Analysis, Perspective, Trading Strategy
We’ve seen this before. Staying Cool and Trading Well will Save the Day
By Joe Duarte on March 10, 2019
ten years of the longest bull market in history, your view of the present
may depend on which metaphor you choose. For example, if you’re crazy bullish
some may think you are “whistling past the graveyard.” Meanwhile if you’re
bearish, you may be thinking that “Nero is fiddling as Rome burns.” However,
from a trading standpoint it’s best to be pragmatic, in which case it is best
to view the glass as neither half full nor half empty but as one that still
I’m not taking this market lightly. It’s clear that the global economy
is slowing rapidly while central banks continue to move at glacial
speed even as trading algorithms respond to headlines at the speed
of light and price and trend changes swiftly follow.
Unfortunately this is the world we live in. As I noted last week:
“the take home message is how quickly the central banks start easing
if the data continues to slow and how the markets respond.” Accordingly,
when the bad news hit the wires and the central banks delivered little
in the way of actionable monetary policy, the market, as it did in
Q4, sold off aggressively.
So where does that leave the markets? Well, unless something else
happens we are now fully at the mercy of the algos and how they respond
to the headlines as the central banks hope to get lucky.
And while that may sound pessimistic, consider the fact that every
major market decline is followed by a major rally, eventually. Remember
that in Q4 2018, the rapid algo fueled selling made it feel as if the
world was coming apart, while in fact January and February the algos
delivered sterling opportunities on the long side.
- Calendar : U.S. inflation data, U.S. durable
goods, China industrial production and U.S. retail sales. There is
also a key Brexit vote and U.S. Federal Reserve Chairman Jerome Powell
is scheduled to appear on “60 Minutes,” on Sunday.
- Big Picture : The third year of the Presidential
Cycle (2019) is traditionally bullish for stocks. But seasonality
alone can’t hold up stocks if central banks don’t respond to conditions
- Monetary Policy : Central banks are no longer
raising interest rates and markets are increasingly impatient as
economic data continues to show weakness. Meanwhile, the big three:
the Federal Reserve, the ECB, and the People’s Bank of China are
not showing signs of being in a hurry to ease policy aggressively
enough anytime soon because they are essentially out of options.
- Risk : Headline risk is rising. Think U.S.-China
trade war, global tariffs, slowing economic data, politics. Of the
four, it seems politics is starting to get near some sort of boiling
- Market Behavior : When good news and bad news
leads to selling, life is going to be difficult.
- What to do : Stay cool. Trade the market.
Market Breadth Breaks Down
The New York Stock Exchange Advance Decline line (NYAD) remains the
go-to indicator for the market’s trend. Over the last two weeks, based
on the behavior of NYAD, I’ve noted that some sort of consolidation
or outright correction was overdue. And the action this past week has
proven this observation to be correct. Indeed, the NYAD is now telling
us that the short term trend is in danger of having reversed to the
Especially worrisome is the breakdown of the ROC indicator, which
measures momentum, having fallen below zero. This suggests that momentum
to the down side is now picking up steam. Meanwhile the RSI has dropped
to 50 and could move lower if the selling persists.
For their part, the S & P 500 (SPX) and the
Nasdaq 100 (NDX) indexes went along with NYAD and are both struggling
to move back above their 200-day moving averages after breaking below
this key support level. This is a crucial juncture for the market since
the 200-day line is the dividing line between bull and bear trends.
Thus, if both these indexes remain below this key indicator, the odds
of lower stock prices are on the rise and the bears will be back in
charge, perhaps with equal or greater force than what we saw in the
fourth quarter of 2018.
Note the rolling over of the ROC indicator for
both indexes, indicating a breakdown of momentum to the up side. This
rise in weakness was confirmed by the On Balance Volume (OBV) and the
Short Term Trend is Negative but a New Rally Will Eventually
Trading is both an intellectual as well as a practical pursuit. It
pays to be aware of the big picture as well as the details. This bull
market is now ten years old, the longest in history. It was fueled
by historically low interest rates which, at least in the U.S. were
reversed by the Federal Reserve until recently.
But if you take a step back it’s clear that beyond those two characteristics,
this market is not much different than any other market in history;
the major influence on stock prices is the general trend of interest
rates. Where this market is different than past markets is in the speed
that it moves due to the influence of robot trading algorithms.
As a result, what used to take weeks to develop now often occurs
in hours or days. Thus, in order to survive traders must act rapidly.
So while this market could be headed down in a hurry, the flip side
is that at some point, we will be able to buy stocks at lower prices
and perhaps in a shorter period of time than anyone expects.
Accordingly, consider this an opportunity to hedge, go short if the
opportunity rises, to use options to cut risk, and to put a buy list
together for when the bull trend returns.
The sun will rise again. Be prepared.
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