Analysis, Perspective, Trading Strategy
Change is Coming to the Markets
By Joe Duarte on March 3, 2019
remains a bull market for now, but with the emergence of softer economic
data in the U.S. and the world the character of trading is changing and only
those traders who change with the times will profit.
With two “First World” countries – Italy and Canada – recently reporting
two consecutive negative GDP quarters in a row, the call for central
bank easing is about to rise. Moreover, when you consider that U.S.
ISM numbers are starting to roll over and that China’s economy is flat
at best, logic dictates that it’s all but a matter of time before the
next round of lower interest rates/quantitative easing literally rolls
off of the central bank printing presses. But it’s not so much a question
or if or when the central banks will ease. The real question for global
markets the reaction to any easing of monetary policy by the big central
banks, if and when they open the easy money faucets.
For its part, the Federal Reserve sees a slowing economy in the U.S.
and has made it clear that rate increases are on hold. The People’s
Bank of China is already in easing mode, albeit through back channels
instead of an outright lowering of interest rates. But in Australia
where there is weakness in housing, and in Europe where there is weakness
everywhere, the central banks are still waffling. We’ll see what the
ECB says this week and how Canada reacts to its own slowing, which
could be made worse if there is an extension of what could be a political
So the take home message is how quickly the central banks start easing
if the data continues to slow and how the markets respond. And this
week’s U.S. employment data along with numerous Fed speeches and the
release of the Beige book along with housing data could well be catalysts.
Also data on U.S. home sales, Chinese trade data, and the ECB meeting
are on tap.
Emerging Markets, Central Banks and the Future of the Trend
Regular readers of this column are aware that I’ve been positive
on the emerging markets for some time. Indeed, until recently positive
action in Brazil (EWZ), Malaysia (EWM), Singapore (EWS) and Australia
(EWA), four countries that given their trade agreements should benefit
from easing of monetary policy in China had been leading the way. Yet
that has changed recently, as these former leaders have rolled over
and entered a consolidation pattern which has the potential to deteriorate
into outright selling if things don’t turn around in the next few days
to weeks. So I’m thinking the emerging markets may be the canaries
in the coal mine, and I’ll be watching their price action in the short
to intermediate term very closely.
- Calendar : Big data releases this week: employment
report, U.S. housing data, the Fed’s Beige Book, China trade data.
- Big Picture : The third year of the Presidential
Cycle (2019) is traditionally bullish for stocks. So far so good.
But the short term could see some slowing of the recent gains in
- Monetary Policy : Central banks are no longer
raising interest rates but markets may become impatient if economic
data continues to show weakness and the big three: the Federal Reserve,
the ECB, and the People’s Bank of China don’t start easing aggressively
- Risk : Headline risks persist. Think U.S.-China
trade war, slowing economic data, politics.
- Market Behavior : Short term volatility. Look
for swift corrections and price dip buying over the next few weeks.
- Stocks: Think sector rotation: new leadership
in sectors and within sectors is emerging
Market Breadth Says Consolidation and Rotation
The New York Stock Exchange Advance Decline line, the most accurate
indicator of the market’s trend since the 2016 presidential election
made a new high last week but seems to be thinking about entering a
consolidation pattern. As this unfolds, we can expect a leadership
rotation perhaps away from some, but not all technology stocks (XLK)
and into other areas of the market. Already we are seeing money flowing
more aggressively into biotech (BIB).
The S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes failed to
rise above their Q4 highs ibut have remained above their respective
200 day moving averages. SPX did close above 2800, which is a positive.
There are three key chart support and resistance
points which are likely to define the next market trend:
- Support at the 200 day moving averages on SPX and NDX
- Resistance at 2900 on SPX
- Resistance at 7200 on NDX
The key is to watch for breaches of key support
and resistance and how trading evolves from there.
Take Some Profits. Look for New Leaders. Hedge Some. Use
At this point, given the potential for either a consolidation or
a correction of some sort, it makes sense to take some profits off
the table and look for new sectors and individual stocks that are starting
to move. It also makes good trading sense to use options when looking
to trade in high price stocks. Hedging is still cheap and so are put
options on stocks that have come a long way over the last six weeks.
Finally, stay with what’s working and look at stocks individually as
some are more likely to outperform others as this market evolves.
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
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