Analysis, Perspective, Trading Strategy
Take Cover. Don’t be a Hero.
Duarte in the Money Options
bulls ran for the exits last week as a political nuclear blast hit Washington
DC and the sellers took over the market in aggressive fashion with no sign
that the bulls will be in charge again for a while unless something very positive,
such as a full and complete trade deal between the U.S. and China develops
in the next few days. And to make matters worse computer memory giant Micron
Technology (MU), gave investors a very dim and hazy future guidance based on
its current trade war expectations, taking the wind out of the sails out of
what was starting to become a very promising semiconductor sector rally.
As I stated last week, the only way to survive in this market is
to follow the money. And unless something changes, money is now moving
out of the markets. Thus, as the action turned sour active traders
should have pivoted into managing hedged instead of net long portfolios
and should assume an overall cautious tone until it is clear that things
have calmed down. That said, this bull market’s story may not be fully
written yet. After all, even as Washington melts down, the most recent
U.S. data, especially that which is housing related remains fairly
decent, especially when compared to the rest of the world.
Furthermore, if the economy weakens further, the odds of more interest
rate cuts from the Fed will rise. Of course just because the Fed cuts
rates, there are no guarantees of higher stock prices. Nevertheless,
those who trade one stock at a time, hedge their portfolios appropriately,
and follow the money to what’s working are likely to remain in the
game over the long haul.
MEL Update: Can Housing Remain the Bright Spot in the Stock
When a stock misses on its revenues and ends the day higher, it’s
a sign of strength. But when the market rolls over on the next day
and the stock continues to act well, it becomes clear that the company
and its sector maybe onto something.
Well, as difficult as it is to find such as scenario on Wall Street
these days that’s exactly what happened when KB Homes (KBH) beat expectations
on its earnings on 9/26/19, but missed on its revenues. Initially the
stock fell, but on the heels of better than expected numbers for sector
wide pending home sales along with comforting guidance about the future
(expectations for “quite solid” returns in 2020 including a doubling
of the company’s return on equity) from KBH’s CEO on the company’s
conference call the stock continued on its steady climb on 9/27 despite
a very dicey overall market.
More specifically, the market seemed to like the
company’s increasing the number of its communities as well as a move
toward higher margin properties. Meanwhile, KBH continues to reduce
its debt load while capitalizing on the demographics of the moment
and the continued tight housing supply in the marketplace especially
in the grossly underserved first time buyer segment. Indeed, KBH delivered
55% of its new homes in the third quarter to first time buyers, while
also focusing on move up buyers and empty nesters. The three categories
compose the largest composite segment of the market.
So while KBH is firing on all cylinders, it’s important to also focus
on whether the company is immune from macro trends, such as the general
political trends of the moment and the potential for an economic slowing
if the political situation worsens and people hunker down. If this
cycle is as previous cycles, housing stocks should start to tumble
as soon as the market starts getting concerned about the economy.
But so far that has not happened, so the question is whether it will
start soon or whether this time is different and people will shrug
off the politics and general queasiness of the moment. In other words,
as is often the case, housing stocks will be a decent canary in the
coal mine for what happens to the overall economy.
Thus, investors should be following the developments in the Markets-Economy-Life
complex adaptive system for clues very closely. The bottom line is
that if homebuilder stocks continue to rise along with the housing
data it would be a sign that everyday people are voting with their
wallets and that the politics of the moment are secondary to them.
This will be very interesting to watch for sure.
Indexes Break below Support
The New York Stock Exchange Advance Decline line (NYAD) made a new
high on 9/26/19 but rolled over aggressively on 9/27 along with the
market suggesting that the short term trend has likely reversed, unless
NYAD finds support once again at its 50-day moving average which has
been a great trend barometer since 2016.
Moreover, the brunt of the selling hit the semiconductor stocks and
took the Nasdaq 100 index (NDX) below its 50-day moving average with
seemingly little effort. Critical support for NDX, the 200-day moving
average awaits a test.
The S & P 500 (SPX) also fell but was able to hold above its
50-day line as energy and housing stocks held up better than the high
tech sector. Unfortunately the On Balance Volume (OBV) indicator for
the indexes shows heavy selling pressure while the RSI for NDX, SPX,
and NYAD still has a long way to go before hitting oversold.
Meanwhile, the bond market is poised for a big move with the Bollinger
Bands around prices starting to shrink as the U.S. Ten Year Note yield
(TNX) bounces between its 20 and 50-day moving averages.
This is no Time to be a Hero
When high stakes political games take over the headlines there is
no point in taking risks. As a result, this is one of those periods
in the market where having raised some cash, being hedged, and tightening
sell stops is the best place to be. Moreover, the speed with which
events have developed suggests that the headline reading algos are
about to be very confused and that volatility could be legendary.
Furthermore, with the public being plugged into the news cycle and
with the Markets-Economy-Life complex suddenly finding itself at a
crucial pivot point, this is no time to be a hero in the markets.
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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