Analysis, Perspective, Trading Strategy
At the Edge of Chaos: I am Hopeful, Ready, Willing, and Able to Buy Stocks.
Duarte in the Money Options
am hopeful. I am also ready, willing and able to buy stocks as soon as
the all clear signal is given by the markets.
It is, indeed, very possible that we are now in the capitulation
stage of this rapid fire bear market, fueled by forced liquidation
of assets due to margin calls, and that a meaningful bottom may be
approaching. More specifically, with the liquidation of
CME clearinghouse Ronin Capital and weekend reports about the Fed bailing
out hedge funds, the selling could accelerate to a huge climactic
point which could precede a serious buying opportunity. Thus, being
ready for any scenario is the best option.
Yet, as I write on 3/22/2020, it is clear that as the number of Covid-19
virus cases and deaths rise dramatically, the markets may again open
limit down by Monday morning as the negative feedback loop of bad news
begets more selling intensifies. Therefore, all we can do is to wait,
hold on to our cash, and see how things develop.
Near the Breaking Point and Looking for Good News
Last week I noted: “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.” Moreover, at this
point, I see no reason to change my conclusions since the all clear
signal was not given by the markets, as I expand on below.
Still, this is no time to panic. Instead, it’s a good time to take
a step back, consider the possible scenarios and plan accordingly.
Clearly the market is near its make or break point. But more important,
people are ripe for a pleasant surprise, which means that if something
good happens; the odds of a huge upside reversal are excellent given
the outrageous amounts of central bank and fiscal stimulus that is
in the pipeline.
Thus it’s important to gauge how the entire Markets-Economy-Life
(MEL) complex adaptive system is faring, especially regarding the most
crucial aspect of economic life in the present, the ability to borrow
money during difficult periods such as via Home Equity Lines of Credit
(HELOC), mortgage refinancing and the 401 (K) plan. Thus, as big companies
and entities drain their credit lines it will be important to keep
of weekly mortgage numbers and other indicators of banking liquidity
at the retail level.
If lending freezes at the retail and commercial levels, especially
for small businesses, in the wake of the beating delivered to the 401
(k) plan universe via the current action in the financial markets,
the repercussions for MEL will have far reaching consequences and any
bounce in stocks could be short lived.
Starbucks: Can Strong Coffee and High Levels of Board Room
Testosterone Build a Trading Bottom?
Shares of coffee shop giant Starbucks (SBUX) fell nearly 47 percent
from their January 2020 highs as of the recent low on March 17. And
although it may be premature, it’s not a bad idea to have a look at
the shares. We certainly had a successful short term trade featuring
SBUX at Joe Duarte in the Money Options.com last week and I suggest
taking advantage of our 30-day Free Trial to have a look at our current
premium strategies. Visit HERE for
Starbucks is certainly an interesting company with a widespread global
footprint, and clearly a contrarian bent. Moreover, as other companies
are panicking and hitting their lines of credit, Starbucks is doubling
down on its business plan via its recently announced plans to further
expand its China footprint to 6000 stores by 2022, while adding another
40 million shares to its already existing stock buyback program. Thus
management is either showing a lot of hubris, a great deal of confidence
in its business, or there is a high level of testosterone in the board
room which may lead to unfortunate developments.
That said, for us, it’s not about making judgments or discussing
biology. It’s all about price action, and whether the stock is worth
nibbling at for more than a day or two as it bounces around with the
Of course, the truth is that it may be too early to put a big chunk
of money into this or any other stock. But you just can’t blow this
corporate strategy off either. Moreover, we can certainly stipulate
that it’s a big company with deep pockets ($3.1 billion in cash on
balance sheet as of 12/31/19), which will suffer some but maybe not
too much as long as people can drive up to their shops and stay in
their car to avoid the coronavirus in order to get their caffeine fix.
Clearly from a technical standpoint, the stock was extremely oversold.
Its RSI was well below 30 in mid-March with the indicator making a
nice higher low on the lowest low for the stock, a very positive technical
sign signifying a loss of selling momentum. Moreover, money took its
cue from the technicals and the company’s announcements and moved back
into the stock as signaled by a big jump in Accumulation Distribution
(ADI) and no new lows in On Balance Volume (OBV).
Furthermore, the stock didn’t just bounce but actually moved well
above its lows, certainly helped by short covering. But, maybe that’s
the point, at least in this case, and perhaps in the whole market.
If the shorts are bailing out then maybe the real buyers will be coming
into the SBUX and other stocks soon. And that’s what the next few days
will tell us, not just about Starbucks but also the rest of the market.
So is it time to jump in? Not likely until we get the all clear signal
or you are willing to be very patient perhaps for a long period of
time. Certainly the stock is cheap enough price wise, especially after
it took a beating at the end of the day on 3/20/2020 as options expiration
hit the entire market.
But things could get a lot worse in a hurry, for SBUX, and for the
whole market as no one knows what the future holds, and all stocks
could still get cheaper. Yet at this point, in a market which is full
of dead stocks, it’s good to see even tentative signs of life in severely
oversold stocks with solid businesses even during tough times; even
if they maybe fueled by caffeine at the storefront and testosterone
in the board room.
Technicals Leave Door Open to More Selling
The market was unable to hold its gains on 3/20/2020 but, despite
the roller coaster ride there were no new lows in the New York Stock
Exchange Advance Decline line (NYAD) which is a positive and if not
reversed may signal that a credible bottom is forming or already in
place. But that’s just one positive. Unfortunately, beyond NYAD, the
technical picture at the moment does not give the market the all clear
we’ve been looking for.
Both the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes made
new closing lows but did not fall below their intraday lows, leaving
some doors open for more selling but also creating some albeit dim
hope that maybe we’ve seen the worst of it. What was encouraging is
that even though there were new closing lows RSI did not make a new
low for either index to confirm the new price lows. This is a potentially
bullish divergence but was unfortunately not universally confirmed
by other indicators.
Specifically, what is worrisome is the new low in ROC (Rate of Change)
indicator for both indexes, which measures momentum. Also worrisome
was the reversal in Accumulation Distribution (ADI) and the lack of
a convincing rise for On Balance Volume (OBV) indicators, a fact that
suggests that the midweek bounce was mostly short covering.
Thus since not much real buying took place we could still see more
selling as the new week arrives, especially if there is more bad news
about the coronavirus over the weekend as we’ve seen on a regular basis.
Certainly the moving in of the military into New York City as well
as the rising number of new cases will likely affect the headline reading
algos and possibly exacerbate the selling.
The bottom line is that very little was settled last week and that
the market remains vulnerable to more selling unless a very positive
news item hits before Monday’s open.
It’s Best to Wait for All Clear Signal before Diving Back
Although there were some opportunities for short term gains last
week, and there may be more in the next few days, the market has not
given the all clear signal. That means that the best use of time for
investors will be by counting their cash and building a shopping list
to deploy once the all clear signal appears.
Specifically, the all clear signal will be evident when we see at
least three to four days of the market trading with less volatility
and actually being able to put together some back to back gains with
good breadth and accompanying volume.
Bear markets do have on positive side to them, which is not evident
during this one, and that is that some traders may take a vacation.
But unfortunately with the coronavirus around I can’t even suggest
that we all go fishing.
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
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