Analysis, Perspective, Trading Strategy
Dividend Stocks Rock but Tech Stocks are Cheap
By Joe Duarte on June 9, 2019
is a new consensus on Wall Street, and it is all but confirmed; the Federal
Reserve will begin a new interest easing cycle, perhaps as early as in
the month of July.
This new set of expectations is by no means a sure thing, although
the Fed has said it will do something if it has to, whatever that means.
Nevertheless, the thought of a new easing cycle is already influencing
the stock market.
On the plus side, it looks as if the stock rally is back, at least
as of the close of business on June 7. The negatives, however, remain.
We still have the U.S. China trade wars, the potential for significant
slowing in the U.S. economy - think employment data and PMI numbers,
and the placement of trade tariffs beyond China, regardless of the
“agreement” with Mexico.
Most important, the market is run by headline trading high frequency
trading (HFT) algos who wait for every trade at the exchanges. Since
the algos know the future before it happens and are always on the right
side of every trade, the net effect is that every significant price
trend is accelerated, up or down.
Bulls are (almost) Back in Control
The New York Stock Exchange Advance Decline line (NYAD) made a nearly
full reversal last week, making a new intra-day high on June 7. Unfortunately,
by the close of trading the new high faded slightly, which means there
is still enough doubt out there to keep the bull slightly in the pen.
The S & P 500 (SPX) rebounded after falling below its lower Bollinger
Band (BB) before reversing and crossing back above its 200-day moving
averages, but is nowhere near a new high, given the laggard technology
sector’s recently poor performance. SPX is now battling to move decidedly
above its 50 day moving average.
The Nasdaq 100 (NDX) also rebounded and closed
above its 200-day moving average, regaining the recently lost long
term uptrend. Nevertheless, things are still in flux in technology
land as NDX, unlike SPX, is still well below its 50-day moving average.
Thus it’s still about the headlines and how the oversold market and
the algos decide to trade.
Dividend Stocks Break Out.
Last week I noted that dividend stocks and real estate investment
trusts (REITs) were doing well in the current climate. And this trend
seems to be accelerating as yield hungry investors move into the two
One particularly hot dividend stock, which has been in the Joe Duarte
in the Money Options dividend portfolio for some time is Coca Cola
(NYSE: KO), which just broke out to a new high on June 7, 2019. Coke
goes ex-dividend on June 13 and the stock has a good record of rising
until the date.
Bargains in the Tech Wreck
As much as I currently like momentum stocks when they are in a good
groove and dividend stocks when yields fall, I also have a contrarian
streak in me. So if you’ve missed the rally in KO, it may make sense
consider a contrarian move in the broken down technology wrecks.
A perfectly wrecked tech stock to consider is Micron Technology (NSDQ:
MU) a leader in memory chips. Of course, it’s important to keep in
mind Micron’s shares have been crushed primarily because of the U.S.-China
trade war. Thus, given the day to day headlines on the subject, owning
Micron at the moment has some risk.
On the other hand, the stock is extremely oversold, while currently
trading at an unheard of P/E ratio of 3. This ridiculous valuation
means the stock is priced as if it will never sell another memory chip
to anyone and thus it is an anomaly worth noting and perhaps capitalizing
As a result, the odds are that the risk in Micron, although not zero,
is lower than it was a few weeks ago. Moreover, the potential for major
gains in the stock is likely high if there is any progress, if encouraging
news surface in the U.S.-China trade talks or if Micron surprises with
its earnings which are due out on June 25.
Indeed the tech wreck has created some potential bargains worth considering.
Moreover if recent history is any guide, there is the potential for
short to intermediate term relief from the trade war as both sides,
- perhaps China more than the U.S.- are starting to feel the pinch
of the current situation. Therefore, if any good news surface technology
stocks will likely move decidedly higher, at least in the short term.
Accordingly, with a high beta stock like Micron, a two week rally could
deliver a nice profitable trade.
Keep Your Eye on the Ball
This remains a tough market, but don’t be discouraged. Good baseball
hitters keep their eye on the ball and keep swinging even when they
are in a slump. Consequently, here are two ways to maximize your trading
success right now.
First, spread the risk around by owning small lots in more than a
handful of stocks. Second let the market be your guide by placing and
adjusting your sell stops in a way that lets your winners rise as long
as they have legs. Meanwhile when the market stops you out of a losing
trade, just move on without regrets.
Since the algos can’t read my mind I keep my stops mentally and use
alarms to alert me of potential problems. Thus, they can’t move the
price of my stock to the stop, take me out and then take the stock
higher immediately in an HFT nanosecond after the damage is done.
Furthermore, with this much volatility it’s good to give any stock
room to maneuver, so a 5-8% sell stop is reasonable.
A perfect example of letting your profits run in a tough market is
Broadridge Financial Solutions (BR), a financial services software
company, whose shares are up some 30% since we bought it in March 2019.
As the chart clearly shows, patience is a virtue that pays off. Thus,
if you own a stock such as BR that is holding its value when the market
is falling, hold on to it, as hard as it might be to do so, until if
falls below your sell stop. As it gains, the negative effect on your
portfolio of stocks that have been stopped out is muted.
Finally, remember this when trading. If you’re stopped out of your
losers with small losses but you have a handful of big winners that
keep on rising, the odds of a profitable cycle are in your favor. Furthermore,
this approach will serve you well in rising and falling markets, especially
if the Federal Reserve doesn’t live up to the market’s new expectations
of another round of quantitative easing.
I own BR, MU 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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