Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Preserve Capital. Prepare for the Bottom. Deploy Cash when the time comes.
Duarte in the Money Options
this market, there are three prime directives: capital preservation,
preparation for the end of the correction and the deployment of cash
into worthy stocks when the right time comes; whether it’s in three days
or six months.
Although the present is daunting, and the worst may still be ahead,
investors should consider the possibility that at some point the coronavirus
correction will end, that the seeds of the next rally – the Fed flooding
the market with money via its recent rate cut and continuing QE may
have already been planted - and that when the dust clears there will
likely be a multitude of historical bargains to be had in the stocks
of companies whose brands and business niches have been decimated by
the recent selling spree.
Furthermore, if there are any positive surprises in the not too distant
future, such as a quicker than expected vaccine or successful treatment
for the virus, see Gilead Sciences (GILD) below, the odds of the bearish
case disintegrating almost instantly are significantly better than
This is a Serious Situation
I don’t want to sound like, Chicken Little, Pollyanna or Goldie Locks,
but there is no wrong in assessing the moment through clear eyes, nor
in looking at the glass being half full, as history is full of examples
of markets turning just as the end seemed near.
Of course, it’s obvious that the current situation is serious and
no one knows when things will improve. In fact everything now is predictably
unpredictable as we are in the midst of a cage fight between Chaos,
the purview of complete uncertainty and Complexity where complex adaptive
systems adapt to evolving sets of variables looking for a payoff. Paradoxically,
Chaos is a complete and unpredictable mess while Complexity is a highly
organized, rules based process within which systems function optimally
based on the constant interaction and the feedback loop between the
active agents in the system and the environment.
As a result, it’s important to understand the dominant features of
the environment as well as the agents engaged in the daily activity
of the system. Currently on the agent side we have the components of
the complex adaptive system known as MEL, the Markets, the Economy,
and Life (people’s financial decisions). On the environment side we
have the coronavirus.
Moreover, Chaos randomly works toward total destruction while complex
adaptive systems, such as beehives and MEL, work toward a payoff which
eventually leads to the emergence of the system in the direction of
an even more optimal operational state. Thus, the key to where MEL
-a complex adaptive system whose payoff is the attainment of profit
and financial wellness- will emerge depends to a large degree on if,
when, and how Complexity can overcome the current Chaos. In the middle
is the 401(k) plan, the center and vehicle of many people’s financial
life and the effects of the current market on if, how, and when they
will spend money.
For a full review of how Complexity and Chaos work in the financial
markets, how I predicted the current trading environment well before
it started, and how to survive and thrive in it, check out my Orlando
Money Show presentation: “ Trading
at the Edge of Chaos
That said, from an epidemiological point of view, it is reasonable
to expect that what happened in China will be reproduced in the rest
of the world and that the effects may be more dramatic as the virus
grows exponentially for what could be an extended period of time. What
that means is that as long as the viral footprint is increasing it
will exert its Chaotic influence on people’s lives, on businesses,
and on political institutions such as the Federal Reserve, Congress,
the White House and the entire U.S. and global healthcare, financial,
and government systems. This, of course means that quarantines, business
closures, and unfortunately increasing death tolls will likely be present
for a while.
Moreover, the news will certainly be grim in many places and there
are likely to be a great deal of permanent changes that emerge in all
global systems, including MEL as the world adapts to a new reality.
Specifically, alliances will shift, supply chains will be remade, and
the likelihood of new pockets of leadership in high places in both
governments and corporations will develop and which will reshape global
events for the foreseeable future.
As investors, it is important to recognize that change is unfolding
and that adaptation will be the key to success. Thus vigilance and
agility will be the keys to survival. Here are several key points to
- Stay patient
- Keep high levels of cash in reserve
- Develop and adjust your shopping list as events unfold
- Be prepared to deploy capital into your shopping list based on
- Be selective: Only deploy cash in the best possible trading opportunities
- Trade Small lots
- Use well placed sell stops (maximum draw down of 5-6%)
- Prepare for more volatility and the potential for any rally to
be a false start
- Consider options where appropriate to minimize risk and to maximize
profits but don’t overpay for contracts just to gamble and hope.
Finally, as I discuss below, if there is a positive announcement
regarding a treatment or a vaccine for the coronavirus the bearish
case will likely crumble; perhaps instantly.
Gilead Sciences Breaks Out: Bright Light or False Hope Against
Shares of Gilead Sciences (GILD) a global biotech leader in combating
viral diseases broke out convincingly on March 6, 2020 as the market
is hoping that the company reports positive results on its ongoing phase
3 trials of its antiviral drug remdesivir. Clinical trials of remdesivir
in the treatment of coronavirus are being conducted in China by the Chinese
government while global trial, including patients in the U.S. is being
conducted by Gilead.
This is purely a technical play at the moment, given the fact that
all we know is that remdesivir has been proven to be effective in treatment
of a handful of patients with coronavirus as well as having acted well
against the virus in vitro- test tube - studies. But the chart is very
compelling at the moment with the stock taking out long standing overhead
resistance near $80 on heavy volume and confirmation from On Balance
Volume and Accumulation Distribution (ADI).
That said, given the fact that a vaccine, if one can be developed
is likely to be available perhaps by summer 2021, Gilead seems to have
the upper hand at the moment, which is what the market is betting on.
Interestingly, remdesivir – which is not a vaccine as some are erroneously
reporting - has been around for a while and has had success in lab
tests against the SARS and MERS viruses, which are corona viruses.
Thus, for now, GILD gets the benefit of the doubt based on remdesivir’s
lab test background, the small sample of known real life successes
on coronavirus patients, and the fact that the stock has momentum.
Moreover, with little else on the horizon for eighteen months, barring
an unexpected vaccine breakthrough, remdesivir seems to be the only
show in town.
Of course, there are no guarantees, and the wait for the current
clinical trial results is likely to be over by April, so the trade
may not have much time left. My premium subscribers have been actively
trading GILD profitably for the past couple of weeks. To subscribe
for a free 30 day trial click here.
Bond Yields and Market Breadth Collapse Simultaneously
The U.S. Ten Year Note yield (TNX) and the New York Stock Exchange
Advance Decline line (NYAD) are both in collapse mode as investors
price in the potential for a significant global economic slowing and
a subsequent decline in corporate earnings. The effects of this dramatic
decline in yields on the mortgage and housing markets should be carefully
Indeed, the declines in both key benchmarks are impressive, they
may still both fall further, although the declines seem to be overdone
in the short term. Of the two, TNX is the most extended as measured
by the extent it has traded outside of its lower Bollinger Band. On
the other hand, NYAD still has room to fall, perhaps as low as its
200-day moving average.
Meanwhile, the S & P 500 (SPX) has broken below its 200-day moving
average, a very bearish sign, which if not reversed will signal the
possibility of a bear market.
Finally, the Nasdaq 100 (NDX) index is not far from breaking below
its 200-day moving average, which if it occurs would confirm the possible
arrival of a bearish trend.
It’s Always Darkest before the Dawn
The current market is extremely challenging. As a result, it makes
sense to keep up with developments, make a shopping list, follow a
sound trading plan and stay patient. This market will eventually bottom
and there will be many bargains to consider. All we can do is hope
to stay healthy, stay awake and avoid foolish trading mistakes.
Disclosure: I own GILD 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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