Analysis, Perspective, Trading Strategy
At the Edge of Chaos: It’s Still about Easy Money and the Coronavirus
Duarte in the Money Options
Stock market is clearly on pins and needles as traders weigh the unknown
repercussions of the coronavirus against the Federal Reserve’s bipolar actions
regarding liquidity in the repo market. Not unexpectedly, the market may be
entering a period where buyers take a break and just walk away while the algos
run wild increasing daily volatility.
Last week, in this space, I noted that the market’s breadth had begun
to deteriorate. Interestingly that didn’t last, as I will describe
below, given the new high on the New York Stock Exchange Advance Decline
line midweek. But even after that usually bullish development the general
vibe for stock traders is one of uncertainty, and with Monday being
President’s day in the U.S. raising the potential for more algo volatility
on news from China, many traders might just sit out the action for
Of course, the big elephant in the room is the coronavirus and the
unknown effects it will have in terms of lives lost and the global
economy, as all indications suggest that China was not ready for this
type of event. Yet a stealth elephant to consider is the fact that
the Fed has recently announced that it will begin to reduce the amount
of money that it offers to the repo market over the next few months,
which has been the main driver of the market’s gains since the fall
But is that going to make a difference? Maybe not, because even as
they reduce repo market liquidity, the Fed will still continue its
Treasury bill purchases with the net effect being a continuation of
high levels of liquidity in the money markets, albeit via a backdoor.
Thus, the bottom line is that at this point, in terms of macro trading,
flesh and blood traders are scratching their heads and sitting back
as the algos read the headlines and execute programs until the next
headline hits the wires and the market again reacts.
By the way if you couldn’t make it to Orlando for my Money Show presentation,
you can see it here.
Bonds Still Bet on Global Recession
The bond market remains a crucial indicator for the Markets-Economy-Life
(MEL) complex adaptive system, and as traders hedge their bets against
the potential for a global recession due to the coronavirus, the U.S.
Ten Year Note (TNX) continues to hover near its twelve month lows.
This has interest rate sensitive stocks, such as REITS (IYR) moving
higher. The problem with this is that if the market rolls over, REITS
may not continue to move higher. Moreover, given the fact that many
REITs are backed by apartment rental and shopping center income, their
earnings may be vulnerable if the economy rolls over and demand for
high rent apartments declines.
That said, there is an emerging trend in the U.S. stock market where
stocks such as Gilead Sciences (GILD), whose interesting niche in the
markets as related to the coronavirus which I profiled last week, is
being joined by other biotech companies whose products may be useful
in situations where pandemic scenarios, especially those related to
germ related warfare, as I discuss below.
Emergent Biosolutions: The other Virus Stock to Consider
Shares of Emergent Biosolutions (EBS) have recently been moving steadily
higher. That’s because this mid size biotech is well positioned in
vaccines for germ warfare, bioterrorism, and a key antidote for opioid
Unfortunately, the stock can be frustrating to trade as given its
generally low profile, it often moves with thin volume making for choppy
action. Still, if you’re looking for a company which is well positioned
in case of a biological catastrophe, EBS is near the top of the list,
and here is why. It has the exclusive contract for the U.S. government
for filling the stockpile for anthrax vaccine, and has just signed
a multiyear, multibillion contract with the defense department for
the next generation of anthrax vaccine which is already in production
and in the early delivery phase, a fact that should be noticeable on
the bottom line over the next few quarters.
It’s also in late stages of a vaccine for a mosquito transmitted
virus (chikungunya), which can be similar in symptoms to the Zika virus
and dengue fever, potential plagues over the summer months. Moreover,
EBS is likely to receive exclusive European approval for an oral cholera
vaccine in the next few months. The likely scenario is that a majority
of the millions of European travelers, who often frequent endemic cholera
regions of the world, will be receiving the vaccine which has been
available in the U.S. since 2016.
EBS will report earnings on 2/20/2020 and is likely to move in response.
It beat expectations in its November 2019 report after missing the
previous three times. However, the company did give positive guidance
for 2020 after the November report and the stock has been moving steadily
higher since early February. This trading pattern suggests a positive
buzz for a beat. Nevertheless the company can disappoint so small positions
may be warranted for those who decide to take a bite.
Market Breadth Remains Jumpy and Difficult to Decipher
Last week I noted that the New York Stock Exchange Advance Decline
line (NYAD) was starting to diverge from the major indexes, usually
a sign that a decline in stocks may be on the way. But by midweek,
NYAD managed to make another new high, which essentially negates the
slight divergence that seemed to be developing. Nevertheless, by the
end of the week, the new high had faded and trading turned sloppy.
So, in the current environment, it’s a tough call as to which way things
are going to go.
Certainly, NYAD is above its 50-day moving average as well as above
the 50 area and below the 70 area on RSI. Both of these indications
are usually positive. The problem is that the market is too dependent
on news about the Fed and the coronavirus, which means that things
could turn either very positive or extremely negative in a heartbeat.
Both the S & P 500 (SPX) and the Nasdaq 100 (NDX) indices made
new highs for the week, which were confirmed by NYAD. Thus, in normal
times this would be a very bullish development. However, in the current
market, this set of new highs should be viewed with an asterisk unless
The bottom line is that the short term trend is
too dependent on the Fed and the coronavirus, making for a dangerous
trading environment for anyone with a time frame which extends beyond
the next few minutes to hours.
Reduce Exposure to Stocks
As I’ve noted over the last few weeks, the best strategy at the moment
is to reduce exposure to stocks unless there is a good reason to own
particular shares. In other words, stocks such as Gilead Sciences and
Emergent Biosolutions make sense at the moment, albeit in prudent lot
Thus, as I’ve noted repeatedly, taking profits, picking only stocks
whose niche and trading pattern is compelling, having lots of cash
around and building a shopping list make the most sense for traders
who want to hang around and do this for a long time. Finally, although
it is tempting, shorting this market should be avoided until it becomes
crystal clear that it is warranted. Otherwise it could be very painful
given the potential for something positive to develop at any time which
would destroy the doom and gloom of the coronavirus in an instant as
the Fed’s liquidity is likely to stay en force for the foreseeable
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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