Analysis, Perspective, Trading Strategy
At the Edge of Chaos: You can’t go wrong holding Cash at the Moment.
Duarte in the Money Options
matter what, you can’t go wrong with lots of cash at the moment.
If the rally we saw on Friday afternoon 3/13/2020 fades, investors
will be in a lot of pain in a hurry. In other words, if instead of
a true bottom, V or otherwise, and the start of a lasting up leg turns
out to be a return to the down trend, we may be at the starting point
of a major bull trap. Smart investors should prepare for both scenarios
and be ready to act accordingly as things could go either way.
Global stock markets have been pummeled by the coronavirus and the
situation on the ground, especially in Europe where events seem be
spiraling out of control and in the U.S. which maybe on the cusp of
a large increase in cases as more testing is implemented. Moreover,
while things can certainly get worse all around, the market was extremely
oversold as of last week, just as global central banks began flooding
the world with money. This created a perfect scenario for a dramatic
bottom if there was a positive event, such as the algos’ apparent perception
of President Trump’s state of emergency press conference.
The problem is that even after Friday’s rally, the news got worse
over the weekend. Therefore, as we’ve seen before during this decline,
Friday’s bounce could be wiped out by Monday.
Furthermore, the daily grind and the tragedy of the coronavirus pandemic
have certainly taken its toll on investors and everyday people in the
Markets, Economy, and Life (MEL) complex adaptive system – consumer
confidence is declining, stores shelves are emptying, businesses are
Certainly much of what the future holds remains unknown as states
of emergency spread across the U.S. and the world and governments deploy
extraordinary measures. Still, this situation will improve some day,
and there will be some sort of return to normalcy; which is why as
investors we must look both to the present and the future.
Indeed this is one of those times when it will pay well to consider
what a wise investor once said: “It’s more about the return of your
money than the return on your money.”
The Bullish Side
Certainly bearish sentiment, before Friday’s rally, was at a point
of despair as I’ve never seen before. For example the CNN Greed-Fear
Index registered a reading of 2 recently. That means that there was
no greed left in the market and that total fear ruled. Even more impressive
was the record rise in mutual fund cash ever registered as investors
fled stocks. Accordingly, with so many bears around, cash piling up
on the sidelines, along with the encouraging set of technical findings
that I describe below, if this isn’t a prelude to a meaningful bottom
then this time is truly different and what lies ahead is unimaginable.
Meanwhile we are seeing blue chip company stocks being destroyed
by non-stop machine selling. Thus, as investors looking to the future,
we must ask one question: when this is over, is it likely that company
X, if it survives will continue to flounder? Or is it more likely that
its sales will increase dramatically as pent up demand kicks in? Moreover,
if management has made good decisions through this period, won’t there
be companies that actually thrive?
The answer to both questions is that some will continue to flounder
and some will perish. Yet, there will be those companies that thrive
as their products, especially after the public has had to do without
them for a period of time, will be in high demand. And those are the
companies which will likely lead the charge when the market rebounds.
I am developing a list of companies that meet these criteria at Joe
Duarte in the Money Options.com. If you’re not a subscriber yet take
a 30-day Free Trial HERE.
For a perfect example of what I mean see the section on Exxon Mobil
Exxon Mobil, with a Nearly 10% Dividend Yield is trading
as if No One Will Ever Fill their Tank Again
I am in no hurry to rush out and buy stocks at the moment. But I
am noticing that there are some potentially enticing prospects shaping
up in the market.
For example, shares of the world’s largest oil Company Exxon Mobil
(XOM) have been cut in half over the last few days as investors flee
the energy sector due to the global oil glut and the potential demise
of OPEC after Putin’s Vienna surprise. Nevertheless, as with the rest
of the market, it seems as if the selling in XOM is overdone, especially
when you consider the dividend yield has risen to nearly 10% due to
the recent selling, and the very low odds that Exxon will cut that
dividend in the near future.
Certainly, the energy sector had plenty to worry about since the recent
failure of negotiations regarding curbing oil output between Russia
and Saudi Arabia failed. And there may be more trouble ahead as well,
given the precarious state of the U.S. shale boom as frakking companies
are increasingly vulnerable to rising debt burdens just as the price
for crude has fallen and demand may be slowing due to slowing economic
But this is Exxon Mobil and it will likely survive most of what’s
happening at the moment, which means that once the selling abates there
may be a once in a lifetime opportunity to buy the stock and to consider
holding it for a while. What I’m saying is that like Exxon, there are
similar companies out there who have been decimated by an overzealous
machine traded market and that at some point, will be bought back,
likely vigorously. So as we sit at home and wait out the coronavirus
to play out, hopefully with a safe outcome for as many as possible,
a good way to spend the time is to make a shopping list; and Exxon
Mobil is a prototype for the type of stock that could well lead the
market higher once all this is over.
Bullish Rebound or Bull Trap? Market Breadth Holds above
Long Term Support
The New York Stock Exchange Advance Decline line (NYAD) found tentative
support at its 200 day moving average on 3/13/2020 after making a new
low for the current decline, and breaking below the key technical gauge
on the prior day. This reversal around the 200 day moving average concurred
with the third tagging of the RSI 30 level and what seems to be a higher
low on the ROC indicator than the prior low of the current decline.
When taken together this group of technical indicators may indicate
a tradable bottom, if not the absolute bottom for the current decline.
This type of conclusion would be supported partially by the rally we
saw into the close as the Trump press conference progressed. But it’s
still uncertain as to whether that was truly the bottom or just a temporary
What has to happen for this bottom to hold true is that no further
lows are made in the market and that a credible rally springs from
these levels and lasts more than a day or two. If the market fails
to shake off the bears and breaks to new lows then it would likely
negate this potential bottom and what follows could be a new set of
Meanwhile the S & P 500 (SPX) and the Nasdaq 100 (NDX) indices
bounced back as well. But with both indices trading well below their
200-day moving averages, they remain in bear market territory. That
said; it is encouraging that the recent lower lows in both NDX and
SPX were not confirmed by lower lows in RSI, which suggests we might
have seen the panic low. Still, as with NYAD, if there are new lows
in the next few days for the indices, then the bears will have won
the short term battle and the market will have to try again in the
So what is the most important thing to watch? How about the U.S.
Ten Year note yield (TNX), which fell to record lows last week and
began to rebound on Friday. The big question is whether this rise in
yields, which means people are selling bonds, is because investors
are breathing a sigh of relief or because the bond market is malfunctioning
due to poor liquidity. If it’s the latter, there will be bigger problems
The bottom line is that the action on Friday the 13 th, 2020 was
a short term positive but the real trend will likely depend on what
happens next week.
Beware an Illiquid Market
Those who bought the market at the last hour on 3/13/2020 and kept
their positions over the weekend may be rewarded in a big way or may
lose their shirts by Monday or the next few days as the worsening coronavirus
news and the potential for a liquidity squeeze may again take over
the markets. That’s because if this doesn’t turn out to be the bottom
then we’ll be in the grip of a bear market rally and a subsequent and
potentially worse down leg.
As a result it makes sense to deploy some cash if the market follows
through on the 3/13/2020 action but not to be too aggressive until
the all clear signal is given. It’s also a good idea for those who
venture into the market to keep positions small, to use prudent sell
stops and to plan for the worst, just in case. For now, the jury is
still out but those who are nimble may be able to carve out a profit
in the next few days.
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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