Analysis, Perspective, Trading Strategy
A Trading Plan for the HFT Have-Nots
By Joe Duarte on May 27, 2019
more headline related volatility as the summer trading season thins out
volume, the geopolitical situation heats up and the algos keep chasing
their own tails. Unfortunately, the bottom line is that the macro situation
is increasingly sticky and it will have consequences.
In fact, stock trading is a tale of two worlds; the high frequency
trading (HFT) world of the algos, where big bucks buys access to faster
data and the knowledge of what’s going to happen with every trade before
it happens, and our world. Of course, our world is one without an HFT
rig in our garage and the advantage of being at the exchange waiting
for every trade. Moreover, this scenario is not likely to go way, at
least for now, which is why it’s important to know how to maneuver
around the algo trading traps.
Therefore, for the rest of us, it’s all about stock picking, risk
management, grinding out profits, collecting dividends, and using old
fashioned eye burning analysis of charts, SEC filings, and conference
Getting Back to Basics: Two Healthcare Diamonds in the Rough
The algos may rule the roost, but there are places where being patient
may pay off.
A perfect example of where patience paid off recently is Medtronic
(MDT), a highly under rated medical equipment manufacturer which we
have owned for the past few weeks. Medtronic is a geeky medical stock
which is best known for its pacemakers and heart valves; you know stuff
that saves lives but doesn’t get much buzz in the algo world. What’s
interesting is that very quietly, under the radar, the company has
been diversifying its wares into orthopedics and spine surgery while
shoring up its pain management division. And last week’s earnings beat
shows that the strategy is working as the surgical unit outperformed
expectations and delivered a nice pop in the stock.
Perhaps what is still under appreciated is Medtronic’s pain management
surgical product line, which should benefit from the opioid crisis
and the likelihood of further reductions in prescription pain medications
over the next few years. If I’m right, once the market figures that
out, the stock should move higher for some time.
Another under rated company is healthcare giant Astra Zeneca (AZN),
an old school, seemingly plodding pharmaceutical stock. I recently
recommended AZN to subscribers and I own shares in the company as well.
AZN is far from sexy to the algos, but it has solid franchises in oncology,
diabetic care, and asthma. Furthermore, recent studies suggest that
AZN’s cardiac drugs are making a big difference in diabetics with heart
disease, a fact that should allow for label expansion on at least one
current blockbuster. It’s not 5G but, just for a moment, consider the
fact that you have to be alive to watch streaming video on your new
cell phone, especially if you’re diabetic and you have heart problems.
Amazingly, likely due to “Medicare for All” jitters
and HFT hysteria, the stock has lost 14% since April 1, before bottoming
out in mid May. Nicely the stock found support at its 200 day moving
average and money is starting to flow back into the shares. Barring
an all out market massacre, if things continue as they are starting
to go for AZN, the shares look set to recapture the lost ground, which
would put the stock back above $40, perhaps in the next few weeks.
Market Breadth Limps Along
Certainly, we are in a difficult market. And although there are stocks
out there that are worth owning, given the status of the market’s breadth
this is not a good time to be double mortgaging the house to buy stocks
or to be overly aggressive.
Of course, the NYSE Advance Decline line (NYAD) remains the most accurate
indicator of the market’s trend which is why its current posture is
of concern. Specifically, the NYAD is currently range bound but is
also clearly not forecasting much beyond a sideways trend. And things
could change in a hurry.
Furthermore, given the current time of the year during which trading
volume traditionally thins out, we may see a lot of false starts for
Making matters a bit worse, the S & P 500 (SPX) and the Nasdaq
100 (NDX) indexes are not as robust as the NYAD, which is saying something.
In fact, both benchmarks closed below their 50 day moving averages
and just above their 200 day moving averages which means that a few
more bad days could increase selling pressure and lead to worse losses
if the 200-day line does not hold as support. If that happens, the
algos would pounce on the situation and the selling could well accelerate
as it did in the fall of 2018.
Even of more concern, the Accumulation Distribution (ADI) and On
Balance Volume (OBV) indicators for both are also rolling over. As
a result, the odds are increasing that we will see lower prices in
many stocks before all this is over unless something changes.
On a positive note, the RSI indicator for both indexes is just above
30, which signals that the market is oversold. This could also be a
signal that the next down leg may lead to a more credible rally after
Still, this is not a time to be very aggressive while remaining patient
Risk is Rising
With the major indexes seeming to be in a transition from an uptrend
to a downtrend in the intermediate term, it makes sense to be risk
averse. Indeed, this is the reason that at the moment, only stocks
with very strong characteristics are still holding up and should be
areas where smart money concentrates.
This is a great time to stick with what’s working and to consider
options for higher risk stocks if you must trade them. It is also a
time to start watching the very beaten up sectors of the market, especially
technology and energy for possible places to enter the market in the
future while currently focusing on solid dividend paying stocks with
strong technical and fundamental characteristics.
Meanwhile having a bit of a hedge in place via put options and inverse
ETFs is not a bad idea.
I own shares in AZN, and MDT as of this writing. I have used Medtronic
medical products in my private practice of medicine but have no insider
knowledge of events in the company.
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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