Analysis, Perspective, Trading Strategy
Big Things are Afoot. Keep Your Eyes Open and Follow the Money
Duarte in the Money Options
are living at a moment in time where the absurd - flash mobs are threatening
to storm Area 51 - and the hugely important issues, such as central banks pumping
money into the financial system like there is no tomorrow, rising domestic
and geopolitical tensions and the U.S. stock market continuing to churn higher,
along with the seemingly endless wall of worry are adding new rows of bricks
on a daily basis while barreling toward an uncertain end. Yet, for investors,
it is always best stick to a well proven trading model. Thus as Deep Throat
told Woodward and Bernstein, it’s always best to “follow the money.”
Worries and More Worries
The usual worry list, starting with the U.S.-China trade war continues
to evolve with threats by the White House on 9/19 about raising tariffs
to 100% followed by product exemptions on 9/20/19 and an early departure
from Washington by China trade representatives during a Quadruple Witching
options expiration were good enough to make trade volatile for the
week. Meanwhile the Federal Reserve lowered interest rates and, just
to make trading more difficult remained vague about its future moves.
Across the world, the attack on Saudi Arabia’s oil infrastructure
may be developing into a long term worry as news emerged late on 9/20/19
of an unspecified increase in U.S. troop deployments into the Middle
East. This one dynamic could add significant uncertainty to the markets
as the lack of information and details on the situation beyond vague
allegations about Iran being responsible are likely to fuel price volatility.
Indeed, the general lack of information and the only immediate responses
from Washington being to increase sanctions on Iran while announcing
a vague troop increase in the region are spawning conspiracy theories
in some circles and raising uncertainty in the oil markets.
Nevertheless, the U.S. economy seems to be holding up, even in the
face of high levels of survey pessimism (CEOs, COOs, economists,) even
as the world economy continues to slow. This latter fact is evidenced
by the recently issued grim OECD assessment of Europe’s economy which
noted Germany is already in a “technical recession,” which increases
the likelihood of more central bank easing, and perhaps in more creative
fashion than in the past, such as India’s recent central bank backed
tax cut. Interestingly, the U.S. public is not quite as bearish, although
it is divided on its opinion the economy, based on income level and
party affiliation, according to a recent Gallup
UpcomingHomebuilder Earnings Are Crucial
for the Markets, Economy, and Life (MEL) System
In this market, it’s not difficult to get caught up in the daily
news influenced price grind. But it is imperative to remain calm, as
complex adaptive systems are dynamic and are always on the move. Therefore,
even though daily volatility can be frustrating, the central concept
here is that the financial markets are not operating in a vacuum. Indeed,
they are a part of the Markets-Economy-Life (MEL) system, where the
financial markets, the economy, and people’s daily lives meet.
It is in this very active, actionable and interconnected loop where
the actions of traders, corporations, policy makers, and consumers
act and react fueled by the news cycle and social media. It is their
convergence which creates interdependent trends visible in the stock
market, the economy, and people’s daily lives. In other words, every
instant in MEL is only a fleeting glimpse of where things may be headed,
and the possibilities of where things may end up are infinitely and
predictably unpredictable based on the basic tenets of Complexity,
the branch of science which studies how adaptive systems work.
Certainly last week’s housing data is proof of that motion as mortgage
demand from buyers jumped 15% year over year while mortgage apps for
refinancing fell, just as market interest rates rose. I’ve been expecting
a significant move in MEL, and have been watching housing carefully
for signs that people with money in their pockets were waiting for
the right set up to act. So, until proven otherwise, the most recent
housing data is likely an indication that such a move may be starting.
And if it is not impeded by external events we could see this trend
remain in place for some time as interest rates remain low, as long
as the economy remains stable.
Furthermore, as I’ve noted here multiple times the money in housing
seems to be moving more aggressively into newly built homes with the
latest amenities, delivering a 33% increase year over year increase
in this segment as homebuyers are avoiding expensive existing homes
with the potential for high remodeling and maintenance costs.
