Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Bull Run like to Continue as the Fed has no choice but another round of QE
Duarte in the Money Options
bulls lived to fight another day last week as the potential sell signal
from Duarte’s 50-50 Rule did not come to pass. So for now, instead of a “cruel,
cruel summer” investors seem to have just gotten lucky once again, especially
when you consider the fact that the Fed will almost likely rev up the QE machine
in the not too distant future or risk another bear raid.
Certainly, liquidity is the dominant theme in the market. Moreover,
there are emerging signs that the Fed’s lack of largesse in terms of
money creation is starting to create yet another potential freeze up
in bond land, which if not remedied, will almost turn into a problem
for the stock market. Get the details here.
That was a Close Call
We almost got a big time sell signal last week as the 50-50 rule,
which is triggered when the New York Stock Advance Decline line (NYAD)
breaks below its 50-day moving average as its corresponding RSI indicator
breaks below its 50 line simultaneously failed to materialize. But
we are not out of the woods. That’s because the Federal Reserve is
still only pumping $4.5 billion into the Treasury market on a daily
basis, which, as the stock market’s recent hiccups suggests is simply
not enough money to keep the stock rally going.
Last week, in this space, I noted: “The way this market has acted
over the last few months, it could well set a new high in a few days.
However, if the NYAD breaks below its 50-day moving average, a trip
to its 200-day moving average is well within the normal technical expectation.
That could translate into fairly steep losses for individual stocks
and the major indexes.”
Thankfully, the bulls got a reprieve. But as I noted above, the Fed
is likely to increase its money pumping into the bond market, but the
central bank is still not all in. Moreover, as I point out below, we
have not received the “all clear” signal that the bull market is fully
back in business. Thus, we are in familiar territory which means that,
above all, attention to individual positions and adherence to sound
trading principles is the key to success as we wait for the Fed’s next
Here is a review of the keys to success:
- Stay with the market’s primary trend
- Trade small positions to reduce portfolio volatility
- Don’t fight the Fed’s interest rate trend
- Take profits on positions that are consolidating prices or no
longer acting well
- 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
- Always be prepared for when the music stops
MEL Anecdotal Evidence Holds Up
Aside from the market’s lack of a bearish break, which is great news,
the macro data tells us that before the recent surge in new COVID-19
cases people were going back to work, consumer confidence was rebounding,
and as reported by PMI data, the U.S. economy had at least bottomed
out. The problem is that we really don’t have any data which tells
us what’s happening after the latest surge in positives.
Indeed, the constant worrying remains a bullish factor as the one
consistent dynamic of this entire bull market from the bottom in 2009
has been the presence of a persistent wall of worry. Moreover, when
that wall of worry began to dissipate in the late spring, after the
March bottom, the market started showing signs of topping out.
In fact, just before the COVID-19 resurgence I asked subscribers
to send me anecdotal information about their geographical areas. I
was looking for information to help me make sense of the state of MEL,
the complex adaptive system composed of the Markets (M), the Economy
(E) and people’s Lives (L).
And what I received painted a fairly positive and similar picture
to what I was seeing in Dallas at the time; clear signs of increased
activity in the form of full freeways, improved traffic at restaurants
and grocery stores, and mostly active retail activity, especially at
places like Home Depot (HD) and grocery stores.
Interestingly, one subscriber from California, also noted heavy traffic
at Home Depot, but also empty shelves, which I have not seen to a great
degree at HD. I’ve also heard general misgivings about the potential
for Christmas merchandise being delayed this year. Someone from Florida
astutely noted decreasing traffic in the Brickel financial district
in Miami, just days before the news of the COVID surge hit the mainstream
media, which suggests that the number of Florida cases was already
A sub from Chicago noted muted activity in small restaurants in his
area and wondered if these small businesses were going to make it.
Meanwhile someone from Pennsylvania reported concerns about the future
of the education system in his area due to kids not sure about returning
to school in the fall.
