Analysis, Perspective, Trading Strategy
Big Decision Point lies ahead for the Markets, the Economy, and Life as we know it.
Duarte in the Money Options
My only point is that we are reaching a point where the Markets-Economy-Life
ecosystem (MEL) is reaching a big decision point and that whatever happens
in the next few days to weeks will have wide ranging repercussions well
beyond Wall Street. And since MEL functions as a single unit, what happens
on Wall Street will affect the 401 (k) plan, the Home Equity Line of
Credit, and the plans people make regarding big purchases such as homes
and cars. Thus, just as markets have climbed and home buying activity
has increased and the economy has done fairly well as the Fed injected
liquidity in to the Repo market, things will likely reverse when they
stop the printing presses.
As a result, this is a good time to evaluate each individual position
one owns and to truly ask whether it is worth owning. It also makes
sense to consider adequate exit points in case things get ugly in a
Steady as She Goes. Glaxo’s Dividend and Oncology Effort
Makes Shares Attractive Even if Market Corrects
If the market corrects investors will be looking for places to hide,
which is why shares of pharmaceutical giant Glaxo Smithkline (GSK),
which offer a 4.3 percent annual dividend may come in handy. Glaxo’s
shares have climbed steadily over the last twelve months as the company
is succeeding in its to bid reinvent itself into a big time contender
in the top tier of cancer fighting big pharma companies, while not
abandoning its diversified drug portfolio and its focus on other disease
areas such as its rapidly growing shingles vaccine Shingrix.
Moreover, at the recently held JP Morgan Healthcare conference in
San Francisco, management was clear about one thing; they are not in
a hurry to make bad deals or to develop new oncology meds that they
can’t fit into their steadily increasing pipeline. Instead, they stressed
balance and value. This is significant because GSK was out of the cancer
business until recently when it bought biotech oncology company Tesaro
but has quickly integrated Tesaro’s portfolio into the fold profitably.
Since then, GSK has expanded its cancer treatment unit based on the
surprising success of Tesaro’s Zejula, a drug which had lots of doubters
but has actually exceeded expectations in the treatment of ovarian
cancer including recently grabbing FDA approval for expanded uses.
Now by leveraging the success of Zejula, Glaxo is hopeful for FDA approval
of a cancer treatment for multiple myeloma and one for uterine cancer.
In addition the company is looking for approval of the three other
new drugs, one for asthma, a combination of two drugs for HIV treatment,
and a third drug aimed at the chronic anemia of renal failure.
Importantly, the company’s CEO since 2017, Emma Walmsley who has
spearheaded an extremely credible turnaround of the company, recently
noted that there are no plans to scrap or reduce the dividend at any
time in the near future, which means that if the market rolls over,
GSK’s dividend will be attractive to yield seeking investors and the
stock should exhibit some relative strength.
Market Breadth Remains Spectacular Except for One Thing
The New York Stock Exchange Advance Decline line (NYAD) continues
to make new highs, therefore the trend remains up. That said, the signs
of wear and tear on the rally are piling up.
Here are three warning signs:
- NYAD is trading outside its upper Bollinger Band on a regular
- The RSI for NYAD is well above 70 signaling an extreme overbought
- The number of stocks advancing on a regular basis is getting smaller
What this means is that the market is getting tired and that at best
a consolidation is near and that at worst a real meaningful correction
The S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes both made
a series of new highs last week confirming the generally bullish advance
in the NYAD.
Moreover, if there is a pullback in the markets, the first tier should
be in the range of 2-3% with the 20-day moving average for the indexes
being the first support point to be tested.
If the 20-day MA gives way, then a more substantial move toward the
50-day MA in the range of 5-7% is likely. That would likely be enough
to take the sails out the rally and perhaps provide another opportunity
to enter the market, assuming the Federal Reserve or the economy don’t
Finally, the bond market is once again getting a bit skittish with
U.S. Ten Year note yield (TNX) once again trying to move toward 1.9-2%.
If TNX can get above that key resistance area, it will likely sink
the housing stocks and the interest rate sensitive and dividend paying
Odds of Market Crash Are Moderate Unless Economy Rolls Over
I am not expecting a market crash, although one is always possible
after a ten year plus bull market. More likely, I’m expecting a pause
of 3-7% in the near term or perhaps a multi-week sideways trading range
market. Much depends on earnings, the economy, and whether people continue
to open their wallets to buy big ticket items that require financing,
such as cars and homes.
That said, with the speed with which selling can develop when robots
act, even a moderate pullback could be scary, which means that it’s
better not to have a huge exposure to stocks when the big selling starts.
Thus, a bit of profit taking along with exploring whether hedging makes
sense is not a bad strategy to explore as February gets closer.
I own GSK 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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