-- This Week In The Money --

Analysis, Perspective, Trading Strategy

Stocks are in the Mood to move Higher

Editor Joe Duarte in the Money Options

The bulls seem to be gaining the upper hand in this market.

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 is favorable.”

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 of downturns.

 

 

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 demand.

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 distance.

 

 

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 books.

His latest Best Selling book The Everything Investing in your 20s & 30s at Amazon and The Everything Investing in your 20s & 30s at Barnes and Noble.

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