Accordingly, this seemingly persistent trend is likely to favor homebuilders
such as KB Homes (KBH) and DR Horton (DHI), whose shares delivered
chart breakouts and new 52 week highs for the week ending on 9/20/19.
Horton delivered an upbeat quarterly earnings beat for its most recent
quarter and offered positive guidance while increasing its already
leading market share through purchases of local builders while announcing
a $1 billion stock buyback program. Furthermore, the company reported
that demand for new homes remains high while supply remains tight,
which it has transformed into steadily rising gross margins and net
For its own account, KBH, whose earnings are due out on 9/25/19 continues
to focus on building gated communities in prime locations and is focusing
on smaller single family energy efficient homes or townhomes targeting
convenience seeking and price point conscious consumers and first home
buyers. In its previous earnings report, KBH delivered a 15% year over
year growth rate in new home orders while lowering its debt and increasing
the number of communities in which it offers homes to potential buyers.
If recent home sale data is indicative of where KBH’s sales have gone,
it would not be surprising to see a decent, if not a blow out quarter.
The bottom line on housing is that supply, demand, and demographics
– Millennials coming of age, albeit in their mid 30s, and boomers looking
to down size - are on the side of the builders who can deliver affordable
modern homes in accessible locations. With builders being increasingly
in tune with these issues, if mortgage rates remain reasonable and
barring a major economic downturn, homebuilders may be in their own
sweet spot for the next few quarters.
Market Breadth Takes a Pause
The market’s breadth, as chronicled by the most accurate indicator
since the presidential election of 2016, the New York Stock Exchange
Advance-Decline line (NYAD) took a pause last week after scoring
a series of new highs. Therefore the bulls are still in the game. Nevertheless,
given the daily geopolitical issues of the moment, we have to see what
happens in the next few days before making further decisions.
Meanwhile, the S & P 500 (SPX) is still range
bound between 2050 (50-day moving average) and 3020, while the Nasdaq
100 (NDX) is showing some apparent signs of weakness.
Of specific concern on NDX is the rolling over of the On Balance
Volume (OBV) indicator which is a sign that money is moving out of
the index. As a result, it’s important to parse through NDX to make
sure that we don’t throw all tech stocks out with the bath water.
The S & P 500 (SPX) and the Nasdaq 100 (NDX) indices both ended
lower on 9/13 but had rallied for the prior several days. Moreover
both indexes are within reach of their all time highs.
And a look in inside the index shows that old tech stocks, such as
KLA Corp. (KLAC), a major producer of semiconductor manufacturing equipment
is within striking distance of its recent high.
In contrast, the old FANG darling Netflix (NFLX) has broken down
completely. My point is that before turning completely bearish on technology
stocks, it makes sense to look at individual stocks inside NDX before
By the same token, SPX is holding up better than NDX because of sectors
such as housing which are holding up at the moment.
Furthermore, the Fed’s rate cut and the OECD report certainly had
an effect on what seemed to be a runaway reversal in the U.S. Ten Year
Note yield (TNX), which shot up to 1.9% before reversing. Much of what
happens in the market and the economy over the next few months, as
been the case for some time will depend on how the bond market adjusts
to the current global economic and political situation.
Keep Your Eyes Open and Follow the Money
The stock market is clearly at a decision point and the world has
an infinite number of balls in the air, many of which could crash at
any moment. Moreover, given the increasingly jumbled state of affairs,
a period of significant price volatility could start at any moment.
Nevertheless, despite the daily news, when it’s all said and done,
markets are all about interest rates and money flows. In other words,
the eventual price action is directly related to whether the market
cares more about low rates than actual economic growth rates and geopolitics
at the moment. Moreover in the long haul the reality of the price trend
is related to whether the debt saddled global economy, burdened with
deep infrastructural problems can still muster one more rally.
Thus, for traders like us, it’s all about finding what if anything
I own DHI, KLAC, and KBH 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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