What this anecdotal evidence, combined with the improving employment
and economic data suggests is that before the new case surge, we were
starting to see a recovery, albeit somewhat uneven in multiple areas
of the country and not without risk to certain sectors. Just the same,
since there seems to be a reasonably good correlation with what we’re
seeing in terms of on the ground data, it’s important to keep tabs
on this type of information.
Join the MEL Brigade
So now, I’m looking for clues as to what’s happening now in MEL as
the COVID cases increase across the country. Specifically, it’s good
to know what’s happening in real time and compare it to what the algos
think is going on as we may be presented with a great buying opportunity
or an equally important exit point.
Presently, what I’m seeing in Dallas is a slight decrease in freeway
traffic combined with a pronounced decrease in major avenue traffic
while retail seems to be holding up.
Let me know what you’re seeing by emailing me here.
Biotech Surprise: Repligen Breaks Out, Expands Manufacturing
The biotech sector remains a minefield for those making big bets
on the next great COVID-19 treatment or vaccine headline. Yet, as I’ve
noted for months, there is a better way to play the sector, which is
via companies whose roles in the daily grind of drug manufacturing
and research will remain crucial regardless of the ups and downs of
any particular acute developments.
Such a company is the little known Repligen, whose business focuses
on the production of basic proteins and manufacturing systems used
by biotech and pharmaceutical companies to actually make cancer treatments,
gene therapy, and other biologically derived treatments and drugs.
Here is my point, in the past quarter Repligen beat earnings and revenue
expectations, expanded its margins and made several key acquisitions
which will help it expand
manufacturing base and thus its ability to meet the rising demand
for the tools required by advanced cancer, rare disease, rheumatoid
arthritis, and even developing treatments for traditional ailments
such as Diabetes.
Moreover, its equipment and basic medication components will also
likely play a role in the manufacturing of any successful COVID-19
related treatments. In other words, RGEN is a central company to biotech,
which means that the odds of a continuation of its recent upward thrust
are favorable as more investors catch on to what’s going on with the
Technically speaking, the stock is now under intense accumulation
after a pullback to its 50-day moving average. Note the huge improvement
in Accumulation Distribution (ADI) and On Balance Volume (OBV) while
the Volume by Price indicator is telling us that there is little upward
resistance to any price advancement at the moment. Therefore, if there
are no extraordinary developments, I expect a test of the old highs
I recently recommended RGEN to subscribers of JoeDuarteintheMoneyOptions.com.
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Trend Remains Up as NYAD Lives to Fight another Day
The New York Stock Exchange Advance Decline line (NYAD) remained
above its 50-day moving average last week while the corresponding RSI
indicator bounced back above its 50 day line. That means that until
proven otherwise the trend for the stock market remains up and the
50-50 Rule sell signal did not materialize.
The S & P 500 (SPX) also recovered and closed the week above
its 200-day moving average reversing what seemed to be a darkening
picture for the stock market.
Moreover, the Nasdaq 100 (NDX) made a new high with a significant
rise in Accumulation Distribution (ADI) and On Balance Volume (OBV)
suggesting that money is moving back into the stock market.
What we need to see now, however, is a new high on NYAD to confirm
the move in NDX. If there is no confirmation in the next few days,
we would have a potential negative divergence which could be a prelude
to yet another opportunity for the 50-50 rule to give us a sell signal.
Bulls Should Remain Cautious
The bull market escaped a potentially sizeable decline last week.
And while that was a positive development, all the market accomplished
was the avoidance of a major breakdown. What we need to see now is
a resumption of the upward momentum as would be signaled by a new high
on the NYSE Advance Decline line.
I’m not expecting any slowing or changes in the political warfare
that is ongoing or a sudden end to the COVID-19 pandemic. So what it
all boils down to for the stock market, as it has for the past several
weeks is whether the Fed will convince the market that its current
$4.5 billion daily injection into the Treasury bond market along with
its other interventions will be enough to keep the stock market liquid
or whether the market will increase the pressure on the Fed to juice
up the QE machine once again.
We should know fairly soon.
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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