Analysis, Perspective, Trading Strategy
Is A Golden Age of Science Here?
Duarte in the Money Options
each day passes, it becomes clear that we are at the Edge of Chaos, a
place from where things emerge and complex adaptive systems, such as the Markets-Economy-Life
(MEL) ecosystem move on to their next level of complexity, which is often a
surprisingly positive development. Thus, as we head into a new decade, it makes
sense to analyze the big picture, as we peek into The Edge of Chaos, the topic
of my presentation at the February
2020 Money Show in Orlando.
After a volatile and politically contentious 2019, the new decade
ahead will likely bring equally dramatic highs and lows. But regardless
of the daily grind, and barring a major negative event, the potential
for selective stock investors to deliver profits remains high. Moreover,
even in a cautiously optimistic analysis it is important to keep an
eye on where unexpected negative events that derail markets may come
from. And while there are numerous members of a potential calamity
list, here is a small sampling of plausible Black Swans whose occurrence
would have well above average impact on MEL:
- If he U.S.-China trade deal sours
- If there are central bank policy errors
- If a major liquidity crisis and/or bond market meltdown emerges
- If events related to the U.S. election and the political situation
in Washington reach a critical point which threatens the social order
- A calamitous natural disaster of biblical proportions
Certainly, as the list above suggests, even as we look forward to
what may be another profitable year, there is nothing wrong with keeping
an eye out for potential problems and to act accordingly.
Why I’m Cautiously Optimistic
As 2019 wound down, I kept looking for reasons to sell stocks, but
the act of selling wasn’t as easy as I thought it would be. Certainly,
as I listed above, there is still plenty to worry about in the world,
and any market analyst worth their salt will tell you that any day
could be the start of a new bear market. But the usually wall of worry
aside, as I wade through my equity charts on a daily basis, I am still
finding a well above average number of stocks which seem to be at the
point of nearing breakouts. All of which suggests that at this point,
and until things change, it’s more about individual sectors and their
components than about the worry.
Is 2020 the Year of the Turnaround Stock and Truly Meaningful
Perhaps the most interesting result of my recent analysis is how
many companies in the midst of a corporate turnaround are starting
to see positive results. One of them is Hewlett Packard (HPQ), a stodgy
and long troubled PC and printer maker currently involved in a merger
dispute with Xerox (XRX) whose endpoint is uncertain.
Interestingly, and well aside from the Xerox situation, HP shares
seem to have bottomed and, may be knocking on the door of a potential
chart breakout. And, if there is a breakout, it will likely come for
good reasons, as margins are improving and revenues and earnings have
started to climb as the company cuts costs and adapts to the current
marketplace and re- invent their business via restructuring its operations
through cutting management levels.
Indeed, the successful turnaround seems to be a trend that is gathering
steam as companies look to increase efficiencies, reduce bureaucracy
and speed the delivery of products from research to market and improve
their competitiveness in an increasingly difficult environment. More
specifically, HP is expanding its industrial and manufacturing presence
via improved graphics platforms and via its 3D and digital manufacturing
into areas such as automotive, as through its recent 3D parts manufacturing
contract with Volkswagen, as it expands its product line to a more
industrial base, while maintaining its still dominant PC and mainstream
printer market share.
Encouragingly, the signs of new life and the possibility of critical
mass being reached by turnaround companies are not just visible in
the high tech industries. For example, in the pharmaceutical sector,
the second half of the past decade delivered significant advances in
the treatment of cancer. Yet, as I’ve written about multiple times
recently, the future potential of the pharmaceuticals industry may
be beyond even the most bullish expectations.
For instance, Pfizer (PFE) and Eli Lilly (LLY) are in late clinical
trials for Tanezumab, a monoclonal antibody which blocks nerve growth
factor, a chemical which is critical in the chronic pain generation
pathway. Recent trials have been encouraging and the potential for
FDA approval seems to be above average. Of course there are some potential
roadblocks. For one, Tanezumab is not without risk, as there are reports
of potentially serious side effects with its use.
But here is where the innovation kicks, perhaps turning Tanezumab
into a blockbuster. If Pfizer and Lilly can make Tanezumab a safer
drug, it will change the pharmaceutical landscape as it could significantly
reduce the use of opioids over the next decade and beyond. Meanwhile,
PFE recently submitted an application for Braftovi, its cancer drug,
in combination therapy for colorectal cancer, while receiving a broadening
of indications for Xtandi, its treatment resistant prostate cancer
drug. In addition Pfizer has spun off its non prescription business
and has a potential heart failure blockbuster drug in Vyndaqel. Lilly
for its own part is making significant advances in the acute and chronic
management of migraine headaches along with its recent advances in
the treatment of certain types of leukemia and lymphoma while recently
upgrading its earnings and revenue guidance for 2020.
My point is that in contrast to first decade of the 21 st century,
where scientific advances – smart phones, social media, the commercialization
of the Internet - were aimed at selling gadgets and what some may call
trivial pursuits, we seem to be in the early stages of a period in
which the implementation of truly meaningful scientific applications
inside and outside of medicine may actually change the way we live
and work at a different level than what we saw in the recent past.
Indeed, from an investing standpoint, it seems we may actually be
in the early stages of a new golden age of science. And all things
considered, that would not be a bad thing to see in the midst of all
the ongoing uncertainty in this world.
New Highs all around
The New York Stock Exchange Advance Decline line (NYAD) continues
to make new highs on a regular basis. And although the indicator is
likely to pause at some point and investors should be prepared for
a short term reversal, NYAD remains the most accurate indicator of
the stock market’s trend, as it has been since the 2016 presidential
Interestingly, the bond market once again failed
to reverse its recent downtrend fully, with the U.S. Ten Year note
yield ending last week below 1.9% after threatening to move closer
to 2% in the prior week. This remains a positive for the overall trend
in the market, as a move above 2% on TNX would be unpredictable for
Meanwhile, the new highs on NYAD have been confirmed by new highs
on the Nasdaq 100 (NDX) and the S & P 500 (SPX) indexes, suggesting
that the trend for stocks remains up.
As a result, taking some profits before the end of the year is not
a bad idea.
Rotate Portfolios into turn around Stocks in the New Year
I am having no trouble finding stocks with positive money flows whose
prices seem ready to break out. In fact, there are quite a number of
companies whose recent restructurings may be ready to bear fruit.
Thus as we head into the 2020 and the start of new decade, it makes
sense to rearrange portfolios in order to accommodate new picks. Moreover,
investors who fight greed and take some profits while simultaneously
deploying them into stocks that have not had big runs of late, but
seem poised to do so are likely to do better as 2020 progresses.
Happy New Year
I own PFE, LLY, and HPQ 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
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