Analysis, Perspective, Trading Strategy
Blood in the Streets and No one is buying. Watching the Fed’s Talk this week.
By Joe Duarte on November 25, 2018
too soon to say it, but it surely seems as if there is blood in the streets
and no one is buying. Of course that old Wall Street adage -“Buy when
there is blood in the streets” - is attributed to legendary banker J.P.
Morgan as he described periods during which value investors could pick up bargains
in the midst of selling panics. But in this episode of the occurrence there
don’t seem to be any buyers, at least not yet, which makes trading with any
certainty a difficult endeavor, even if the short side is delivering some wins.
And although there may be a somewhat credible relief rally at any time in the
future, all current signs suggest we may be in for a longer than expected period
of market volatility akin to a slowly bleeding peptic ulcer.
Here we are in yet another chapter of “This time is different,” as
the stock market continues to crash and there is no sign of any buyers
who hang around for more than a couple of hours. For its part stocks
look increasingly vulnerable to further selling, as the S & P 500
(SPX), the Dow Jones Industrials (INDU) and the Nasdaq 100 (NDX) indexes
are off 11.2, 9.5, and 14.9% off of their October highs and negative
for the year; and maybe well on their way to formal bear market territory
of 20% losses.
Sure there is plenty to worry about as the global economy has been
slowing for months and recent PMI data and flaky earnings suggest that
the U.S. economy is joining the slow growth pack. Of course, the changing
political landscape – Brexit, the midterm election, trade war possibilities
and a suddenly ambivalent Federal Reserve are also adding to the uncertainty.
So with both eyes open, our fingers crossed and our ears pinned to
the ground, we head into that traditional time of the year which is
better known on Wall Street as the Santa Claus rally. Moreover, with
a large number of Federal Reserve speakers out this week, anything
they say which could be interpreted as hinting at a change in the course
of interest rates could be a nice Christmas present.
No Help from Market Breadth
The New York Stock Exchange Advance Decline line (NYAD), the most
accurate indicator of the market’s trend since the 2016 presidential
election gets the award for calling the market’s decline when it delivered
a subtle but correct non confirmation of a marginal new high in the
Dow Industrials in late September, which in retrospect qualified as
a sell signal.
Indeed, on September 30, 2018, <add link to the column from September
30, if you can, Frank> in this space, I noted:
“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.”
Flash forward to the present and we see a marginal new low for NYAD,
registered last week, along with a rolling over of the RSI and ROC
indicators. Furthermore, the line is now below its 200-day moving average,
signaling that the benefit of the doubt for the market’s direction
at the moment goes to the bears.
Indexes Look Weak
The market indexes are no help as they are also in what could be
long lasting bearish trends. Indeed, both SPX and NDX are trading below
their 200-day moving averages amid lower volume which suggests more
traders are now on the sidelines and that volatility could spike further.
Furthermore, Accumulation Distribution (ADI), On Balance Volume (OBV)
and the ROC indicators are moving lower, suggesting a potential increase
in down side momentum.
If there is any positive side to the current situation in the stock
market it may be that the odds of a washout and possibly climactic
selloff are increasing or that stocks are so oversold that some sort
of bounce that actually lasts takes place. Either one of these scenarios
is equally plausible given the posture of the above noted indicators
which are all near their recent lows accompanied by thick layers of
bearish sentiment everywhere. Of course the bounce scenario would be
negated or delayed if the market selloff accelerates and prices fall
through the recent bottom.
Concern for the U.S. economy is evident in Oil and Bond Markets
Last week I noted that the crash in oil prices (WTIC), coincident
with the fall in the U.S. Ten Year Note yield (TNX) suggested that
the market was betting on a slowing of the U.S. economy. Unfortunately
this has not changed much.
TNX is hovering just above the 3% yield after recently trading above
3.2%. That’s quite a drop in yield in a short period of time, a signal
that the bond market is increasingly concerned about economic growth
slowing, not inflation as the Federal Reserve seems to be. This divergence
between the Fed and the bond market is of concern, and suggests that
the Federal Reserve is in a box from which there could be no easy policy
Furthermore, oil prices continue to crash with the WTIC now seeming
ready to test the $50 per barrel price area. There is the possibility
of some type of bounce in crude, but there is plenty of resistance
around $60 where there could well be yet another price reversal.
Uncertainty is still the Word of the Moment
Bear markets are defined as market drops of 20% or more. Cyclical
bear markets tend to last 12 months or less, give or take a couple
of months on either side. Secular bear markets last longer, sometimes
two years or more. It’s unclear as to whether we are working our way
to one or the other, but the thought is clearly sneaking into the minds
of traders, which is the reason for the fall in volume and the failure
of rallies beyond the short covering phase.
There is no point in trying to pick a bottom here as it will be self-evident
if and when it comes. For now, it’s a good idea to sit back with lots
of cash on hand, a good buy list in hand, and a big serving of patience.
For now, dabbling in inverse ETFs, poaching short term profits from
occasional longs, and trading options makes ssense. Above all, do whatever
it takes to avoid peptic ulcers.
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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