Analysis, Perspective, Trading Strategy
Hair Trigger Market Poised for Big Move as Wall of Worry Rises
By Joe Duarte on September 1, 2019
are experiencing a hair trigger stock market which is poised to make
what could be a significant move as the wall of worry erected by interaction
between the Federal Reserve and the White House, the U.S. - China trade
war, and the increasingly tense geopolitical situation (Hong Kong and
Brexit) converge. What this means is investors should expect the unexpected
as the month of September arrives.
As I noted last week in this space, the U.S. stock market was on
the razor’s edge at the start of the pre-Labor Day week. Moreover,
by the time the week ended despite the lack of a complete market breakdown,
there was still no definite verdict on the direction of the next major
move other than the odds of one coming soon are on the rise, as I discuss
So as we head into the often treacherous months of September and
October, it’s important to keep in mind what has worked and what may
work in the future and that trading what we see is more important than
to make blind bets on what we expect.
Leidos Holdings Breaks Out Fueled by Government Contracts
With the market on pins and needles only one thing is certain, it’s
presently not as easy to find winners as it was at the end of the Q4
rout in stocks. But, it’s not impossible either, if you keep an open
mind and look for the correct situation and setup. For example, last
week I wrote about Generac Holdings (GNRC), a power generator manufacturer
whose shares rallied nicely, as I expected, on the hurricane situation
in Florida and the U.S. East coast. And although the stock broke out
on the news of the worsening hurricane, depending on how the situation
develops, it could well add to its recent gains.
Yet, beyond seasonal stock picks the recent volatility has created
some opportunities in stocks of companies which happen to be in the
right place at the right time such as software designer and administrator
Leidos Holdings (LDOS), which I recommended in April 2019, about 36%
below the closing price on 8/30.
Leidos is poised to do well over the longer term because of its customer
base; local, state, and the Federal governments, especially the U.S.
department of defense. And it’s the latter where I expect there will
be more growth in the not too distant future due to the U.S. - China
trade war and the rising need for intelligence gathering and data sorting
as the geopolitical situation remains a hot mess.
In other words, as long as there are taxpayers to foot the bill and
geopolitics to create a need for spyware and systems administration,
LDOS will have business. Moreover, they’ve been getting paid well for
their wares as they beat expectations and raised their guidance while
announcing a growing book of pending deals in their most recent earnings
report. One example of such a deal, which has recently closed is a
$160 million pact with the U.S. Army for software engineering at Mission
Command, and management of fires and radar systems. At the same time
the company just completed the acquisition of IMX Medical Management
Services which will bring the revenue of data management for three
thousand medical exams and medical reviews per day from key federal
The stock broke out this week and has the potential to move to the
$90 area as investors start to factor in what is expected to be another
positive earnings report in late October. LDOS will also pay a dividend
of $0.34 on 9/30/19.
Markets Remain Up in the Air after another Non Committal
Finish for NYAD
Two weeks ago, the New York Stock Exchange Advance Decline line (NYAD),
the most accurate indicator of the stock market’s trend since the 2016
election, closed at its 50-day moving average before rebounding throughout
the week ending on 8/30. But even though the indicator improved its
standing it once again left investors with a sense of dread as it failed
to make a convincing new high to end the week.
Meanwhile both the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes,
while also bouncing off of long term support, failed to close the week
above their 50-day moving averages, essentially leaving the overall
market’s trend up in the air.
Nevertheless, a big move is coming as the Bollinger
Bands are increasingly tight suggesting that the market is storing
energy which will be released at some point in the not too distant
future as some time of significant price move develops. Thus, given
recent history, whichever way the market breaks, up or down, it’s likely
to be a sizeable move.
Moreover, the RSI and ROC indicators for NYAD, along with the Accumulation
Distribution (ADI) and On Balance Volume (OBV) for the indices are
stuck in neutral, only confirming that the market is undecided but
that a big move is coming.
Bonds May Hold the Key
While the stock market is on pins and needles, the bond market rules
the roost. That’s why I’ve been covering it here in more detail for
the past few weeks. In fact, it’s the interplay between the bond market
and the Fed that are most important for stock prices since these two
players are the biggest influencers of the Market-Economy-Life loop
where the instant dissemination of news via social media and the 24
hour news cycle prods people into making crucial financial decisions
based on their expectations for the trend of interest rates.
Last week, despite relatively weak housing news, mortgage rates actually
rose as the U.S. Ten Year note yield (TNX) rebounded above the 1.5%
area, which seems to be the floor for rates at the moment. Meanwhile
consumer confidence is starting to roll over, and those houses I’ve
been watching for the last few weeks are still for sale with Open House
notices and “REDUCED” price signs on them.
When you put it all together it’s hard not to notice how fast the
news travels, how quickly people react, and that the Fed is living
in the 1990s.
Getting Ready for the Unexpected
With technical and fundamental indicators pointing to investor uncertainty,
and a cautious consumer just before a three day holiday, it’s a good
idea to take a step back and see what happens before putting big money
to work. At the same time, planning for any eventuality and being ready
for anything is paramount.
Thus, as we head into what is traditionally a volatile two months
in the market, shoring up sell stops on open positions while simultaneously
looking for opportunities on the long side, and considering the use
of hedges such as inverse ETFs and options is the way to go. Meanwhile
keeping tabs on key chart points for when the market breaks above key
resistance or below crucial support. Specifically, the key resistance
and support levels are at SPX 2945 and 2893 respectively. The former
is the truth line for the bulls, while the latter is the red line for
I own GNRC and LDOS 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
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