-- This Week In The Money --

Analysis, Perspective, Trading Strategy

Why Bother Trading in this Meat Grinder Market?

By Joe Duarte on October 22, 2018

It’s always darkest before the dawn and this market may be on the verge of turning around and heading to new all time highs, but it surely doesn’t feel and act that way right now.

Indeed, I don’t mind trading in a challenging environment, and I enjoy a good burger. But I am finding it difficult to justify putting my money into a market that resembles a meat grinder and where the condiments to a good burger are nonexistent.

Events in the world and the market seem to be racing toward a point from which there may be no return, at least for the foreseeable future. The international markets are either in bear markets (China) or on the verge of one elsewhere, as the major U.S. stock indexes straddle crucial long term support. Meanwhile the geopolitical situation is escalating, the Federal Reserve is forecasting higher interest rates, weather patterns are increasingly volatile and the U.S. midterm election is inflaming emotions and actions beyond the boiling point on both sides of the aisle.

The net result is that human traders are slowly pulling out of the daily trading fray and leaving the market to the robot algorithms. Accordingly, since algorithms trade at the speed of light, partially based on headlines, what just happened may mean absolutely nothing in the next quantum second; leaving nothing behind but a trail of rising uncertainty and nothing to look forward to but another run in the meat grinder. Moreover, as this cycle repeats, the odds of something like a flash crash due to the evaporation of the market’s liquidity increase, especially in response to a dramatic headline.

The Volume Trap: When Algos Trip on Each Other

Since the headlines are so volatile these days, algos can’t create a trend that lasts more than a few minutes at best. Instead, because of the rising uncertainty and the rapid fire changes in the real world they are forced into a helter-skelter trading pattern which unfolds at the speed of light and which no human can keep up with, leading to lower trading volume and draining liquidity from the market.

Indeed, it is this algo confusion which turns trading screens into a meteor shower in the last hour of trading or anytime the Fed, Trump, or anybody who can make stuff happen says something which the algos find meaningful until the next item hits the wires. Furthermore, in this disorderly quantum world trading pattern nothing seems to stick and the market just flops around like a dying fish out of water.

Unfortunately, I don’t see any resolution of the situation at the moment, which means that trading in the near term will remain very uncomfortable. And this is where things are until something very decisive happens before or after the election and the markets revert to a more predictable trading pattern.

Market Breadth Nears Long Term Decision about the Market’s Trend

The New York Stock Exchange Advance Decline line (NYAD) has retained its title as the most accurate indicator of the stock market’s trend. I am referring to the technical divergence I noted here in my September 23 update, where NYAD failed to confirm the new highs in the Dow Jones Industrial average correctly predicting the current and still ongoing decline in stocks.

All that remains to see at this point is what NYAD does at the 200-day moving average and whether any further selling in stocks, if it comes, is true panic selling - which is often the last cleansing before a new setup for a rally develops.

The S & P 500 (SPX) is nearing full term sell mode as prices test the 200-day moving average while the selling pressure seems to be increasing as On Balance Volume (OBV) has broken its intermediate term uptrend and is close to breaking below support while the Accumulation Distribution line (ADI) is near to confirming the action in OBV.

The Nasdaq 100 (NDX) is in a similar situation as SPX, but is showing just a bit of relative strength. Perhaps the only encouraging thing I can see at the moment is the slight uptick in ROC with each lower low in NDX. If this market does rally from here, I would suggest that this seemingly trivial observation may have been the one which correctly predicted such an event.

This of course brings me to the FAANG ETN (FNGU); which is off nearly 50% from its June 2018 top and which also followed the algo script at the 200 day moving average and is respectively displaying a set of equally legendary oversold technical credentials.

Finally, I want to highlight the fact that last week’s bullish action in agricultural commodities seems to have run into some headwinds as the previous forecasts for a colder than expected winter has now been replaced, at least temporarily, by forecasts for an El Nino trading pattern of warmer weather. Needless to say, the Invesco Ag ETF (DBA) may be in the process of rolling over, or not. After all, opinions, these days seem to change like the weather.

Time to Hit the Sidelines

The stock market, similar to where it was in January 2018, is at a make or break point. And you know times are hard in the stock market when stock guys, like me, are trading Ag funds.

I’m not advocating 100% cash, yet, but I can’t seem to talk myself out of considering that option and actually doing it if things don’t improve. In addition, with less than three weeks left before the election, barring an unforeseen decisive event, I expect no major change in the current meat grinder trading pattern. As a result, it’s a good time to at least raise some cash, make a shopping list and to stay patient. If true panic builds, and things eventually change for the better before the election, it makes would make sense to buy into those shares or ETFs that show the most strength.

Until then, if you must be aggressive, consider using options and keeping a tight leash on them. Above all, here is my new mantra for the short term: stay patient, enjoy the 2 percent in cash, and if any stock or ETF is not working either sell it or avoid putting your money into it until it does.

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.



JoeDuarteInTheMoneyOptions.com is independently operated and solely funded by subscriber fees. This web site and the content provided is meant for educational purposes only and is not a solicitation to buy or sell any securities or investments. All sources of information are believed to be accurate, or as otherwise stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com have no financial interest in any of the sources used. For independent investment advice consult your financial advisor. The analysis and conclusions reached on JoeDuarteInTheMoneyOptions.com are the sole property of Dr. Joe Duarte.