-- This Week In The Money --

Analysis, Perspective, Trading Strategy

Ride the Momentum but be aware of Risk

Editor Joe Duarte in the Money Options

The stock market’s end of the year rally is gathering steam pushing technology stocks selectively higher and spreading to more sectors, such as selected retail stocks.

This, more than anything, is a sign that the Fed’s repo liquidity operations are pushing money into stocks, especially as bond yields have calmed down for the moment. Thus barring something spectacularly negative – China, impeachment, and the usual list of potential bad things that are lurking - the path of least resistance for stocks, with some likely bumps along the way, remains upward perhaps well into the start of the new year.

Bond Panic Attack Increases Mortgage Activity as Homebuilders May Have Topped Out

Over the last couple of weeks, I’ve noted that the U.S. Ten Year note yield (TNX) was moving toward the 1.9% area, and that a cross above that yield could have negative effects on the Markets-Economy-Life (MEL) ecosystem, especially in the housing market. Thus, it was a welcome development for the bulls when yields failed to move above that key chart point and reversed in the middle of last week.

Indeed, as I’ve been expecting, the interplay between the Fed and bonds is playing out within the mortgage and housing markets. For example, last week’s mortgage applications for home refinancing rose 12.9% while mortgages for new home purchases rose nearly 5%. This rise in both types of mortgages occurring simultaneously with the rise in yields suggests that both refinancers and new home buyers were betting that the bottom in rates was in and decided to make their move.

Of course, they may be right. But frankly, in this very fluid time in which events can change at the drop of a hat, this may or may not be the case. Nevertheless, that’s what seems to be going on for now, so the real question is what happens over the next few weeks both in the bond market and in the housing market as consumers respond and the M-E-L complex adaptive ecosystem moves on toward its next point of emergence and evolution.

By the way, I will be appearing at the February 2020 Money Show in Orlando where I will be discussing the ins and outs of the Markets-Economy-Life ecosystem (MEL) and how I use it to pick winning stocks. Attend free to watch my presentation, meet me up-close and personal, and ask your most pressing questions. Discover the best investing and trading opportunities and learn how to adjust your portfolio and strategies for 2020’s unique market conditions. For information on how to register and details on the presentation go HERE.

Certainly the action in the largest homebuilder in the U.S., DR Horton (DHI) is worth watching as a bellwether. The company reported better than expected earnings last week but missed slightly on its revenues noting that the average closing price for newly built homes was flat compared to last year while the most recent quarter’s new sales price was up a mere 1% year over year. That may be good news for consumers, but it’s hardly the stuff that drives a stock decidedly higher, which suggests that even though the economy may be stable, and that DHI is going to make money over the next few quarters, the days of heady growth for the homebuilders may have passed, at least for the moment.

 

 

Incidentally, the company’s reported rise in its gross margins was due to a decrease in customer incentives, not to pricing power or to a large growth in orders or sales. Furthermore, Horton’s tone on its conference call was moderately upbeat at best, maintaining its forward guidance close to fiscal 2019. So although the stock is near its 52-week highs, it’s not likely that it will make much headway in the near future given the rise in bond yields and the Fed’s resistance to lowering rates further unless the number of buyers rises well above current levels.

Can Kohl’s Morph into Amazon to Juice its Earnings?

They say imitation is the best form of flattery, and we may be watching some intense flattery this Christmas retail season as brick and mortar retailer Kohl’s (KSS) seems to be taking a page out of Amazon’s playbook.

Accordingly, I recently recommended KSS shares as the stock has been acting well and recently crossed above its 200-day moving average with solid confirmation from On Balance Volume (OBV) and Accumulation Distribution (ADI). I also spoke to several knowledgeable sources on retailing who confirmed that the Kohl’s stores they frequent and monitor are starting to see noticeable increases in traffic.

 

 

Certainly Kohl’s is well known for its promotions, such as its Kohl’s cash reward program and its coupon offers. But suddenly it seems to have become an Amazon.com clone, complete with both an online and a brick and mortar presence in order to engage its cult of loyal shoppers on multiple fronts. This year, however, Kohl’s seem to be taking its promotions and incentives into a higher gear, by starting with its Christmas season push early and integrating the shopping app, the web site and the brick and mortar stores nearly seamlessly and to a greater degree.

Kohl’s has also put together numerous exclusive deals with designers of both clothing and home goods in order to attract customers along with toy and technology promotions including Amazon gadgets – why not?-, active wear and beauty products while wrapping everything up with aggressive social media interaction and adding a same day delivery service.

The net effect, for now, seems to be that investors are willing to take a chance on the shares which are clearly moving higher. So for now, it’s not a bad idea to follow the money. After all, this type of integration of shopping modes and heavy promotion is what made Amazon.com number one. I like this strategy and I like KSS at this time.

I do suggest a bit of caution as KSS reports earnings on 11/19. And even though the current trading pattern suggests that investors are expecting good news, keeping a well placed sell stop under any shares will help you sleep at night especially if KSS delivers a negative surprise in the report and the shares get crushed.

Market Breadth and Index New Highs Signal Uptrend is Intact

The New York Stock Exchange Advance Decline line (NYAD), the most accurate indicator of the strength of the U.S. stock market made a new high on 11/15/19, a sign that money is still moving into stocks and that the uptrend, for now, remains intact.

 

 

The S & P 500 (SPX) made a new high last week confirming the uptrend for stocks. The rally is starting to show broader participation which suggests that the Fed’s repo market operations, aka its backdoor easing of monetary policy without lowering official interest rates is causing investors to move money into the stock market.

 

 

The Nasdaq 100 index (NDX) is also making new highs regularly now confirming the uptrend. The general expectations that there will be some type of trade deal between China and the U.S. as well as the Fed seem to be pushing this index higher.

 

 

It is important to note that the gains in the technology sector are not as widespread as would be expected if there were extremely high expectations of a trade deal. For example networking stocks, which would benefit from 5G related gains from a deal are still not moving in tandem.

Ride the Momentum but Beware of Risk

The classic rules of stock of investing according to the late Wall Street great Marty Zweig are:

  • Don’t fight the Federal Reserve and interest rate trends
  • Don’t fight the market the market’s momentum.

And this is a classic time to follow Zweig’s advice as the Fed’s repo operations continue to pour billions into the banking system creating a flood of liquidity which is finding its way into the stock market.

Certainly, the news is good for the bulls for now, but there is always a flip side. And in this case, it’s all too familiar as all momentum runs in the stock market end badly. Thus, at some point, this market will show signs of weakness and the uptrend will reverse. That said, there are no signs of that at the moment, which means that investors who stick with the trend will be rewarded.

Still, it’s never a bad idea be skeptical, to monitor sell stops, to look for profit taking opportunities and above all, don’t stay at the party too long.

I own KSS 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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