Analysis, Perspective, Trading Strategy
The Pink Floyd Market: Another Brick in the Wall – of worry that is
By Joe Duarte on October 1, 2018
The Federal Reserve’s
latest interest rate hike and the politics in Washington have me humming
Pink Floyd’s “Another Brick in the Wall:”
“We don’t need no education. We don’t need no thought control. No
dark sarcasm in the classroom. Teachers leave them kids alone.”
As the witching month of October kicks in, visions of ghoulish stock
massacres may be dancing across the sub or otherwise conscious levels
of traders and hedge fund managers just as the market seems to be setting
up for a big move. This is especially prescient for those hedgies whose
coffers have seen client withdrawals over the past couple of quarters.
Last week I wrote: “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.”
In fact at first glance little has changed on the surface of the
market as stocks exhibited some volatility while no grossly discernible
change in the general uptrend seemed to emerge after the Fed raised
rates and the Washington situation developed. That the market didn’t
crash given those two events is nearly impossible to describe. Indeed,
because of what we don’t know and can’t predict, the wall of worry
may climb even further.
Mostly, this market is becoming a fragmented, stock and sector specific
affair as investors parse the vagaries of the Federal Reserve and the
plausible evolution of whatever is next. Thus those who are fortunate
enough to be parked in the right assets are likely to be doing just
fine, for now, even if they are nervous and in full knowledge that
the current status quo may not last.
Moreover, recent news that corporate insiders are selling stocks
at a record pace while the market is parked near a significant decision
point makes this a moment where wakefulness is the key to survival.
Odds Favor a Big Move Ahead
The New York Stock Exchange Advance Decline line (NYAD), is nearing
a decision point. This is a major development because of the uncanny
ability of this indicator to point the way for stocks since November
Specifically, the NYAD is forming a base above its 50-day moving
average and the lower Bollinger Band. A review of the indicator’s chart
over the past two years shows that when the line has found support
at the convergence of these two support levels – December 2017, March
2017, August 2017, November 2017, and August 2018 – the market has
rallied. In contrast, the only time the indicator fell below these
two support levels– January 2018 – marked a period of significant price
Perhaps the best clue as to which way things will break lies with
the RSI indicator. If the past is any prelude to the present, RSI for
the NYAD may have to fall further before the market to whip up the
bears just a bit more, and thus fuel a more meaningful rally, if indeed
once does materialize.
he S & P 500 (SPX) and the Nasdaq 100 (NDX)
indexes remain within reach of their recent highs which is a positive.
However, and this may be a fleeting thing, On Balance Volume (OBV)
for both seems a bit weak. This is more noticeable on NDX, which has
had its share of blowups in the FAANG stocks (FB, AAPL, Amazon.com,
Netflix, Alphabet) of late.
In fact, the chart of the FANG Index ETF (FNGU)
is tracing a price pattern of lower lows and lower highs, which is
being confirmed by a similar appearance in OBV and ADI. If this is
not reversed, things may get very interesting in a hurry.
Stick with what’s working
The market remains in an uptrend, but it is becoming
more selective. This is best illustrated by the action in the NDX index
and the FNGU ETN, both heavily weighted toward the FAANG stocks, as
reports of aggressive corporate insider selling and hedge fund client
withdrawals are beginning to emerge.
Moreover, October is often a down month and the market is not at
its most bullish posture at the moment. Furthermore, with money market
rates nearing the 2% mark, it’s much more difficult to justify the
case for buying extremely overvalued momentum stocks as aggressively
as when interest rates were zero.
“All in all it was just another brick in the wall.”
Thus, this is a great time to follow the Duarte mantra: Trade small,
hedge, use options, and stick with what’s working.
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,
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