Analysis, Perspective, Trading Strategy
Investors Want to Move On. Algos Stick to China Script.
By Joe Duarte on May 19, 2019
are thinking it’s time to move on from the wacko algo world of U.S.-China
trade war related daily volatility and return to stock picking but the
algos aren’t budging from their digital program trading routine.
The news related action in the stock market continues, but so far
the major indexes have not broken below long term support and instead
the key benchmarks have entered into a consolidation pattern. Indeed,
what is apparent is that both China and the U.S. have now dug into
their respective positions and that the likelihood of a deal in the
short to intermediate term is unlikely. Perhaps there will be no deal
Yet, as always there is more to the story that what is in the headlines
the algos trade on. So while the U.S. and China argue, the U.S. has
removed steel and aluminum tariffs that were slowing ratification of
key treaties with Canada and Mexico clearing the way for approval and
perhaps a pickup in trade. Finally, it’s important to note that Japan
has removed trade restrictions on U.S. beef imports as Trump delayed
auto tariffs that could be harmful to Japan’s Toyota, Honda, and other
Inflection Points Lead to Complex Readjustments
As I’ve said multiple times on these pages, complex systems are self
correcting. Moreover, we seem to be in the early stages of one of those
corrections. In other words, short term thinking based only on U.S.-China
trade headlines could be a mistake for those investors who fail to
look beyond the moment.
For example, as China starts to lose business, as it surely will
when companies realize that the hassle of doing business there under
the current conditions may not be worth it, the U.S., Mexico, Canada
and Japan will likely trade more. So it makes sense to look at how
that might unfold while tracking the progress made by companies likely
to benefit from this. Think low tech such as consumer staples, as I
Still, there is no reason to rush into making bad decisions, as the
algos will focus on the headlines and the indexes will likely churn
for a while. What is quite likely is that some point they will have
to focus on changes in the trade dynamic as it evolves away from the
U.S. -China trade spat and it moves on to whatever new landscape evolves
from all of this.
Certainly, it’s hard to know what the future holds. But given the
way algos act, based on the fact that they know the direction of every
trade before it happens, I suspect that a new theme will emerge in
the next couple of weeks and the market will break out of the current
trading range, hopefully to the up side.
Thus, at the moment it seems prudent to move as far away, if possible,
from companies whose fortunes are tied to the U.S.- China trade war
and to focus on companies whose shares are being spared the algos’
knee jerk selling wrath.
It’s Back to Fundamentals and Stock Picking
We may be witnessing a shift in mentality. Over the last few years,
the market has been all about technical analysis, trend following,
momentum and algo driven trades. Most recently it’s all about the U.S.
China trade talks. But as the market seems to be entering a volatile
trading range it’s important to focus on individual stocks and to manage
risk, not necessarily by outright hedging, but by picking stocks in
the old fashioned way, based on value criteria and whether companies
can execute their business plan.
Last week I discussed Leidos Holdings (LDOS) a defense and government
service software stock which beat its earnings expectations and soared.
The stock held its own on the week ending May 17, and is an example
of the type of company that has the upper hand in the market, as long
as it can deliver. I like LDOS because it’s in a business niche that
will remain vibrant for the foreseeable future, national defense, homeland
security, and government contracting.
This week I want to focus on a stock I recommended to subscribers
of my service last week, Flowers Foods (FLO), a company specializing
in baked goods. In fact, anyone who buys groceries is familiar with
its major brands, the pantry staples Wonder Bread, Nature’s Own and
the leading organic bread in the market at the moment, Dave’s Killer
Bread. The stock has a low price in the $20 area and has a 3.1% dividend
yield with a history of dividend growth.
Perhaps the best thing about FLO is that management is executing
its business plan smartly, by making smart acquisitions, growing its
sales steadily, adapting to health conscious consumer trends. Meanwhile
it’s also capturing “impulse” buyers via its traditional bakery goods
– snack cakes, creating a diversified product portfolio. My point is
that in this market, it’s not always about hitting home runs with tech
stocks, but in finding stocks with strong management, realistic growth
targets, dividends, and products that consumers will continue to buy
if the economy slows.
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Market Breath Cliffhanger
The New York Stock Exchange Advance Decline line (NYAD), the most
accurate indicator of the market’s trend, ended the week of 5/17/19
just below its 20-day moving average with ROC just below the zero line
but its RSI above 50.
Altogether, this is a cliffhanger technical picture
which suggests that Monday’s open and subsequent action will likely
depend on headlines. I can’t wait for the Sunday tweetstorm from Trump
and the equally crazy editorial responses in the Chinese press. Still,
if NYAD holds above its 50-day moving average, the trading range, despite
any portfolio pain, remains intact.
The S & P 500 (SPX) closed below its 50-day moving average, which
is negative, but is something that could be easily reversed. Accumulation-Distribution
(ADI) and On Balance Volume (OBV) remain in up trends and ROC is just
below the zero line with RSI just below 50.
The Nasdaq 100 (NDX) ended in a similar technical posture. When all
the indicators are summarized, you still have nothing concrete other
than the market could go lower, but that it may not unless the headlines
are seen as being negative by the algos.
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Patience, Stock Picking, and Hedging remain the keys to Survival
This is pretty nasty market to trade due to the headlines and the
algos. Investors who stick with the basics should be able to weather
the storm. But for now it makes sense to avoid algo stocks, such as
big tech and multinationals for now. Instead, it makes sense to focus
on out of the way, less actively traded stocks with good management
and attractive business lines. Otherwise, with the summer trading season
about to kick off in about two weeks, maybe an early vacation is not
a bad idea.
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
Preorder the second edition now of The
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