Analysis, Perspective, Trading Strategy
There is Unrest in the Forest. Heading Off the Beaten Path.
By Joe Duarte on December 9, 2018
In a classic
tune called “The Trees,” Retired Canadian rockers Rush cleverly dissects
the outcome of a political game gone wrong, which just happens to describe
the current situation in the world and the financial markets. It starts
with the haunting lyric “there is unrest in the forest, there is trouble with
the trees, for the maples want more sunlight and the oaks ignore their pleas.”
As in all political disputes, there are at least two sides to the
story: “the trouble with the maples, and they’re quite convinced they’re
right, they say the oaks are just too lofty and they grab up all the
light. But the oaks can’t help their feelings if they like the way
they’re made. And they wonder why the maples can’t be happy in their
Of course, the point of conflict arrives: “there is trouble in the
forest and the creatures all have fled. As the maples scream ‘oppression’
and the oaks, just shake their heads.”
And the conflict escalates: “so the maples formed a union and demanded
equal rights. ‘The oaks are just too greedy; we will make them give
And then the unintended consequences: “now there’s no more oak oppression,
for they passed a noble law. And the trees are all kept equal by hatchet,
axe, and saw.”
All of which brings us to the present where the U.S., China, and
the Federal Reserve are playing a dangerous game involving trade and
interest rates while the political parties around the world –France,
the UK, Germany, Russia, Turkey, etc. are at odds with one another
and within their own ranks. Meanwhile cities are burning (Paris) and
mudslinging in Washington is the order of the day. Closer to home,
Wall Street is being run by robot trading algorithms which react to
every single headline that comes out of China, the Fed, and the global
Moreover, strictly speaking, it seems that the stocks of companies
with reasonable or even strong prospects are being sold off aggressively
even in the face of good news. This of course is a big red flashing
light for the short and perhaps the longer term and suggests that active
traders should consider trading areas beyond the stock market at the
Market Breadth Fails Again
The short lived and temporarily encouraging action in the New York
Stock Exchange advance decline line, the most accurate indicator of
the stock market’s trend since the November 2016 presidential election,
evaporated by December 4; as the bears flexed their muscles in spectacular
Note the complete failure of the NYAD to rise above its 50 day moving
average and a subsequent break below its 200-day moving average raising
the odds of more action to the down side. Momentum seems to be close
to accelerating to the down side, barring yet another move toward the
top of the recent trading range.
Indexes Trade in Whipsaw Range
Perhaps the most frustrating aspect to this market is the volatility
displayed by the market indexes within a fairly tight range. For example
the S & P 500 (SPX) has been trading between 2600 and 2825 and
the Nasdaq 100 (NDX) has been rising and falling violently between
7300 and 6450 or so for the past few weeks accomplishing little more
than whipsawing investors, often with 100 plus point swings within
minutes of one another.
Most confusing is the fact that both the On Balance Volume (OBV)
and Accumulation Distribution (ADI) indicators have been trending positive
over the last few days as the market seemed to bottom, yet prices have
again turned lower.
Meanwhile the U.S. Ten Year Note yield (TNX) has
decidedly broken below 3%, a sign that the bond market is pricing in
economic weakness. At least on Federal Reserve governor (Bullard) has
hinted that the Fed will bypass its expected December rate increase.
This waffling from the Fed is adding to the confusion by traders, human
Elsewhere crude oil (WTIC) may have found a price bottom near $50
per barrel, although there is price resistance at $55, and there is
always uncertainty after an OPEC agreement given the potential for
cheating form OPEC nations after their recent agreement to cut production.
There is unrest in the forest
Last week it seemed as a worthwhile bounce was in the cards for the
stock market. Alas, that was yet another algo driven false flag. And
as every day passes, it’s becoming crystal clear that the current market
is not truly tradable for any extended period of time, as the odds
of mistiming both entries and exits are extremely high even for experienced
traders. Thus, cash remains the most viable alternative.
Still, those with high risk appetites can use inverse ETFs on a short
term basis such as the ProShares Ultrashort Dow ETF (DXD) when the
market offers the opportunity to sell stocks short. Those with a more
aggressive bent may also look into commodities via the Invesco DB Commodity
Index Tracking Fund (DBC).
At some point, I suspect the proverbial buying opportunity of the
next bull market will arrive. Yet, I suspect that this won’t be for
a while. Thus, wearing a steel hat and looking up and around once in
a while seems prudent. You just never know when a tree can come crashing
down in the neighborhood. After all, there is unrest in the forest.
I own shares in DXD as of this writing but who knows where I’ll be
in a few hours given the current market.
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
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