Analysis, Perspective, Trading Strategy
At the Edge of Chaos: What should we focus on? In the World it’s the virus. In the Markets it’s Still Liquidity.
Duarte in the Money Options
the past six weeks of bearishness, this market needs a pause. But as
we’ve seen over the last few weeks, by Monday morning anything is possible,
especially after the NIH infectious disease chief, Dr.
Anthony Fauci told CNN that models are projecting the possibility of millions
of coronavirus cases and one hundred to two hundred thousand deaths.
The bottom line is that for now, the most aggressive bear market
many of us have ever seen has delivered a spectacular short term upside
reversal but faces important overhead resistance. Thus, the real question
is whether this is the real bottom, the beginning of a bottoming process,
or worst of all, just a really good bear market rally with a new down
leg coming in the next few days.
As I noted last week, and in light of Dr. Fauci’s comments, waiting
for the all clear from the market is a sound strategy and our best
bet. After all no one has ever suffered financial ruin in a bear market
by holding large sums of cash and avoiding losses. Moreover, it’s crucial
to remember that the all clear is traditionally described as a rebound
from the lows followed by a period of stability in stock prices, even
a slowing in volume and actually some boring days.
So much for that; I mean what could possibly be the next act for
the algos after a thirty five percent decline in six weeks? How about
a full on bull market in just three days followed by a fourth day which
looked as if we were right back into the bear market?
Well, that’s what happened as stocks bottomed and rallied twenty
percent in three days as global central banks flooded banks with newly
minted out of thin air money as global governments dug their debt holes
deeper while concocting wildly hyped fiscal stimulus packages. Certainly
the algos liked the news. And I didn’t mind them either as there were
some worthwhile trading opportunities during those three days – think
SBUX, as I noted in this space last week.
But guess what? I still haven’t gotten the all clear, which means
I won’t be plunking huge bucks into stocks until the dust clears; which
of course, could be anytime or in months, considering the way the market
is trading on a daily basis.
Still, take a step back and think what would happen if the market
can shake off Friday’s decline and fully recovers the entire bear market
loss in the next week or two. What would be its next move and what
would we do? Would we dance in the streets? Would we take the rest
of the year off? Or would we be numb as the whole thing collapses yet
again? Your guess is as good as any, which is precisely why I am still
holding lots of cash and am only willing, at most, to take small risks
under the right circumstances.
Certainly the coronavirus and its repercussions are still the major
factor affecting everyday life. But in the market it’s all about liquidity;
specifically liquidity provided by central banks via asset purchases
and injections of cash into the repo, bond and money markets. This
point was clearly evidenced by Friday’s selloff in stocks in response
to the Federal Reserve reducing the amount of money, from $75 billion
to $60 billion, that it will inject into the markets on a daily basis;
just a few days after saying that there were no limits to their largesse.
Moreover, since the Markets, the Economy, and people’s lives are
now one interconnected system (MEL), my bet is that some of that money
will be used to repatriate production capacity from China, back to
the U.S., voluntarily or by force – GM anyone?- which means that companies
with domestic production capacity are likely to fare better in the
Simply stated, as time passes, and purely from a survival perspective,
more and more people openly or privately, will come to the realization
that the world can’t take a chance on this happening again without
being more prepared. This, of course means that even as the daily grind
of self quarantine, social distancing, and working from home continues,
people are thinking, and Complexity, the process of system adjustment
and operational optimization through which the Universe evolves, is
active. Indeed, decision makers across the spectrum, most importantly
at home, where 401 (k) plans and Home Equity Lines of Credit are crucial
tools of wealth, are thinking about future preparations for the next
visit from the unpredictable and destructive phenomenon known as Chaos.
Moreover, after all of this is said and done there will be some seriously
pent up demand for, well, how about everything. Indeed, the trillion
dollar questions are when, what type of recovery are we likely to see?
