Analysis, Perspective, Trading Strategy
At the Edge of Chaos: For the Bears it’s back to the Drawing Board
Duarte in the Money Options
been bullish on this market since soon after the mid-March bottom. But
I’m not taking a victory lap, as I full well know that the market is a perverse
beast and that once today is over, no one knows what tomorrow will bring. Moreover,
it seems as if we are now entering a momentum run in stocks. And as everyone
knows, all momentum runs end badly, although they are very exciting as they
Still, after Friday’s shocker employment report and blow out rally,
it’s hard not to see that hedge fund managers and individual investors
who first avoided the rally and who in some cases had increased their
short positions over the last two weeks of social unrest will have
to go back to the drawing board and consider whether to chase the stock
market’s rally clear momentum acceleration. What makes this an even
riskier decision is that after a nearly complete reversal of the bear,
stock prices may be beyond reasonable valuations, which means that
when the rally is over, the ensuing decline may be even worse than
what we saw in the early days of COVID-19.
It’s a Whole New Ball Game
Indeed, the latest U.S. jobs report is likely to be a game changer,
as it refocuses investors on the return of MEL, the complex adaptive
system composed of the markets (M), the economy (E) and people’s lives
(L) to a tangible recovery mode while taking attention away from the
Federal Reserve as the primary reason for stocks to rise. Of course,
the Fed is still carrying the heavy load; thus it would be a mistake
for the central bank to pull away its stimulus aggressively at this
point. Moreover, monetary easing is not likely to fade in the near
future as the Fed now has some help from the European Central Bank
(ECB) and the Chinese central bank have begun aggressive QE programs.
Last week, in this space, I wrote: “Famed technician and collaborator
of the late Marty Zweig, Ned Davis, is known for asking the question
“Do you want to be right? Or do you want to make money?” And as crass
and cynical as the words may sound to the uninitiated, truer words
were never spoken in the context of being a stock trader,” and I’m
standing by those words, especially after the employment report and
the market’s response to the numbers.
Indeed, as I’ve noted repeatedly here, when events are at the edge
of Chaos (EOC) as they have been for the past few weeks, things happen.
Specifically, the EOC is where the actions of Complexity, the ruling
forces of the Universe are most meaningful. Specifically due to those
actions reaching the point of emergence complex adaptive systems, such
as MEL evolve to new operational levels.
In this case, it is now plausible to consider that the U.S. economy
is on a path to some level of recovery. What that means is that analysts
and economists will now have to reassess their earnings and GDP estimates
respectively. And when they do, it will likely trigger trading algorithms
to buy stocks and move prices higher.
Should I stay or should I go?
If you bought stocks near the March bottom, as we did at Joe Duarte in
the Money Options.com, your portfolio is in good shape at the moment.
But, if you missed the rally, you have a decision. If you bought at the
right time, you now have to figure out whether to take profits if you’ve
got or to ride the trend out longer. Meanwhile, if you missed the rally,
you are now faced with the prospect of playing catch up knowing full
well that to buy stocks at current prices in hopes that there is more
upside left is likely to be a higher risk proposition than in was two
Of course, this is the timeless dilemma in life and in trading, especially
when the stock market is essentially back to even after a six week
36% decline due to an external factor such as COVID-19 earlier this
year. And certainly the answer is almost never clear.
On the positive side, the Federal Reserve is still pumping liquidity
into the markets, albeit at a slower pace. Moreover, the European Central
Bank and the Bank of China are now aggressively putting money into their
respective bond markets, a fact that could extend the current rally.
Still, as the jobs number revealed, there is now the possibility that
some sort of recovery has started in the U.S. Indeed a recent
Rasmussen poll shows that 51% of Americans know someone who has returned
to work. What it all boils down to
is that the odds of the big picture changing are rising.
So, depending on which way the algos are programmed, the market could
increase its rate of ascent or succumb to profit taking, and even a major
selloff now that it’s back to even.
