Analysis, Perspective, Trading Strategy
Traders Should Prepare for a Surprise Turn in the Markets Soon
By Joe Duarte on August 18, 2019
should be prepared for something unexpected in the markets fairly soon.
Global stock traders will have a serious decision to make in the
next few days to weeks regarding the effects of lower interest rates
on share prices. Moreover, one thing is fairly clear, the trend toward
lower rates seems to be well defined now with central banks lowering
rates regularly and an interesting move by China’s central bank over
the weekend where they streamlined the mechanism of getting money from
the central bank out to private banks and making loans to the public
easier to obtain.
Certainly, the market’s largest participants, the artificial intelligence
robot trading algorithms (algos) are programmed to rally in the face
of lower interest rates, which is why this market has not fallen completely
apart lately. Recent history shows stocks rallied on lower rates since
the bottom in 2009 until the Fed started raising interest rates in
2016. In fact the market didn’t really get dicey until 2018 when the
Fed pulled the higher rate lever once too often.
Nevertheless, the state of the economy is also an important factor.
Thus with the economic data slowing globally and slowly but surely
in the U.S. things could get a lot worse. Therefore in this fast moving
volatile market, rather than trading on broad assumptions, it’s best
to make trading decisions based on what you see, albeit tempered by
a healthy mixture of skepticism and an understanding of the playing
field. As a result it’s important to establish some landmarks and set
some targets in order to make the most of what could be a tradable
Above all, realize that events move at the speed of light and information
links the Markets, the Economy, and people’s lives (MEL) nearly simultaneously
creating rapid trend changes in all three areas nearly simultaneously.
Note the rapid increase in mortgage refinancing that has occurred since
the Fed lowered rates and bond yields followed with a rapid collapse.
Meanwhile consumer sentiment has taken a hit as everyday people, with
instant access to information, are suddenly worried about a recession.
That this has happened in a few weeks instead of months is proof that
MEL is indeed an entity to contend with at the moment.
As a result of these converging factors a trader’s reaction time
must be shortened, judgment must be hedged, and any trading decisions
must be based on sound technical indicators, which is why in this issue
I am studying the New York Stock Exchange Advance Decline line and
its current posture in detail along with updating some observations
on three houses that I have been watching on a regular basis as a bellwether
on the housing sector in order to evaluate the current status of MEL.
MEL Update: Affordability Trumps Tight Supply
Since buying a home is the the largest financial decision many undertake,
I’ve been watching three houses in my daily travels that have been
for sale over the last few weeks. One of them is an older home which
needs lots of updates. The other two are newer homes in what is described
as an “up and coming neighborhood” for young professionals, an area
that was “hopping” during the last housing boom and which recovered
nicely when the market improved after the subprime mortgage crisis
The older home was listed for $599,000 initially but after several
months on the market, it’s now off the market after many open houses
which saw little traffic. The other two homes both initially listed
for $800,000 or above and have been on the market for at least 60 days
each. One of them is now listed for $741,000 and the other for $784,000.
The Zillow.com description on the less expensive of the two lists the
seller as “motivated.” Interestingly, lower priced, more affordable
town homes in my survey area have sold well after the Fed lowered rates
and mortgage rates followed.
Meanwhile, with the U.S. 10 Year note yield below 1.7%, new homes
are selling steadily at best, except for manufactured homes, as I stated
above. Still, it’s obvious that older homes whose prices are high seem
to be struggling despite 15 year mortgage rates as low as 3.17% and
30-year loans as low as 3.65% in some areas of the country according
Indeed, the bottom line seems to be that the key to housing is affordability,
which is clearly overwhelming the relatively tight supply of homes
to buy. Where this whole dynamic comes together is in the inner workings
of MEL. This is due to the impact of the housing industry on the U.S.
manufacturing sector. This connection is due to the building of new
homes, and the ongoing repairs and remodeling required for existing
homes, especially as a contributor to employment in trades as well
as related industries, real estate sales, retailing, transport, and
The bottom line is that if housing does not pick up, or at the worst
remain stable, the risks of recession will definitely rise.
