Analysis, Perspective, Trading Strategy
Let the Good Times Roll. In this Market it always pays to Adapt.
By Joe Duarte on January 20, 2019
wave rockers, The Cars, in their early hit: “Let the Good Times Roll,”
sang about the carefree ways of the young. In a sense, the song is about going
with the flow, adapting to the moment, and taking life one day at a time -
“let them take you up in the air, let them brush your rock n’ roll hair.” And
that roll with it attitude may be useful in this market, especially if the
good times roll over in the next few days to weeks.
Arguably, and perhaps for good reason, the good times vibe is not
universal. There are still plenty of investors who remain on the sidelines,
living in the recent past and licking their wounds after the fourth
And there is nothing wrong with learning the lessons of history,
especially the lessons of such a painful period. Yet, from a trading
standpoint you can’t take this stuff personally - you’ve got to know
when to let go. And until proven otherwise, it makes sense to stick
with what’s working right now, which is to be long stocks in the right
sectors. Currently that means owning select semiconductors (TXN, AMAT,
MU), biotech, (BIB), and select international ETFs such as the IShares
Brazil ETF (EWZ).
Still as we learned in October 2018, balance and prudence are the
keys to success. Moreover there are some positives beyond stock prices
to consider. Perhaps the most interesting development of the last week
was that a key barometer of the stock market rose above a key resistance
level which, unless conditions are reversed, signals we are back in
a bull market phase. Furthermore, with the Federal Reserve on hold
and the Chinese central bank in easing mode, money is returning to
global stock markets. Furthermore, it would not be a big surprise if,
as I said last week in this space “there may be a positive surprise
coming from the U.S.-China trade talks given the recent backslapping
by both parties after recent talks and reports.”
This combination of influences makes for an interesting decision
point for those investors who have been skeptical of the recent bounce
in stocks and have missed the opportunity to accrue sizeable gains
in a short period of time. Accordingly, given that there is so much
lingering doubt about this market, and with so many having missed the
rally, it seems as if it still has some upside left.
Of course, there is no guarantee that stock prices will continue
to rise. And yes this rally will eventually roll over. But for now,
the path of least resistance seems to be up, although the potential
for daily volatility is likely to rise with earnings season moving
into full swing.
But it’s more about what happens after earnings than the earnings
itself as investors will start to focus on revenues and forward guidance.
Moreover, since time heals all wounds, the longer the bears get whipped,
the lower will be the odds of a return to the bearish trend and the
higher the odds that money will continue to move into stocks at least
in the near term. This is especially true given the way that robot
trading algorithms accentuate the major trend of the moment, which
Market Breadth Rises Above Key Resistance Line
The New York Stock Exchange Advance Decline line (NYAD) has been
the most accurate indicator of the general trend in the U.S. stock
market since the 2016 presidential election. It certainly and correctly
predicted the decline in stocks over the fourth quarter on 2018.
Thus now that NYAD crossed back above its 200 day moving average
investors should pay close attention to what happens next. If the advance
decline line consolidates or moves further above this line, it would
signal a sustainable return to a bull phase in the market. By the same
token, a failure of this crossover to hold would likely signal that
stocks are once again heading lower.
Indexes to Test Key Resistance
The NYAD has crossed above its 200 day moving average but the S & P
500 (SPX) and the Nasdaq 100 (NDX) indexes have not confirmed this
event, although they are within reach of the key chart point. Furthermore,
both SPX and NDX have crossed above their 20 and 50 day moving averages
which is encouraging.
Nevertheless this sets up a conundrum for technical investors. Certainly
NYAD has been the more pivotal indicator since November 2016 but at
some point, it would be comforting to see the indexes confirm the uptrend.
Specifically, I am focused on SPX and NDX and their 200 day moving
averages because most human technicians seem to ignore this traditional
dividing line between bull and bear markets but the robots don’t. In
fact a review of the SPX chart clearly shows that during the Q4 decline,
the index tried to remain above this key long term moving average three
separate times. On the third attempt it failed and the selling accelerated.
Thus I expect a challenge of that key resistance level before the market
makes its intermediate term decision.
Together, these charts suggest that we are still seeing hesitation
from investors to fully return to this market broadly, but that they
are moving into select areas with a great deal of momentum.
Patience and Selectivity are the Current Tools of Success
The market may no longer be in a true bear phase, although given
the number of geopolitical bombs that could explode at any moment things
could change rapidly. Still, the fact that the Fed is on hold has reversed
money flows into select areas of the market.
Among the best performers remain the technology stocks, with stocks
such as Micron Technology (NSDQ: MU) and Applied Materials (NSDQ: AMAT)
along with a select group of international ETFs such as the Brazil
ETF (NYSE: EWZ).
So by sticking with what’s working and keeping tabs on the geopolitics
and the Fed, those with patience to sort through the charts, the stories,
and company fundamentals have a chance in this market for now.
I own MU, AMAT, and EWZ as of this writing.
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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