Analysis, Perspective, Trading Strategy
This is not a Good Time to Fight Upward Momentum
Duarte in the Money Options
Federal Reserve cut interest rates and signaled that it’s on hold unless
inflation rises when it will raise rates again. But the markets, after the
usual algo related confusion are betting that stock prices can move higher.
Indeed, history shows that the odds of a market rally increase after
three consecutive interest rate cuts by the Federal Reserve. That data,
however, is based on rate cuts that have come when the economy is in
an established down trend and the rate cuts lead to improvement in
the economy which in turn fuels a resurgence in corporate earnings
and consumer spending.
A close look at current U.S. economy – mixed PMI data, slowing although
still present job growth, reasonable earnings, and a fairly stable
consumer (regardless of recent retail sales figures) – suggests that
the U.S. is not yet in a sustained down trend, but in more of a flattening
or slowing but still rising slope. So, perhaps the market is betting
on the possibility that there are enough negatives around which can
be turned around or improved upon to justify higher stock prices. Nevertheless,
when you factor in the increasing weakness in the global economy, nearly
zero chances of a rate hike in the next six months and strong seasonal
tendencies for stocks you can make a case for a decent end to the year.
Bonds Get Spooked. Mortgages May Benefit.
Last week’s plunge in the U.S. Ten Year Note yield (TNX), after a
collapse in the Chicago PMI may give the housing market a short term
boost as mortgages activity usually responds to changes in TNX. As
expected after the Fed’s rate cut and the Chicago PMI, TNX reversed
its recent climb which took the yield close to the 1.9% area. That
climb had begun to have a negative effect on housing data. But by week’s
end the yield had begun to test the 1.7% area, which could bring in
refinancing activity and spur new home sales.
Specifically, the huge two day move for bonds,
which if not reversed will likely have a positive impact on mortgage
activity which is likely to become evident over the next two to three
weeks. Still, even with the recent climb in rates pending home sales
continued to climb as low housing supplies, well priced new homes,
and low interest rates, compared to last year, continue to push new
home buyers and empty nesters into the market.
And just as I recently wrote, shares of KBH, a stock which is becoming
a bellwether for homebuilders, pulled back slightly during the rise
in TNX, but after testing key moving average support, and a softening
of yields, the stock once again moved higher.
In other words, the Markets-Economy-Life complex adaptive system
is still functioning. Millennials are coming of age as boomers downsize.
Furthermore, of benefit to homebuilders are the general supply and
demand fundamentals of the market. Big expensive existing homes are
out while smaller more affordable functional homes are in. Homebuilders
have adapted to these conditions and are responding to what the customers
are looking for. Thus, barring a rise in interest rates, a major economic
or political disaster the housing sector looks set to do fairly well
for a while still.
Does Pfizer Have a Stealth Blockbuster in its New Specialty
Pharmaceutical stocks have been beyond wallflowers in 2019. In fact,
some of them, like drug giant Pfizer (PFE) have been right down in
the fallen angel category until recently. Certainly Pfizer’s stock
blues have come due to the loss of its patent exclusivity on nerve
pain leader Lyrica, the difficulties of getting insurance companies
to pay for expensive medications as well as just a general feeling
of massive head scratching among investors due to some of management’s
past decisions, such as trying to put a new long acting opioid into
the market just as the government was rolling out its opioid crisis
Still, if you look at stock charts, it’s hard to ignore that money
has been moving into the shares of late; and perhaps with good reason.
That’s because deep inside the archives of Pfizer’s drug portfolio
is a new medication called Vyndagel, which treats a frequently undiagnosed
form of congestive heart failure known as ATTR. Without getting into
the medical weeds, just know that ATTR is a condition in which a protein
builds up in the heart muscle resulting in the stiffening of the muscle
wall, which eventually loses its ability to contract and pump blood
thus leading to heart failure
Unfortunately ATTR is a little known entity, thus it is often confused
with other forms of heart failure and in many cases is left untreated
until it becomes an advanced condition. In comes Vyndagel which improves
the situation, if the doctor can figure out that it’s the cause. But
here’s where PFE may have something. The company is educating cardiologists
on the condition and how to look for it, inexpensively by the use of
a specialized non-invasive radiological test which is also used to
diagnose bone conditions.
Now if we take the analysis further, data shows that 40% of patients
with carpal tunnel syndrome (pain and numbness in the hands) can develop
ATTR, although it is still very early in making sense of this data
and there is no way to know how it will pan out. Nevertheless, if you
extrapolate these numbers based on current data, they suggest that
there may be as many as 10 million people who may be at risk for ATTR
in the U.S. alone.
Furthermore, and this is where it gets interesting and potentially
profitable for Pfizer, since Vyndagel is helping people who would potentially
end up in the hospital with major heart problems, insurers are actually
starting to pay for the medication in more cases than expected, so
Pfizer’s sales of the drug are well above expectations and are expected
to ramp up as more doctors start to diagnose the condition.
Certainly, given Pfizer’s past as a plodding giant replete with unimaginative
management and their generally awful performance as a stock over the
years, it’s hard to get excited and buy a whole bunch of the stock.
But if Vyndagel may become useful to ten million people over the next
few years, and On Balance Volume (OBV) is moving steadily higher while
the stock is just below its 200 day moving average, it means somebody’s
crunched the numbers and is betting that Pfizer will finally get it
Furthermore, despite management’s past efforts and blunders, PFE is
starting to see benefits from their established drugs in oncology,
as well as blood therapies (Eliquis) and their rheumatoid arthritis
franchise (Xeljans). Moreover, they are making inroads in Biosimilar
drugs, getting close to FDA approval for a long acting growth hormone
drug and have recently closed a set of pipeline packing biotech acquisitions
after their recent jettisoning of their consumer division.
Thus, as hard as it may seem, Pfizer may be turning the corner, and
for investors with a longer time frame, it may be worth considering
nibbling at the shares.
Another Week, another New High on NYAD
The New York Stock Exchange Advance Decline line (NYAD) remains the
best predictor of the trend in U.S. stocks since the 2016 presidential
election and last week was no exception. Although NYAD had a slight
midweek pullback, it ended Friday’s trading session with a bang, scoring
yet another new high and pointing to higher stock prices in the short
to intermediate term.
Furthermore, the new highs on NYAD were confirmed by new highs on
the S & P 500 (SPX) and the Nasdaq 100 (NDX) indices. When indices
and NYAD make new highs in tandem it is a bullish signal for the next
few days to weeks.
And when you add the generally bullish seasonal tendencies of stocks
to rally into the end of the year, the odds of a move higher in stock
prices increase further.
So for now, what it all boils down to is that
as long as there is no major downturn in the job market, the U.S. economy
could continue to be a steady performer.
History is on the Side of the Bulls but there are no Guarantees
The stock market is looking for reasons to go up and investors who
fight this general tendency will likely miss out on some gains. Of
course, there will be some bad days. And certainly, any bad news from
Washington, the trade war, and the usually boogey men that lurk around
could derail the whole thing at any time.
Nevertheless, when the Fed is pushing money into the system and investors
ignore the bad news on a regular basis, it usually means that we are
entering a momentum run. That momentum runs can make investors a lot
of money is a positive. The down side is that all momentum runs end
badly, which means that when this one runts is course it will hurt
a lot, like they all do.
What it all means is that as traders you roll with the trend and
you watch for signs that things are about to change. For now, however,
it looks as if this momentum run is just getting started.
I own KBH and PFE 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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