-- This Week In The Money --

Analysis, Perspective, Trading Strategy

As the Year Transitions Monitor the Fed, the Election, the Bond Market and Key Sectors

Editor Joe Duarte in the Money Options

With impeachment done for now, Brexit increasingly likely, and the U.S.-China trade deal looking as if it is moving to a new and perhaps more constructive stage and a plausible resolution investors will likely focus elsewhere and the interaction between the bond market, the Federal Reserve, the 2020 U.S. Presidential election, and individual sectors of the market offer plenty of new sources of trading stimuli.

The most unlikely bull market in history is over ten years old and continues to power higher, at least seemingly until the end of 2019. That said; there is one major aspect of the end of the year trading pattern which should be of concern to all investors, the steadily rising yield on the U.S. Ten Year note (TNX).

Indeed as stocks have powered higher yields have quietly crept up and with TNX trading just below 1.95%, a move above 2%, although it is not guaranteed to happen, is more likely as each day passes. So why am I worried? Simply stated, the effects of rising bond yields in this market are unknown. Under normal circumstances rising bond yields in the face of an improving economy might be seen as positive, as they would signal that the odds of a recession are falling and that investors are selling bonds and buying stocks in expectations of improving earnings and higher stock prices.

The problem even though the economy is not falling off a cliff, it’s hard to gauge the real strength, other than on a regional basis. Thus based on PMI numbers, a 2.1% GDP growth rate, and steady but not overwhelming new and existing home sales among other economic indicators including employment related data, the economy seems to be stable and doing fairly well. But, it’s also clear that it’s not growing at a rate that would justify higher interest rates.

In fact, in this case, as much as I hate to say it, the Fed is probably right. This, of course, begs the question as to why bond yields are rising, which means that bond traders might be worried about inflation, or there is a growing risk of a liquidity event lurking and bond traders are heading for the hills.

The problem with inflation, however, is that it’s not registering in the CPI and other mainstream measures followed by the Fed, although any trip to the grocery store or the gas pump in places such as California, where I spent a few days a week ago could be an eye opener.

Tale from the Road : It Never Rains in California but it’s certainly a puzzling Place

I spent three days in the L.A. area in mid-December, and saw some interesting things related to the Markets-Economy-Life (MEL) ecosystem. For one, the classic California calm was still evident in some places. This was a huge contrast to Texas where there is a certain urgency to daily living. But there were sudden evident contrasts as I drove. For one, as I drove down just about any road, plush neighborhoods suddenly gave way to vast vacant swaths of land housing landfills and industrial areas which, in turn, transitioned into homeless encampments under freeway overpasses and rows of campers, often with broken windshields and flat tires, parked in rows along the roadways. Moreover, in contrast to Texas,

there were few homes for sale, and little construction evident, at least in the areas I drove by. Furthermore, gasoline prices were nearly double what I see in Dallas, yet airports, rental car agencies, restaurants and hotels were full and no one seemed worried or stressed.

What I’m saying is that there is clearly an imbalance in the U.S. economy, not just from one region to another, but in some cases from one neighborhood to the next such as what I saw in L.A. And given the huge political divide in the country, the odds are that there is going to be something that sneaks up on MEL over the next few months or perhaps years that will most likely be related to or have a negative effect on the bond market, from where a chain reaction could well cascade into the stock market, the economy, and people’s lives.

Big Pharma’s Sweet Spot is growing

In this market, sector specificity is crucial and one of the best areas at the moment is the pharmaceutical stocks. This sector has been quietly moving higher throughout 2019, as investors factor in rising earnings due to an increasing number of potential blockbuster drugs, especially in the area of cancer treatments. Yet, even though some shares have delivered big gains during the year, barring a major macro moment of market upheaval, the fundamentals for the industry are in what seem to be a rapidly growing sweet spot.

Certainly, a stock I recommended recently, Eli Lilly (LLY) has already had a big run in December after upgrading its outlook for 2020 and releasing news that its beta cell lymphoma drug LOXO-305 delivered favorable outcomes in a recent trial aimed at leukemia cases which have proved to be resistant to prior treatments.

 

 

In addition, over the last few weeks there has been increasingly action in Glaxo Smithkline (GSK), Merck (MRK), Astra Zeneca (AZN), and Pfizer (PFE) as these former laggards are starting to move higher.

Ultimately, however, Pfizer, may just 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.

 

 

potential billion dollar drug in their nerve growth factor inhibitor (tanezumab) which is aimed at treating chronic low back pain. What makes tanezumab most attractive 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, as insurers would likely be pressured to pay for a drug which could potentially reduce opioid usage and the potential for drug overdoses.

Moreover, 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, neither Pfizer or Lilly have any significant 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 is Intact but Market Looks Tired

The New York Stock Exchange Advance Decline line (NYAD) made a new high confirmed by the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes. This is a sign that the bulls are in control at the moment.

 

 

On the down side, however, NYAD is well above its upper Bollinger band while NDX and SPX both gapped higher on the day on 12/20. Both of these events are technical signs suggestive of an exhaustion gap, which is often a prelude to a pullback or a consolidation period.

 

 

By the same token, even if a 2-5% pullback develops, the market will still remain in a long term up trend. Nevertheless, it makes sense to keep a very close eye on open positions over the next few days and to err on the side of caution as any pullback could become a major sector rotation.

 

 

Key support levels are 8400 for NDX and 3190 for SPX. Moves below those key chart points may take the indexes back to their 20 or 50 day moving averages.

Expect Profit Taking and Act Accordingly

The stock market is finishing the year on a high note and the odds, for now, seem to favor another up year in 2020. But in the short term, the market is very overbought and the odds of some sort of pause are well above even. Thus, it’s not likely a bad time to take some profits and see how things shake out next year.

Moreover, the action in the bond market will likely play a significant role in the not too distant future if current Ten Year Note yields climb above the 1.9-2% area. Likely hit the hardest, if that happens will be the interest sensitive sectors, especially housing, utilities, and dividend stocks.

Trade accordingly.

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.

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.

A 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.