Analysis, Perspective, Trading Strategy
Danger on the Rise as the Stock Market Walks the Razor’s Edge
By Joe Duarte on August 25, 2019
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U.S. stocks are poised on a razor’s edge, as the U.S.-China trade
war and the sour relations between President Trump and the Fed escalated
to new levels last week raising doubts about the continuation of what
seemed to be a fledgling rebound in stocks. Thus, the question to be
answered is whether the current market will snap out of the increasingly
scary volatility and rise or whether we are in for a repeat of the
Q4 2018 massacre.
Unfortunately, this is not surprising. Last week, in this space,
I noted: “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.” Regrettably, even
though the week started well and stocks were continuing their recent
recovery, by Friday the wheels started to come off.
Or course, in this Twitter hair trigger market this could all blow
over quickly as both the Chinese and the White House may have been
displaying gamesmanship before the G-7 summit. Still as things stood
by the close on Friday, and following louder rhetoric from both sides
over the weekend those investors who had hedged their bets were likely
to sleep better over the weekend and likely for the foreseeable future.
The bottom line is that regardless of the news cycle at this point
our best bet, as it has been since the 2016 presidential election,
is to let the New York Stock Exchange Advance Decline line (NYAD, see
below) be our guide.
U.S. Economy May be Rolling Over
Investors should start looking at consumer and industrial related
data more closely now as the potential for an acceleration of the slowing
in the U.S. economy seems more likely.
Three key pieces of economic data hit last week which will directly
affect the relationship between the Markets, the Economy, and Life
(MEL). First, existing home sales were better than expected, that was
a positive. This was followed by PMI data which fell below 50, signaling
a contracting economy for the first time in nearly a decade, clearly
a negative. And finally, new home sales came in below expectations,
further muddling the picture. The net result was a new down leg in
the U.S. Ten Year Note Yield (TNX), which is now well entrenched below
Thus, as events continue to unfold, the key is whether TNX breaks
below 1.5% and what effect that incredibly low yield will have on related
metrics such as mortgage rates, consumer confidence, general corporate
sentiment, and the stock market. Moreover, a key sector to watch will
be the homebuilder (SPHB) stocks, the data point that connects the
Life component of MEL to the markets and the economy. If nearly record
low mortgage rates don’t bring out the buyers, in both existing and
new homes, it is likely that the most heralded recession in recent
memory may well be on its way to being fully established.
Furthermore, I have now been hearing unconfirmed reports of layoffs
at major employers in the Dallas-Fort Worth area, where the economy
has been purring right along over the last few years. If this becomes
widespread, I would expect more trouble to appear in the regional data
such as the Fed’s next Beige Book.
Generac Holdings: Thriving Between Two Hurricanes
The stock market seems to be headed for some turbulence just as weather
forecasters have named the first tropical storm of the month of August,
Dorian, with expectations of it becoming a hurricane. Still there is
one company whose seasonal trading pattern toward gains seems to make
sense during both a tough market and what could be an awakening of
hurricane season. Certainly if the Atlantic literally heats up and
hurricane season does indeed arrive in full, generator manufacturer
and general power solutions company Generac Holdings (GNRC) is well
positioned to deliver needed supplies to those stricken and profits
The stock has already had a good run after its
most recent earnings report and upgraded guidance. But as we head into
September, the so called “tropical red zone” where the odds of major
hurricanes rise, the stock looks set to move decidedly higher.
Indeed, GNRC shares have been waking up after their recent consolidation,
while steadily trading above support at the $70-$72 price area. If
the shares continue to hold up, even in a tough market, they can be
bought, especially if the market does not fall out of bed altogether.
If you already own it, it may be worth holding on to it as long as
long as it stays above key support, as the odds of a positive price
response should there be a major storm are likely above average.
AD Line Closes on Razor’s Edge
The New York Stock Exchange Advance Decline line staged a dramatic reversal
on 8/23/19 and is now in danger of entering a very bearish technical
pattern similar to that which preceded the October 2018 mini-bear market.
Unfortunately, NYAD was not alone, as the general technical posture
of the U.S. stock market deteriorated rapidly on 8/23/19, in response
to the escalation of the U.S. China trade war and the Fed’s unwillingness
to lower interest rates at a rapid pace in what seems to be a now rapidly
slowing U.S. economy.
Still, NYAD did not break down completely as it held right at its
50 day moving average a key support level which has launched multiple
rallies after being tagged since 2016. In fact, the only big decline
in U.S. stocks came when NYAD broke below the 50 day line decisively
on October 2018.
Unfortunately both the S & P 500 (SPX) and the Nasdaq 100 (NDX)
indexes did worse than NYAD. Indeed, the two indices failed to close
above their 20 and 50 day moving averages as well as having failed
to stay above key chart price levels of 2900 for SPX and 7500 for NDX.
As a result, unless there is significant reversal the next support
level to be tested will be the 200 day line for both. A move below
that line would likely lead to very aggressive selling and a return
to an all out bearish trend.
Perhaps the most troubling aspect of the NDX chart and to a lesser
degree on the SPX chart is the rolling over of the Accumulation Distribution
(ADI) and On Balance Volume (OBV) indicators which show that money
is starting to come out of the market.
Hedging and Stock Picking Won’t Blunt a Bear Market
It’s time to be very cautious and to pay attention to any sell stops
because if the market fails to recover we are likely to see some very
aggressive selling in the next few days.
Up to 8/23/19, anyone who had hedged their bets and had picked stocks
with sound stories, able management, and excellent fundamentals had
been able to ride out the ups and downs of this market. But that may
not be the case any longer if things don’t change in a hurry.
The truth is that in a bear market, very few stocks hold up, regardless
of their underlying fundamentals. What that means is that investors
should now start to pay more attention to when it may be time to sell
those stocks that have done well over the last few months and start
to raise cash.
Certainly, if a bear market does develop, any existing hedges, such
as options, inverse ETFs, and cash are more likely to be the dominant
portion of any sound portfolio as we await the next buying opportunity.
I own GNRC 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
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