Analysis, Perspective, Trading Strategy
Bulls still have Hope but Caution is Warranted
Duarte in the Money Options
remain hopeful and continue to play the long side of the market, albeit
more cautiously than I was a month ago. This is because the uptrend is looking
a bit tired and if the bearish trend reasserts itself, the negative repercussions
would be felt far and wide along the Markets, Economy and People’s Lives (MEL)
At the same time, hope is by no means lost. For if, as I describe
below, and as I discussed in my 4/24/2020 episode of Stockcharts.com’s:
Your Daily Five, because of the Fed’s massive easing , and if there
are signs that people are being successful as they attempt to get back
to a more normal life an upside surprise may be in the offing. What
that means is that if a couple of small, yet important things happen,
especially on the technical side of the market, the bull trend could
easily reassert itself, and perhaps in a fairly spectacular way.
Nevertheless in what remains a very fluid situation, it pays to be
prepared for all possible contingencies, including considering hedging
some bets while continuing to pick stocks near the sweet spot of the
Last week, in this space, I wrote: “we may be reaching a point where
the balance between the components of MEL, the complex adaptive system
comprised of the stock market (M), the economy, (E) and people’s lives
(L) is nearing a point of emergence to a new level of operation. Foremost,
if this is correct, then because of the way algos are programmed, the
Fed’s actions are paramount.”
More specifically, I wrote: “my current analysis suggests that the
markets are on the verge of becoming the leading component of MEL.
This is due to the fact that 401 (k) plans are central to the wealth
effect for many people. Thus, the stock market’s rally has been a psychological
positive of sorts to those who may be temporarily out of work or are
working part time.” In other words, in this new Post New Normal world,
the markets are leading the economy, which means that a negative event
in the stock market could easily derail any potential positives in
Of course, because we are at the Edge of Chaos, at this point anything
is possible. Yet, if the market does roll over decisively, then by
its actions it will be sending the message that despite the Fed’s unprecedented
actions the MEL system has reached a point where the long standing
structural problems: insurmountable debt, mismanagement of capital,
and the maldistribution of wealth cannot be overcome by monetary policy.
Indeed, given the current state of the NYSE Advance Decline line,
see below, the rally is at a crucial decision point. What that means
is that for the first time since the market topped out and the rebound
rally has developed, active traders may wish to consider hedging some
of their bets, just in case the bear starts to growl again.
Leidos Holdings: In the Sweet Spot of the Government’s Super
Nova Spending Stream
Under normal circumstances, Leidos Holdings (LDOS) is a well run software
company with a plethora of government contracts and thus a fairly secure
earnings stream. But now, when government bureaucracies are in Super
Nova mode due to the coronavirus stimulus packages, Leidos may just surprise
even those with the most optimistic of expectations as it continues to
mine the never ending income strea
In the month of April 2020 alone, LDOS resumed work on a five year
$450 million U.S. Air Force IT contract, while adding a $69 million
IRS customer e-services software management contract. And this is on
top of a banner fiscal 2019, where the company delivered over 10% year
over year growth rates in key measures, including revenue, EBITDA,
bookings and profit margins.
For example, in Q4 2019, the company inked a potential $7.7 billion
contract with the U.S. Navy as part of a total of $18 billion in three
separate contracts, two of which are still being negotiated. Meanwhile,
the company booked a total of $14.5 billion in revenues for the full
fiscal year 2019 and has a backlog of $24 billion in potential revenues
on the books. Furthermore, the company continues to grow both organically
and by acquisition in defense as well as most recently in healthcare
where the COVID-19 situation is likely to increase the need for IT
services due to telemedicine as well as electronic medical records.
The stock recovered nicely from its bear market drop and is now in
the Complexity Zone, where systems operate optimally, above its 50
and 200 day moving average after breaking out above the $100 level
on 4/24/2020. Moreover, the breakout came on rising volume and with
confirmation from Accumulation/Distribution (ADI) and On Balance Volume
Barring a major market debacle, LDOS could well make its way back
to its all time highs near $125 over the next few months. For more
on LDOS and stocks that are doing well in the current market consider
Trial to Joe Duarte in the Money Options.com
NYAD Replays Negative Pattern Similar to Troubling Past
The New York Stock Exchange Advance Decline line (NYAD), the most
accurate indicator of the stock market’s trend since the November 2016
presidential election may be tracing a negative chart pattern reminiscent
of its action in October 2019 prior to a 20% decline in stocks.
Specifically, NYAD is struggling to stay above its 200-day moving
average as it struggles with the resistance provided by its falling
50-day moving average. This, coupled with what could be negative divergences
in the ROC and RSI indicators suggests that unless this is corrected
stocks could be close to entering a new down leg.
Meanwhile, the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes
continue to play cat and mouse with key chart points. The former continues
to bounce around 2800 while the latter is having trouble getting back
above 8800, although both indexes ended the week above their 50-day
moving averages, while NDX closed above its 200-day line as well, which
are both encouraging signs.
Moreover Accumulation Distribution (ADI) and On Balance Volume (OBV)
for both indexes stabilized by the close of trading on 4/24/2020. Therefore
if NYAD is able to take out the overhead resistance at its 50-day moving
average, the likelihood of new down leg in stock prices will be greatly
Hedging Starts to Make Sense
We are clearly in a no man’s land scenario as NYAD is stuck between
its 50 and 200 day moving averages while sellers seem to be quietly
moving back into the markets. Therefore, hedging long positions via
inverse ETFs or put options may be a sensible trading tactic to consider
along with tightening stops.
Nevertheless, it’s important to note that the uptrend, until proven
otherwise remains intact. Thus, the focus of any trading strategy at
the moment should be on stock picking along with risk management including
keeping prudent levels of cash in trading accounts.
Of course, hedging, which has proven to be futile over the past twelve
months as the market’s volatility has wiped out any short term benefits
of the strategy may prove to be yet another dead end in this market.
Nevertheless, because we are still waiting for the complete all clear
in the market it makes sense to consider such a move at this point.
Indeed, the worst thing that could happen is that the hedge loses
value if we get another up leg in the market. This, however, could
easily be remedied by closing out any hedge positions while letting
the open long positions move higher.
The bottom line is that in the short term, it’s not a bad idea to
consider hedging in order to protect the gains we’ve attained since
the recent market bottom.
I own shares in LDOS.
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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