Analysis, Perspective, Trading Strategy
Stocks are in the Mood to move Higher
Duarte in the Money Options
The bulls seem to be gaining the upper hand in
Despite the naysayers, the U.S. stock market continues to push higher
driven by the Fed’s infusion of cash into the repo market, a better
than the rest of the world economy and the expectations of a further
lowering of interest rates. Accordingly while the bears can pick at
the data, and in some cases find reasons to be bearish, at the moment
the algos don’t seem to care at thus, until proven otherwise the odds
of higher prices into the end of the year seem favorable.
Indeed, last week’s economic data showed a continuation of the recent
pattern where there is just enough positive activity to keep things
moving steadily, especially if rates keep falling. This was especially
evident in housing where mortgage interest rates rose and existing
home sales came in below expectations while mortgage refinancing collapsed.
Yet, despite the headwinds demand for mortgages for new homes remained
steady due to sound selling strategies from homebuilders and a tight
supply of homes.
Elsewhere PMI data suggested that the economy may be stabilizing
although the employment data and future expectations were cautionary.
Consumer confidence, interestingly, is becoming a political statistic,
at least as measured by the University of Michigan whose recent data
showed Democrats are more pessimistic than Republicans.
On the fringe but worth noting were reports that one bank – Santander
(SC) - is starting to see a rise in loan defaults; in some cases reminiscent
of 2008. Certainly the trade war with China is at the top of the worry
list, which is why last week’s announcement that the “Phase 1” deal
is moving forward helped to boost stocks.
But where it all comes together is in the MEL
complex adaptive system, the interplay between the markets, the economy,
and people’s lives, especially when it comes to long term financial
decisions. Here as long as the stock market keeps rising, interest
rates remain tame, and the job market remains stable people are willing
to take risks as long as there is value in the transaction. This is
directly related to the “feel good wealth-effect” of seeing 401(k)
values rise with the stock market and the ability to borrow based on
one’s home equity.
Specifically, MEL is most visible in the housing market where value
conscious consumers are buying reasonably priced new and existing homes
while overpriced existing homes sit empty until the price comes down.
And it is this value dynamic which in a market where supply is tight,
is driving the momentum run in the homebuilder stocks, such as KB Homes
(KBH) and DR Horton (DHI) along with related home product companies
such as furniture retailer RH (RH) and housing wares giant Williams
Sonoma (WSM), both of whose shares are acting well in the current market.
Nevertheless, the housing sector dynamic could change as the U.S.
Ten Year Note yield (TNX) is starting to rise. Last week’s slight move
above 1.8% may be a prelude to a break out of the recent trading range
whose top is 1.9%. As a result, keeping an eye on what happens to the
housing sector if TNX breaks above that key level will be important.
If TNX breaks above 1.9% but the housing stocks don’t break down it
will likely signal that money is coming out of bonds and into stocks
as investors begin to price in a reduction in the odds of the recession
that many have been expecting.
Certainly, there is plenty of anecdotal and observational evidence
that the recessionary case is not a total slam dunk even as formal
data has been forecasting a slowing economy for some time. Still, as
I noted last week in this space: “I’m seeing solid truck traffic on
the highways, more SOLD and Contract Pending signs on well priced,
not extravagant but attractive existing homes, as new home developments
spring up and new home sales develop. I see ongoing highway construction,
new apartment buildings rising and bringing in tenants everywhere,
and a steady flow of out of state license plates on the freeways as
people leave high tax low employment states to move to where the economy
Qualcomm Courts Breakout on Apple’s “budget friendly” iPhone
11 Production Boost
I walked by the Apple (AAPL) store at the Dallas Galleria last weekend
and the place was packed to the rafters, which made me start looking
at the chip stocks more closely. Certainly, the dim outlook from Texas
Instruments (TXN) is a cautionary tale, but shares of Qualcomm (QCOM)
didn’t miss a beat after TI’s misfortunes suggesting that the current
dynamic for its shares is different given that TI is more about industrial
automation and automotive, two sectors which are currently in the midst
In fact, it seems as if value seeking iPHone users are looking to
upgrade and Apple has told its suppliers to boost production of its
lower priced 11 model in the face of rising demand. Thus, QCOM, on
the list of Apple’s chip suppliers could see a nice boost in product
Indeed there are three factors which may add up to QCOM’s advantage
in the next few weeks. One is the Apple factor, while another is the
U.S.-China trade situation. Last but not least, however, is Qualcomm’s
recent lower priced 5G modem which is likely to be in high demand over
the next few years as the 5G rollout progresses. No doubt, if as the
news on Friday suggests, things are calming down on the trade front,
and if indeed the increased demand for QCOM chips materializes investors
will likely be motivated to own the shares.
Of late, QCOM has been forming a long term base with $80 providing
upside resistance. Moreover, On Balance Volume (OBV) is starting to
turn up, suggesting that money is quietly trickling in. If the stock
can move above $80 convincingly, we could see a move to $90 before
the end of 2019, barring something big and bad happening to the market
along the way.
Bulls Score as NYSE AD Line and Nasdaq 100 Make New Highs
The bullish trend is back in form as the York Stock Exchange Advance
Decline line (NYAD) made another new high, confirmed by the Nasdaq
100 index (NDX), with the S & P 500 (SPX) remaining within striking
The new high in NDX came in decent volume as the semiconductor stocks
seem to be gathering steam on expectations of some sort of tangible
trade deal between the U.S. and China.
Accumulation-Distribution (ADI) and On Balance
Volume (OBV) were also favorable last week although OBV on NDX is still
lagging ADI some. However, both ADI and OBV on the S & P 500 are
en synch and moving up, suggesting positive money flows.
As a result, as I noted earlier, the odds of a continuation of the
rally until the end of the year, barring the potential for negative
surprises looks encouraging.
Stocks are in the Mood to move higher
In this market things can happen in a hurry. But barring a major
negative surprise the bulls seem to have the upper hand for now and
perhaps for the rest of the year. As usual, the bond market and the
Fed will have a lot to say in the price trend, and certainly the list
of external potential problems is large and lively, especially on the
political and trade sides of the ledger. Nevertheless, as we head into
the months of November and December, seasonal tendencies usually favor
higher prices and the algos tend to follow seasonal trading patterns.
As a result, it makes sense to own shares in companies and sectors
which are working while looking at areas with potential value as we
keep an eye out for things that could derail the potential festivities.
Furthermore, since Halloween is next week, and the Fed will meet and
have a press conference, it’s always a good idea to keep an eye on
the exit door just in case.
I own DHI, KBH, QCOM, RH, and WSM as of this writing.
Joe Duarte is a former money manager, an active trader and a widely
recognized independent stock market analyst since 1987. He is author
of eight investment books, including the best sellingTrading
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
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