options for Dummies, rated a TOP
Options Book for 2018 by Benzinga.com - now in its third edition, The
Everything Investing in your 20s and 30s and six other trading
books. To receive Joe’s exclusive stock, option, and ETF recommendations,
in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.
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