Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Who’s the Greater Fool?
As Retail Investors take Over the Market do the old Rules Even Matter Anymore?
Duarte in the Money Options
institutional investors or the retail masses are going to face a serious
market related decision in the next few weeks to months. History says that
retail investors are being lured into a bull trap. Yet this is a market where
the unthinkable is a daily occurrence, which means that history should not
be ignored, but that it can and should be questioned.
As we head into Memorial Day, the official start of the so called
“summer doldrums” and the often elusive “summer rally” season, investors
should consider if the same old rules apply to the stock market in
the Post New Normal. And here is why. Recent trading patterns and data suggest
that the recent stock rally has been mostly due to an influx of money
from retail investors; mostly young people using their online trading
apps, and in many cases moving stimulus money into the stock market
as institutional investors who initially panic sold in response to
COVID-19 have stayed on the sidelines missing the rebound.
So the big questions are: what happens if the individual retail investor
is right for once? What if the worst is actually over? And what will
happen to stock prices if institutional investors decide to play catch-up?
By the same token, there is also the possibility that the old order
will return and the recent rally fades leading to a resumption of the
downtrend and yet another massacre of retail investors.
Is the Worst Really Over?
The gloom and doom is thick and for good reason as the uncertainty
of the COVID-19 crisis, rising geopolitical tensions (Hong Kong, China,
the Middle East), the looming presidential election and their potentially
epic repercussions continue to affect MEL, the complex adaptive system
comprised of the financial markets (M), the economy (E) and people’s
lives and financial decisions (L).
Moreover, as I usually point out, by the time the U.S. futures market
opens on Sunday night and by the time the market opens on Tuesday,
due to the Memorial Day holiday, a lot can happen. Nevertheless, while
there is plenty to worry about, there are also some encouraging signs
that the system has begun to adapt to the Post New Normal (PNN) reality.
Indeed what we are experiencing is a sort of rolling reality with
new layers appearing on key central concepts over time. For example,
on May 17, I noted that the weekly jobless claims number would be a
bellwether for the future. Specifically, I noted that a drop in this
key statistic would likely be bullish for the economy as it would document
any degree of people getting back to work that was appearing in the
And, while initially, the most recent number seemed to be another
negative, there were some interesting statistical gymnastics that were
highlighted in a more in depth
analysis of the data along with recent polling
results which suggest that we may be starting to see a bottom in
job losses which should translate to an improvement in jobless claims,
perhaps as early as the next week or two.
Of course, it’s nearly impossible to know whether the worst is over;
and things could change in an instant. But it’s also not out of the
realm of plausibility that the situation may be improving.
Indeed the way MEL adjusts is just as important as what the virus
does. Thus, if and as people find ways to return to work the odds of
improvement in the economy, although possibly regionally diverse are
likely to increase. In fact, while statistics such as GDP and national
employment statistics look at the macro situation, as this dynamic
evolves, it will be paramount to look at regional data, with special
attention to migration patterns from areas that are having more problems
to areas where the virus has done less damage and where the economy
has recovered and how that migration will affect the inner workings
From an investment standpoint, macro, sector and bellwether analysis
remain crucial, as I highlight below and in my current Stockcharts.com
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From Crisis to Transition
As MEL evolves, it’s important to change our investment focus to
the type of stock that is working at the moment, which is why this
week I’m looking at a stock which is suddenly out of favor Campbell
Soup (CPB), and contrasting it to one that is, homebuilder DR Horton
Campbell’s had been doing quite well during the early stages of the
COVID-19 crisis as investors bet on food shortages and potential long
term periods of having to stay at home. But as the trend toward ending
the lockdowns began to take hold, CPB rolled over and is now on the
verge of a long term technical breakdown as it tests its 200-day moving
On the other hand, DR Horton, the largest homebuilder in the U.S.
continues to climb as weekly mortgage data continues to show that demand
for new homes is much more robust than would seem normal during a pandemic.
Moreover, because supply for homes remains tight, the long term supply
fundamentals for DHI remain favorable, of course, barring a complete
Certainly, there are no guarantees that the U.S. economy will achieve
any improvement in the short term, much less a lasting recovery, although
we are starting to see somewhat encouraging, albeit anecdotal data
in some areas of the country, as I note above. But more important,
from a trading standpoint, money is flowing out of the lockdown stocks
into stocks that presumably would benefit from a recovery, which means
that traders retail or otherwise are betting on some sort of improvement.
Market Breadth Remains Stuck in a Rut
The NYSE Advance Decline line is stuck in a rut between its 20, 50
and 200 day moving averages providing support, and its recent high
offering resistance. This technical posture clearly reflects the ambivalence
of traders and the uncertainty of the moment and until this situation
breaks one way or another, the uptrend remains vulnerable.
Meanwhile the S & P 500 (SPX) continues to struggle at the resistance
area of its 200-day moving average near 3000, although it remains above
its 20 and 50-day moving averages.
Elsewhere, the Nasdaq 100 (NDX) has a shelf of support between 9150
and 9300, but if the indx fails to move above 9750 we may be looking
at a double top.
Therefore, from a technical standpoint, just as from a fundamental
standpoint, the market is trying to decide its next course of action,
just as we head into the traditionally slow summer trading season.
For an in depth look at how I analyze the markets check out my May
25, 2020 interview with Stockcharts.com’s David Keller on his show
“Behind the Charts” on StockchartsTV.
For air time and details click here.
Who’s the Greater Fool?
The stock market could easily crash and burn tomorrow and the institutions
could say “I told you so,” without any qualms. Yet, data suggests that
a big change has taken place in the markets. And whether the data is
believable or whether it holds up over time is as important as the
Nevertheless, the bottom line at the moment is that institutional
traders are not their normal selves these days. By sitting out the
recent rally, they will have to either stay out until the market falls
again or play catch-up and buy stocks in order to keep their clients
happy. If they do the latter, then the stock market will likely make
significant gains as they pour money in as they fear missing out on
whatever is left of the rally. If they don’t then things could get
Certainly, they are not giving us any clues. But some of their problem
may be due to their reliance on computer trading algorithms which base
trading decisions on headlines without balancing them with field observations.
In other words, as the headlines darken, institutions may stay away
Meanwhile people who are out and about, and apply the old Peter Lynch
“kick the tires” investment method, may see that the world is trying
to bounce back and may be willing to take chances on the stocks of
companies which seem to be doing business. This would be especially
noticeable in the price of any stock if the institutions aren’t around
to challenge their assumptions and actions.
What that means for traders and investors is that we continue to
look for stocks with favorable chart patterns and solid fundamentals
while as usual keeping an eye on the general trends of the market as
we manage risk with position size, hedging as needed and periodic profit
taking on those stocks which reach our price targets.
Finally, it’s important to recognize that the pendulum may be swinging,
at least temporarily; that the world is truly changing. All of which
means that we really are in uncharted waters now and those who adapt
will survive while those who fail to recognize the evolutionary process
that is taking shape are likely to be left behind.
I own DHI.
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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