-- This Week In The Money --

Analysis, Perspective, Trading Strategy

2019: A Year of Transition

By Joe Duarte on July 8, 2018

With one trading day left in 2018 most investors, after a harrowing fourth quarter, are hoping the year ends on a high note. But even if the market rallies, there are still plenty of unanswered questions about what lies ahead.

Last week, I described the Thelma and Louise moment where “the iconic T-bird convertible hits the edge of the Grand Canyon and the girls are about to hit the gas pedal. This is when fear fades, reality dawns and helplessness sets in just as everyone decides to sell all at once creating a liquidity trap and a potential collapse of the market’s structure.” Thankfully, the market chose not to hit the gas pedal. Yet, it still may.

Certainly the massive rally on 12/26 was a barnburner, especially after the brutal selling on Christmas Eve. And the bulls took a deep breath when the market followed through on 12/27. Yet by 12/28 trading got a bit sloppy with volume dipping and the market’s breadth losing a bit of steam. Consequently, we’re still in a no man’s land scenario where prices can once again roll over and the bears can regain the playing field even as the news cycle churns and the robots trade every single headline.

Of course, this type of extreme price behavior is not unusual for a bear market, where the rallies tend to be explosive and fizzle out rapidly. But it is also not unusual for the end of a bear market as the first rally can be an uncertain affair. What is unusual is the size of the moves and the rapid reversals, which of course, are due in large part to robot trading algos.

Still the real question is whether we are in a bear market. And if we are, is it one in which the economy is going to fall into a recession? Unfortunately, the economic data is still mixed, especially when taken on a region by region basis. Moreover, given the uncertainty about the Federal Reserve and interest rates and the external political and trade related issues of the moment, which remain unsolved, there is little to suggest things will change in this regard.

From a structural standpoint, the take home message seems to be that robot algorithms are here to stay and that the Federal Reserve, key leaders, and governmental institutions around the world have yet to figure out that what they say and do is fodder for the algos to move the market and accelerate the current trend. Therefore it would seem that volatility is the way of the present and likely the future.

From a behavioral standpoint, volatility is likely to change the way financial professionals – money managers, professional traders, investment bankers – view the world and the markets. As a result we may see a change in trading methods and expectations. This will likely be felt in the way the markets trade including the possibility of renewed interest in active portfolio management versus the more recently dominant passive and asset allocation strategies. Perhaps the most important market event will be what this new normal does to liquidity at any given moment.

Market Breadth Rebounds

The NYSE Advance Decline line (NYAD) rebounded last week. This was not a big surprise given the extremely oversold conditions in the market. What’s more important is whether NYAD holds up, even if it only moves sideways for a while. Thus, the key to a return in investor confidence is that the recent lows hold.

 

 

The S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes both bottomed out along with NYAD last week. More encouraging is the fact that both indexes held on to most of the gains from the previous two day rally at the close of trading on 12/28. However, as with NYAD, the key here is that the recent lows hold for the indexes and that individual stocks start to show signs of being accumulated again.

 

 

 

 

Thus it is of considerable concern that Accumulation Distribution (ADI), On Balance Volume (OBV) and ROC, the latter measuring momentum, rolled over at the end trading on 12/28. This along with lower trading volume raises questions regarding the market’s liquidity and may or may not be meaningful in the next few days if things calm down.

A Year of Transition

So the big picture for 2019 is still cloudy with the Federal Reserve remaining an unknown. The U.S. presidential election season is lurking. And there is the potential for disappointment if the trade talks between China and the U.S. fail to yield any tangible results.

I still wonder how much of the dramatic political and structural changes taking place in the UK, Italy, Latin America, Asia, France and Eastern Europe as well as the Middle East and Africa and

their potential effects both regionally and globally have been factored into the investment equation. It is noticeable that little is being reported on the potential for supply chain disruptions and outright scarcities of goods and the potential economic effects of developments along these lines if the trade talks go down in flames or if there is an unforeseen geopolitical event.

In summary, 2019 will likely be a volatile transitional year, politically, economically, and from a trading standpoint with both risk and opportunity presenting itself to those who dig deeply into data and keep their options open regarding asset classes. The stock market is trying to figure out what to do next. It seems that even the algos are confused. Furthermore, I would not discount the possibility for a major rally in commodities, especially the agricultural sector, a major rebound in oil prices, or both. Arguably, from a corporate standpoint 2019 may be eventually known as the year of the management team, where companies who can manage their supply chains and drive customers to their tents will eventually rise to the top of the food chain.

Rest assured; there is always a bull market, and I will do my best to find it. Otherwise, it’s still prudent to make a stock shopping list and to manage risk accordingly via long and short ETFs.

I wish everyone a happy New Year.

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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