Which way will Complexity steer MEL once the current Chaos simmers
down? What goods and services will be in the highest demand when all
of this is over? And more importantly, which companies will benefit
the most? As I discuss below, one unlikely high tech company is unexpectedly
cashing in from the current situation and is interestingly looking
positively toward the future.
To learn more about how Chaos and Complexity move the markets, and
how to adapt this information into your daily trading routine check
out my presentation, “ Trading
at the Edge of Chaos” and take me up on a FREE
30-day trial offer.
Micron Technology Offers Glimpse into Future of Technology
The recent rally in the shares of Micron Technology (MU) may have
been a shot across the bow of the next technology revolution.
Indeed as Wall Street analysts scramble to cut future earnings expectations
and economists argue about the depths of the contraction in GDP due
to the coronavirus, Micron the global leader in flash memory recently
delivered a huge earnings beat, which took the stock nicely higher
in response. Moreover, in its conference call, Micron actually gave
positive guidance, citing increased demand for its chips due to the
increase in online meetings.
What it means for investors is that the next big wave of technology
may be about to gather steam. Certainly 5G, the buzzword before all
this started will be involved. But, as a betting man, I would suggest
looking for companies in the U.S. and Europe to take over from China’s
domination of that market from Huawei with Micron in the mix.
Indeed, Micron’s guidance suggests that we are already seeing a critical
pivot by companies and individuals to the next big wave of technology
and that over time this will be accompanied by an acceleration of the
already significant move of production capacity away from China. And
while the coronavirus situation will likely resolve at some point in
the future, those new developments which have made people’s lives easier
during this difficult time will remain and likely flourish over time.
We are already Micron benefitting from apps such as telemedicine,
which I expect will increase as the population ages. This is also visible
in the rise of online meetings for banking, deal making, and other
routine things which have up to now been done in person.
What I’m saying is that complex adaptive systems emerge and evolve.
Thus, over time, thanks to the coronavirus, we are likely to see a
rapid transformation of what we do and how we do it. Moreover, it will
likely involve the Internet and private online meetings and subsequent
technology offshoots that evolve from this dynamic. It seems as if
Micron is already there.
Oversold NYAD Rebounds
Last week, in this space, I suggested a credible bottom was possible
due to the oversold state of the New York Stock Exchange Advance Decline
line (NYAD). I also expressed my concerns regarding key technical indicators;
the ROC for NYAD, and the Accumulation Distribution (ADI) and On Balance
Volume (OBV) indicators for the Nasdaq 100 (NDX) and S & P 500
And while the subsequent rebound in NYAD and the indexes was spectacular,
we could still see a reversal and a retest the lows for the cycle as
early as March 30, although end of month seasonal tendencies for money
flowing into stocks could delay any potential decline.
What we saw last week was that the market responded to the oversold
RSI readings on NYAD, NDX, and SPX, and the positive indicator divergence
illustrated by lower prices but not lower RSI readings. Next, the market
responded to the Fed’s liquidity moves instantly, clearly forecasting
what will happen if the money spigot is turned off as Friday’s action
Finally, and perhaps most important are these crucial technical signs;
the NYAD is now testing its 200-day moving average while both NDX and
SPX have overhead resistance levels coming up at their 20-day moving
averages. If the market fails to rise above these key levels, convincingly,
we are likely to see retests of the recent lows.
Trading Small Has been Excellent
As I’ve recommended for the past few weeks, trading small lots of
liquid stocks has been profitable. Indeed with many blue chip and large
cap stocks soaring to large gains on short covering and some buying,
a small amount of money, in many cases, has delivered an excellent
percentage gain. Moreover, I am not changing my recommendations for
now, given the potential for either a consolidation or a retest of
Meanwhile, the key to success until proven otherwise will be to keep
cash at above average levels while deploying enough to make some money
via short term trading in and out of liquid stocks as we wait for the
market to finally reveal its true intentions. The next couple of weeks
should give us a good idea as to what’s next.
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
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