Analysis, Perspective, Trading Strategy
Rising Heat at the Edge of Chaos: Is a U.S.-China Trade Deal about to be announced?
Duarte in the Money Options
Wall Street going to get an early Christmas present or a lump of coal?
Given the current situation in Washington and the world, it could go either
way. Therefore investors should prepare for an eventful end to 2019.
The strong seasonal trend toward higher prices in December, aka the
traditional Santa Claus rally may be knocking on the door, but uncertainty
remains. Arguably, there are no guarantees, especially when news related
to unexpected geopolitical developments, the upcoming release of the
Horowitz report, bad news from the Fed, the impeachment drama, and
a host of other hot button issues of the moment could derail just about
anything including the traditional year-end ramp up in the stock market.
Still nothing would surprise me at this point, even a U.S. China
trade deal being announced at some point before the open of U.S. trading
on December 16 – maybe late Friday afternoon or early Sunday night
- just in time to juice stocks higher before the end of the year.
Certainly I have no inside information on the trade deal, and surely
I wouldn’t double mortgage my house to bet on it, but given the way
the White House works and how one of my favorite indicators, my gut,
feels at the moment, I can’t help but suspect that something dramatic
is brewing. Furthermore, given the way that algos are behaving, a trade
deal announcement, could lead to a sizable blow off in stocks that
could carry the market beyond insanity in the short term,.
Just look at what happened last week. First, the stock market floundered
when President Trump, at the NATO Summit in London, noted that he could
wait for a trade deal until after the 2020 election. That one item
took some 800 from the Dow Industrials in two days. But by midweek,
the jawboning on the trade deal was back and by Friday news of “intense
negotiations” between the two countries hit along with a strong employment
data and improving consumer confidence numbers and the stock market,
right on schedule took off to end the week on a high note.
My point is that events seem to be heating up at the Edge of Chaos,
where the intricacies of the ruling forces of the Universe, Complexity,
do their work. Therefore this could be a pivotal week for all kinds
of things that have been brewing to reach critical mass and that the
potential for something big to emerge is starting to rise.
By the way, I will be at the Orlando Money Show in February 2020 to
discuss “Trading at the Edge of Chaos” and how to use it to find the
best investing and trading opportunities for 2020. For information
on how to register and details on the presentation go HERE.
One of those high potential areas of the market is Big Pharma, where
companies such as Abbott Labs (ABT), Merck (MRK), Eli Lilly (LLY) and
the slow and steady turnaround which is Pfizer (PFE) are finally adapting
to the health insurance marketplace and are sitting on potential blockbuster
drugs and equally healthy pipelines with big things in late stage clinical
These four Big Pharma stocks are increasing their
market share and rising as they expand sales of products which have
been truly disruptive in health care. Abbot, for one is moving on the
success of its cardiac products aimed at treating heart valve disorders
as well as its continuous blood sugar monitoring systems, while Merck’s
Keytruda is becoming the world’s leading cancer drug as the company
continues to broaden the types of cancers that are responding favorably
to treatment with the medication.
Pfizer, on its own account, may be the turnaround story for 2020
as it slowly recovers from losing its patent protection for its blockbuster
drug Lyrica and a host of management decision mishaps while slowly
building a new stable of potential blockbusters including the enigmatic
Vyndagel to treat what may not be as rare as it is believed to be type
of congestive heart failure.
Not far behind Pfizer in the turnaround category is Eli Lilly, which
reeled when it lost its patent protection for ED drug Cialis. Lilly,
however, is making inroads in the treatment of migraines with the recent
approval of its Lasmiditan 5HT-1 blocker for the treatment of acute
migraines to go along with its migraine prevention injectable drug
Emgality. The combo gives it a potential one-two punch in the sector
which could lead to a sizeable increase in its market share for the
Interestingly, Pfizer and Eli Lilly (LLY) also
have a potential billion dollar drug in their nerve growth factor inhibitor
(tanezumab) which is aimed at treating chronic low back pain. The allure
of this drug is that it is not an opioid, which means that the likelihood
of it being accepted quickly in the marketplace upon FDA approval would
be significant, especially as insurance companies would be pressured
to pay what is likely to be a fairly steep price for a drug which could
reduce opioid usage and thus the potential for drug overdoses and which
could positively impact the health care and societal costs of opioid
Tanezumab may also work for osteoarthritis, and for cancer related
pain, which, if true, would expand its potential market share dramatically
on a global basis, especially as the global population ages. More importantly,
Pfizer and Lilly have no competition in nerve growth factor inhibitors
as several other companies have shelved their own candidates due to
severe side effects which were not widely present in the most recent
trial for tanezumab.
Bullish Trend Pattern Remains Intact
Despite the daily volatility the New York Stock Exchange Advance
Decline line (NYAD) continues to ride a bullish trend with two major
characteristics, see directly below, remaining intact. So as long as
- continues to make at least one new high per week and
- remains above its 50-day moving average
It will be very difficult, no matter how absurd or out of place or
incompatible with economic fundamentals it seems, to fight the notion
that the bull trend remains in place. Of course, if the fundamentals
don’t catch up soon enough, NYAD can’t keep this up forever. But for
now, momentum remains intact.
Simultaneously, a slight divergence is taking place between the S & P
500 (SPX) and the Nasdaq 100 (NDX) indexes, which may be foreshadowing
some sort of meaningful pullback along the way.
Specifically, NDX is starting to lag SPX as the technology stocks
are struggling to move higher despite the frequent jawboning on the
U.S.-China trade situation. Specifically, SPX’s outperformance, at
this point, is largely due to the steady rise in pharmaceutical and
healthcare stocks found in SPX and the late week bounce in energy.
Of course, the bond market continues to be of major interest. And
last week’s action was worth watching for sure as the U.S. Ten Year
Note (TNX) fluctuated in a narrow range between 1.65 and 1.9%. The
key for the bond market is what happens to stocks if and when TNX moves
above 1.9% decisively.
Accordingly, if TNX breaks out above this key resistance level, it
is likely that we would see significant selling pressure in the housing
stocks, which even though they have not fully recovered from their
late October decline, are still showing some resilience.
Odds Still Favor end of year Rally in Stocks
The U.S.-China trade war, the release of the Horowitz report, and
the likely impeachment of President Trump by the U.S. House of Representatives
remain potential roadblocks to higher prices in U.S. stocks. Still,
despite the ongoing volatility and geopolitical uncertainty, stocks
continue to move higher as they climb one of the largest walls of worry
in history. As a result, it’s difficult to argue the bear side, other
than fully accepting the fact that nothing goes up forever and that
any day could be the day that stocks top for the long term.
Nevertheless, at the moment as long as we trade what’s working, we
continue to make money. As a result, little has changed from a strategic
point of view, which means we own stocks that work, we keep an eye
on sell stops, and we look to hedge if and when it’s called for.
Finally, it seems the odds are still favoring an end of the year
Santa Claus rally, barring an unpleasant surprise from geopolitical
issues or the Federal Reserve which has its last meeting of the year
early this week.
I own ABT, LLY, MRK 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
Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a 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.