NYAD Tests Post Election History
The one constant in the market since the 2016 election has been the
New York Stock Exchange Advance Decline line (NYAD), which has correctly
called every turn in the market since the election of Donald Trump.
And its current posture suggests that the market is trying to bottom.
However, a bottom may be scarce without a catalyst, such as a surprise
trade deal between the U.S. and China, improvement in PMI or ISM numbers,
and/or encouraging existing home sales.
That said what the chart shows is that after the 2016 election, NYAD
found support at its 50 day moving average five times and rallied to
new highs off of that area. Conversely the market’s only significant
decline during the period came in October 2018 after a major break
below this key support line. This suggests that if NYAD can survive
its current test of the 50 day line, the odds favor yet another rally,
perhaps to new highs once again.
Also notable, the NYAD chart also shows that anytime the RSI indicator
finds support near the 40-50 area, the odds are high for this being
yet another dip buying opportunity. This is where NYAD’s RSI closed
Putting it all together, along with the fact that global central
banks are about to hit the printing presses, and that algos are programmed
to buy on lower rates, you have to seriously consider that we may be
at yet another tradable bottom.
Indices Remain Subdued, Selectivity Still Works
Both the Nasdaq 100 (NDX) and the S & P 500 (SPX) remain below
their 50-day moving averages, a fact which suggests large cap stocks
– technology, energy, autos - that are vulnerable to the U.S. China
Trade war and the increasingly rapid slowing of the European economy
are holding things back.
Still, it’s interesting to note that Accumulation
Distribution (ADI) and On Balance Volume (OBV) both turned up to end
the week of 8/16/19.
Meanwhile, money is still moving into interest rate sensitive sectors,
including home builders (SPHB) and REITs (SPRE), the latter of which
broke out to a new high last week.
Still, from a trading standpoint, owning selective REITs and homebuilders
has paid off over the last few weeks as the market has faltered and
is a solid strategy until proven otherwise.
Two stocks that fit the current bill are mobile home builder Skyline
Corp. (SKY) and healthcare REIT Welltower (WELL).
The former, as I’ve noted here multiple times offers low cost housing
options in a market where affordability is the key. Compared to some
of its conventional homebuilder competitors, SKY has been increasing
its manufacturing capacity while raising prices, both signs of strength.
SKY recently increased its full year’s earnings guidance and should
be helped by lower interest rates. More important, OBV for the stock
is in a well entrenched up trend suggesting money is coming into the
Welltower, for its own account, just made a new high, and is a great
way to play the aging demographic theme while collecting income as
the company provides land and management services to assisted living
and other types of living arrangement communities that target the aging
U.S. population. The company just paid an $0.87 quarterly dividend.
Get Ready for Everything
Get ready for everything, as the financial markets could turn on
a dime in the not too distant future. Indeed, vigilance will pay off
given the daily news cycle and the interplay between interest rates
and the Market-Economy-Life (MEL) complex.
Certainly given the current volatility price trends, we could be
well on our way to an aggressive down leg, or pushing to new highs
over the next few days to weeks at the snap of an algo finger. As a
result, hedging your bets, being very selective, and having an actionable
plan ready is the key to success.
I own WELL and SKY 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
Preorder the second edition now of The
Everything Investing in your 20s & 30s at Amazon and The
Everything Investing in your 20s & 30s at Barnes and Noble.
Washington Post Color of Money Book of the Month is now available.
To receive Joe’s exclusive stock, option, and ETF recommendations,
in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.
JoeDuarteInTheMoneyOptions.com is independently
operated and solely funded by subscriber fees. This web site and
the content provided is meant for educational purposes only and
is not a solicitation to buy or sell any securities or investments.
All sources of information are believed to be accurate, or as otherwise
stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com
have no financial interest in any of the sources used. For independent
investment advice consult your financial advisor. The analysis
and conclusions reached on JoeDuarteInTheMoneyOptions.com are the
sole property of Dr. Joe Duarte.