-- This Week In The Money --

Analysis, Perspective, Trading Strategy

Dazed and Confused: the Magical Mystery Market is Coming to take you Away

Editor Joe Duarte in the Money Options

Led Zeppelin, in an ode to something sinister once played the chromatically inspired ditty “Dazed and Confused.” And while the hallucinations which plausibly inspired that anthem by Plant-Page and company may be intriguing to classic rock fans, it’s an apt description of the current market as the bears are certain that the end is near at the same time the CNN Greed and Fear Index is flashing a danger signal for the market’s sentiment with a reading of 75. But as confusing as the current events may be, you’ve got to wonder if this isn’t the proverbial Beatles inspired Magical Mystery Market coming to take you away.

I’ve been at this stock market analysis, trading, and writing thing for a long time. I’ve lived and traded through two gulf wars, countless invasions, multiple other near global crises, at least two “run of the mill recessions” and a Great Recession.

I’ve survived one and almost two Clintons, two Bushes, one Reagan, one Obama and now Mr. Trump. I’m still standing after the booms, busts, and market crashes and bull markets spawned by the policies and money gymnastics of Greenspan, Bernanke, and Yellen and now Jerome Powell. I can even recall when savings accounts paid 7% interest and yields were well above 9% for the U.S. Thirty Year Treasury bond. But I’ve never seen anything such as what we’re seeing now where the bull market keeps on climbing a wall of worry that doesn’t stop rising and where traditional signals seem to mean absolutely nothing.

Last week in this space I noted that things were clearly different in this general cycle of existence, inside and outside the market. Specifically, I wrote: “ 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 bull market.”

So I’m sticking with that analysis because there is still too much money floating around the world looking for a home, and I’ve got nothing else to hang my hat on at the moment. Moreover, while things could easily change at the drop of a Bitcoin or whatever the hot crypto of the moment is, the only thing I can do is trade the trend and focus on price action with the usual caveats that regular readers have become familiar with: trade small, hedge, and have one foot out the door at all times.

Is it a Divergence or my Imagination?

The Dow Jones Industrial Average (INDU) is firing on all cylinders having made several new highs on the week that ended on 9/21/18 while the New York Advance Decline line (NYAD), the most accurate indicator of the stock market’s trend since the 2016 presidential election, remained in a rising channel but as of 9/21/18 had yet to confirm the new high in the Dow or the S & P500. Thus, it seems fair to raise the question of whether this is a meaningful technical divergence which is forecasting a measureable decline in stock prices.

Arguably the divergence argument is emerging at best but it is worth watching carefully. The NYAD continues to trend higher, albeit sporting a flatter slope than we’ve seen in previous rallies. It is certainly above its 50 day moving average while RSI is not yet at an overbought or oversold level. And the ROC is similarly neutral; all of which suggests the market is in a wait and see posture but still sports a bullish bent.

When it comes to the other major indexes, it’s clear that money is coming out of the big tech stocks in the Nasdaq 100 (NDX) which did not make a new high this past week and where the On Balance Volume indicator (OBV) has clearly rolled over. If this trend continues we may be in for a bumpy ride in the tech sector, although NDX is closer to a new high than to a bear market.

The S & P 500 (SPX), for its own account, confirmed the new high in the Dow Industrials and has a positive money flow appearance with both OBV and ADI sloping higher while ROC continues to be neutral.

As a result, from a technical standpoint we have reasons for caution but no data which overwhelmingly suggests that a major decline is at hand.

Magical, Mysterious, and Certainly of Concern

I remain nervously and cautiously bullish – sort of – because the bears are calling for a crash as the bulls are going crazy with delight, which means that something should give.

Under normal circumstances this much bearish talk would be a very bullish contrarian development. But we have some credible sentiment signals that are flashing caution signs at the same time which gives the bears some clout. If these were normal times we would experience either a stock market crash or a price blow off where it becomes painfully obvious that the stock market is no longer a measure of anything that resembles sanity.

But these are not normal times. Thus I don’t know which way things will break although when they do many will claim credit for having predicted the event, whatever it is. All I know is that I can’t shake the feeling that at some point something very dramatic is likely to develop.

At this point the potential divergence of the NYAD and the major indexes may be meaningful, or it may be just another installment of this bull market’s penchant for algo triggered fake outs, especially if the line catches up to the Dow and the S & P and if the market continues its gallop higher over the next few weeks.

However, I feel compelled to note that if stocks start to retreat wholesale, in retrospect, it may very well be that this very subtle technical development involving the Dow Jones Industrial Average and the New York Stock Exchange Advance Decline line might turn out to have been the proverbial S-E-L-L Signal.

No matter what I suggest we all shake off the daze and the confusion and buckle up. For as the Beatles once crooned: The Magical Mystery Tour is dying to take you away.

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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