Analysis, Perspective, Trading Strategy
The Silver Lining: Three Investments that are working Right Now
By Joe Duarte on June 2, 2019
financial markets are bracing for impact as newly announced U.S. tariffs
on Mexico and India combined with a new round of rising China tariffs make
for what could be a dangerous week in the markets. Add a big dose of economic
data including both private and government employment report, U.S. PMI data,
the Fed’s Beige Book and President Trump meeting Queen Elizabeth, and it could
very well be story time.
No doubt the current market is pretty skittish, but it seems as if
it could be worse. Presently, falling bond market interest rates seem
to be slowing down the rate of descent of stock prices; otherwise this
selloff would likely be much worse. But as things stand right now the
fact that the Fed isn’t raising rates is cold comfort and not much
to hang your wallet on. Clearly the markets are trying to force the
Fed to lower rates sooner rather than later. But the central bank moves
at the rate of a dying glacier while the markets move at the speed
of light, which means that if and when they act, a lot of damage may
have already been done. Unfortunately, as things stand the market’s
daily grind will likely be related to interaction between the algos,
the headlines, and the politics of the moment.
The Silver Lining
It certainly didn’t take long for things to change. Just a few weeks
ago, stocks were moving nicely higher. But as with all momentum runs,
the trend rolled over and investors are once again facing the possibility
of a bear market.
Who knows? Nevertheless, in order to survive and thrive as an investor,
it pays to remain alert and to find what’s working in any market. And
in this market, dividend stocks, inverse ETFs, exchange traded funds
whose share price rises when the market falls, are doing very well.
Furthermore, as I will describe below, REITs are starting to show signs
Indeed, one of the best performers in the Joe Duarte in the Money
Options portfolio right now is the ProShares Ultrashort QQQ ETF (QID),
which is up 11.2% since I recommended it on 5/3/19. QID is a leveraged
ETF whose share price rises or falls at 2X the rate of the QQQ ETF,
which invests in the Nasdaq 100 index.
But QID is not alone in doing well in this market, as dividend stocks
such as Coca-Cola (KO), which is one of the Joe Duarte in the Money
dividend stock portfolio holdings, are also holding up. Investors who
wish to capitalize on Coke’s dividend have until June 1, the ex-dividend
date to buy some shares. Coke shares have been rising of late after
delivering a better than expected quarter and giving investors upbeat
guidance. The 3.26% dividend yield isn’t exactly chump change either
when bond yields seem to be heading to 2% if their trend doesn’t reverse.
Truly the most interesting aspect of the sudden
reversal in stocks is the collapse of U.S. Treasury bond yields, with
the U.S. Ten Year Note (TNX) yield closing the week below 2.2% to end
the week of May 31. Moreover, this fall in bond yields has led to fifteen
year mortgage rates in the 3.3% area. So far, as I will show below,
lower mortgage rates have not helped the housing market. This is a
worrisome sign since traditionally, homebuilder stocks do well when
mortgage rates fall.
In fact, the chart for the S & P Homebuilders Index (SPHB) suggests
that money is starting to move out of the housing stocks as investors
are increasingly glum and concerned about the economy and the potential
for a repeat of the subprime mortgage crisis of 2008, which devastated
the homebuilders and mortgage lenders.
However, even as homebuilder stocks retreat, real estate investment
trusts (REITS) have held their own as yield hungry investors flock
to these dividend paying instruments in order to maximize returns.
A major reason for the relative strength in this sector is that more
persons are willing to rent than to own a home in the current climate.
But apartment REITS are not the only ones doing well. Some commercial
REITs, those who own land housing businesses with deep pockets and
strong balance sheets are doing well.
My point is that, we never know whether we are in a bear market or
not until it’s well established. And although things look pretty bad
at the moment, all we can do is trade what we see. Consequently, as
I’ve been saying over the last few weeks, there are still areas of
the stock market which are offering investors money making opportunities.
Furthermore, these areas share one thing in common, strong fundamentals;
especially the ability to generate cash flow in an economic slowdown.
The Overlooked Bull Market
There is always a bull market, and I just recommended two dividend
paying stocks in an overlooked sector of the market which is heating
up. These stocks have the potential to move significantly higher as
bond market interest rates fall. You can buy these particular stocks
when you sign up for a free 30 day trial to Joe Duarte in the Money
Options by clicking here. (Insert subscription page Frank)
Market Breadth Breaks Down
The good news is that the New York Stock Exchange Advance Decline
line (NYAD) closed below its lower Bollinger Band to close the month
of May. Normally, this would be a sign that a trend reversal is near.
And although that is not out of the question, the bad news is that
beyond the breaking of the lower BB support area, the most accurate
indicator of the stock market’s trend since the 2016 presidential election
looks otherwise dismal.
Accordingly, both the S & P 500 (SPX) and the Nasdaq 100 (NDX)
indexes don’t look much better. Both indexes are now in intermediate
term down trends and are testing the key support of their 200 day moving
If there is a bright spot, it’s in the RSI indicator which is closing
in on the oversold area of 30. But that’s not a guarantee of anything
more than a short term bounce at the moment. But accumulation distribution
(ADI) and on balance volume (OBV) have both broken below their recent
uptrend lines, which means that money is finding it easier to leave
stocks than to find a home there.
Let the market make your decision
My favorite market guru of all time, the late Marty Zweig always
said, don’t fight the Fed and don’t fight the market’s momentum. Consequently,
even though the Fed is neutral, it’s hard to ignore that there are
more sellers than buyers in the market at the moment.
Thus, over the last few weeks, I’ve been letting the market make
my decisions by letting my sell stops trigger my selling decisions.
So far, it’s been a useful tool, which I will continue to employ along
with hedging my long positions via inverse ETFs while using options
for more speculative trades.
Thus, investing in dividend stocks, considering REITs, and using
inverse ETFs makes good sense at the moment. Finally, all we can do
is to wait for the next salvo in the increasingly dangerous world of
politics and tariffs from our well fortified portfolio bunker.
I own QID and KO 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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