Analysis, Perspective, Trading Strategy
Ride the Momentum but be aware of Risk
Duarte in the Money Options
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
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
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
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
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.
Washington Post Color of Money Book of the Month is now available.
To receive Joe’s exclusive stock, option, and ETF recommendations,
in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.
JoeDuarteInTheMoneyOptions.com is independently
operated and solely funded by subscriber fees. This web site and
the content provided is meant for educational purposes only and
is not a solicitation to buy or sell any securities or investments.
All sources of information are believed to be accurate, or as otherwise
stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com
have no financial interest in any of the sources used. For independent
investment advice consult your financial advisor. The analysis
and conclusions reached on JoeDuarteInTheMoneyOptions.com are the
sole property of Dr. Joe Duarte.