Analysis, Perspective, Trading Strategy
2019: A Year of Transition
By Joe Duarte on July 8, 2018
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
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
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
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