So what’s the best approach to your portfolio at this time? I will
say this much; all investment decisions are personal, and are based on
one’s risk profile. Nevertheless, the answer as to what to do in this
market should become clear if we apply the prudent money management principles
- Stay with the market’s primary trend
- Don’t fight the Fed’s interest rate trend
- Take profits on positions that are consolidating prices or no longer
- Constantly look for stocks displaying positive chart patterns when
management is doing the right things for the business
- Maintain and adjust well placed sell stops as your stocks rise and
- Always be prepared for when the music stops
If you follow those simple steps, the odds will be in your favor.
For more on these key principles, to learn more about Complexity and
Chaos in the market, and to review how to pick stocks for the Post New
Normal, check out my latest Stockcharts.com’ Your Daily Five video by
In this video, filed on 6/5/2020 I discuss how the 6/5/2020 employment
report has changed the market plus key portfolio guidelines to help you
stay on the right side of the market.
For a Free trial to Joe Duarte in the Money Options.com, click here.
Intel: The Wind at its Back as Laptops and Cloud Chip Demand
Shares of Intel Corp. (NSDQ: INTC) delivered a breakout on 6/5/2020.
Moreover, what makes this stock interesting is that the stock has shrugged
off the expectations of major losses after the U.S. government stopped
U.S. chip companies from trading with China’s Huawei.
Anyone who’s followed Intel over the years knows that its heyday was
in the early days of the PC and the laptop, circa 1990. Since then, even
though the company is a major player in the semiconductor space, there
just hasn’t been much glamour associated with their worker bee chips
which power such mundane tools. So the stock has mostly bounced around
But the world has changed and what was mundane yesterday is suddenly
necessary and sexy today. This is especially true for Intel, as more
people work from home and laptop sales are likely to rise. Moreover,
those laptops are going to have to be faster and will be expected to
be more portable, more secure and more versatile, especially when connected
to Wi-Fi. Furthermore, chip demand is already exploding as cloud companies
expand their server capacity in response to the changing global environment
– 5G, increased bandwidth requirements, more sophisticated networks,
and more reliable connectivity.
Finally, with a P/E ratio near 12, with positive recent guidance, a
steady dividend, and positive money flows as documented by Accumulation
Distribution (ADI) and On Balance Volume (OBV), the stock looks poised
to move toward $70 in the next few weeks.
NYAD Returns to Pre-COVID-19 Bear Market Highs
It’s hard to be too bearish when the New York Stock Exchange Advance
Decline line makes new highs for the current move on a regular basis.
But it’s nearly impossible to be bearish when this highly reliable indicator
made a new all time high on the heels of a better than expected May employment
Nevertheless, we are now at the moment in the rally when momentum has
taken over. And that means that we should be watching for signs of that
momentum fading. At this point, there are none, but it’s important to
note that RSI for NYAD is now above 70, which is overbought. It can stay
that way for a while, but it’s worth watching.
The Nasdaq 100 index (NDX) confirmed the new high on NYAD behind the
reignited rally in the large cap technology sector.
Meanwhile the S & P 500 (SPX) moved above 3200, although it has
yet to make a new high. Nevertheless, Accumulation Distribution (ADI)
and On Balance Volume (OBV) are very supportive at this time, suggesting
that money continues to move into stocks.
Sound Money Management Principles Will Always Win the Day
When the May jobs report shocked the world, it delivered a welcome
surprise to those of us who are long stocks. But, the fact is that it
wasn’t out of the realm of possibilities. Over the last few weeks, I’ve
noted that housing activity has improved and that freeway traffic in
Dallas, where I live and commute had vastly improved. These are indicators
which in the past I have found to be useful in predicting the state of
What I’m saying is that when in doubt; trust your trading plan and
your observations of daily life. Moreover, your plan should include indicators
which monitor the market’s trend, the direction of interest rates, key
sectors and stocks, and the general state of the economy, often beyond
the official statistics.
In other words, by knowing the status of key components of MEL, gauging
their reaction to events, and being prepared for all contingencies you
will increase the odds of success for your portfolio.
I own shares in INTC.
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 books.
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