Analysis, Perspective, Trading Strategy
Surviving What Looks to be a Volatile Summer in the Markets
By Joe Duarte on June 23, 2019
The Federal Reserve tried to put the best face
it could on caving into the markets and President Trump last week.
And while the stock market seemed to like the Fed’s new stance, at
least initially, the bond market clearly didn’t, which sets up the
potential for a volatile trading summer.
Certainly a lot can happen this week given the G-20 meeting between
President Trump and Chinese premiere Xi. There is also housing data
and the final GDP print to watch, which could be market movers. Furthermore,
there is a whole lot of Fed talk scheduled this week, which could make
Thus, this is a good opportunity to take a deep breath. Indeed, the
key to success at the moment, is not to abandon stocks altogether but
to formulate a plan to counter the possible increase in volatility
if the algos get confused and the market freaks out.
We’ll start by analyzing the big picture and the responses in the
Bonds, Housing, and REITs Are the Key to the Puzzle
First, the bond and stock markets initially rallied on the Fed’s
new easy money promise. But by Friday, bond yields moved decidedly
higher with the U.S. Ten Year Note (TNX) yield bottom now seeming to
be near 2% with key resistance now at 2.1%. If bond yields rise above
this key level things could get very bumpy.
And although the overall more market rolled over with the rise in
bond yields, even more telling was the fact that both housing stocks
(SPHB) and real estate investment trusts (SPRE) took steep nosedives
as bond yields rose. This may be a prelude to a difficult market future
if bond yields continue to climb. A lot may become clearer for housing
stocks this week after earnings from Lennar (LEN) and KB Home (KBH)
Of course, those two stocks may deliver pleasant
surprises, especially if they provide positive guidance. Still the
rapid decline in housing stocks and real estate investment stocks in
response to rising bond yields suggests that the markets are more in
tune with bond yields than with the Fed, which puts the central bank
in an even more difficult situation.
In addition, the fact that the pre-Fed dive in
bond yields during the month of May and June led to a moderate, but
not spectacular increase in existing home sales is a clear indicator
of the interconnection between the markets and the real world which
have melded into the Market-Economy complex.
The bottom line is that consumers are now in tune to the effects
of interest rates on their lives and are making big decisions such
as if and when to buy a home based on the action in the markets more
rapidly than in the past. Thus, if bond rates continue to rise, and
the recent trading pattern in the market repeats, we could well see
both a decline in the stock market as well as a potentially meaningful
decline in the economy, which in turn would lead the Fed to ease rates
with unknown consequences.
The Sky is the Limit for Skyline Champion
Strangely enough there is a bright spot in the housing sector, Skyline
Champion Corp. (SKY) a builder of manufactured homes. The stock has
bucked the general lukewarm trend among its peers due to poor housing
affordability for traditional housing. Consequently there is rising
demand for SKY’s products.
The stock broke out to a new high on June 21, as the market finally
seems to be recognizing that the company is in a great niche during
difficult times in the sector. Furthermore as its competitors struggle
with higher labor costs, land shortages, and higher material costs,
Skyline seems to be in its sweet spot at the moment sporting rising
Moreover, because of its very affordable average unit cost of $61,500,
SKY is seeing an increase in product demand and has been raising prices
while managing its supply chain, employment costs and expanding its
financing options to customers. Furthermore due to rising demand SKY
has recently opened a plant with several hundred employees, in Leesville
PA which is now fully operational.
If the current trend in the shares continues, we could see the price
move to the low 30s over the next few weeks to months barring a major
market event. I recommended the stock recently in Joe Duarte in the
Flowers Foods Delivers Tasty Cakes and Flavorful Stock Gains
Elsewhere the food sector has been a hit or miss affair all year,
providing both satisfaction and heartburn to investors as some stocks
have failed to hold on to short term gains (SYY) while others have
beaten even the most bullish expectations.
One example of a pleasant surprise remains Flowers Foods (FLO) a
dividend paying baker with hot store brands such as Dave’s Wicked Bread
and Nature’s Own along with its sinful and impulse satisfying TastyKake
offerings. The stock made a new high on 6/21/19 as investors are once
again looking for steady stocks in what could be stormy seas. In other
words, in this market it’s not about a company’s glamour, apps or hipster
potential but about its ability to generate revenues, deliver earnings,
and to pay dividends.
I have eight high yielding dividend stocks at the Joe Duarte in the
Money Options dividend portfolio at the moment.
Market Breadth Remains Agreeable but is Still Not All There
The New York Stock Exchange Advance Decline line remains the most
accurate indicator of the market’s trend as it has been since the 2016
election. This past week it made another new intraweek high but could
not hold it on Friday. Nevertheless it is still pointing to higher
stock prices, barring a major market meltdown.
The S & P 500 (SPX) confirmed the new high in NYAD but also failed
to hold onto it on Friday. Nevertheless, the bulls still get the benefit
of the doubt here, although there was a clear shift back into defensive
sectors by the end of the week.
The Nasdaq 100 index (NDX) is still lagging NYAD and SPX, but is
within reach of a new high. Still, the technology sector is not as
vibrant at the moment as it was just a few weeks ago before the U.S.
China trade war began to squeeze into tech company market expectations.
As a result, in this market, it makes sense to move toward defensive
stocks that are holding their own.
A little Patience and attention to Detail will go a Long
Way in this Market
Volatility is likely to increase again with the bond market looking
ready to retrace at least part of its recent gains. As a result, paying
attention to what positions are working and rapidly moving away from
clear losers will go a long way.
One way to cull the herd is to consider using sell stops at 3-5%
for stocks and then letting them go once the stop gets hit. Mental
stops are more useful in this market in order to avoid the algos hitting
your positions and then rallying them after they get you out. But that
requires vigilance and planning so setting alarms and having a good
chart reviewing routine is important.
No matter what, letting the winners run and dropping the losers quickly
is more than ever a viable strategy to consider in a market that looks
set to start churning vigorously.
Finally, keep a close eye on the tech sector. If there is a pleasant
surprise at the G-20, it is possible that this now very beaten area
of the market could once again blossom. I recently recommended three
tech stocks which are holding their own. Visit Joe Duarte in the Money
Options via the link below for a free trial subscription and full access
to these and other great stock picks and option strategies.
I own SKY and FLO as of this writing but in an algo market who knows
where I’ll be in a week.
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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