Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Watch the Fed as Big Move in Stocks Looms
Duarte in the Money Options
earnings season gearing up and rising election and COVID-19 uncertainty,
the actions of the Federal Reserve are now more important than ever. No doubt,
no one knows which way the future will unfold. Yet, at least in the markets,
technical analysis can help us sort through the clouds of uncertainty, especially
over the next few months.
A couple of weeks ago I noted that the New York Stock Advance Decline
line (NYAD) was close to triggering a Duarte 50-50 Rule sell signal.
The signal appears when the NYAD falls below its 50-day moving average
at the same time that the corresponding RSI indicator falls below its
own 50 level.
Luckily for bullish investors, the signal failed to fully materialize
and the uptrend remains intact for now. However, as I describe fully
below, another important indicator is now telling us that a big move
in the stock market is likely in the not too distant future. Therefore,
in order to prepare for that move, investors should ask these important
What is the status of Federal Reserve liquidity?
The primary factor in this market remains the Federal Reserve and
QE. Accordingly, there were two concerning items in that regard last
week. One was that the New York Federal Reserve is floating the idea
that if markets continue to do well, they may actually stop
QE. The second one was that the Fed’s
balance sheet has shrunk three weeks in a row, a factor that has
coincided with recent market volatility.
What is the dominant market trend?
The dominant market trend remains up, but we are clearly in a consolidation
pattern that looks set to resolve soon. Moreover, the direction of
that move is the key to the market’s trend.
Are my stocks keeping up with the dominant market trend?
Regardless of the market trend, if what you own isn’t working, it’s
probably time to make changes. So consider have taking profits in stocks
which have gained 20% or more. Moreover, get rid of losers, especially
if the market is up and you still own stocks that are down more than
5 to 8%.
What’s on my Radar Screen?
Once you’ve optimized your portfolio, if the trend remains up, it’s
a good idea to replace the stocks you sold with new ones that are acting
well. Ideally you want to stack the deck with companies whose management
is doing the right things and whose price charts are showing signs
For more on these portfolio management techniques and stock
picks that work consider a FREE trial to Joe Duarte in the Money
Options.com by clicking here.
Is Gilead Sciences the Rodney Dangerfield of the Biotech
What’s up with Gilead Sciences?
I recently saw a headline mocking a rally in the futures market which
seemed to have been spurred by a positive press release from biotech
viral kingpin Gilead Sciences (NSDQ: GILD). And upon a detailed review
of the company, its management, and its price chart, I started to wonder
why, given its solid drug portfolio and earnings history, like the
late king of the self deprecating one-liners, Rodney Dangerfield, Gilead
gets no respect.
The headline was based on the news that the company’s COVID-19 drug,
remdesivir, reduced mortality rates on hospitalized patients with the
virus by 62%. That means that based on backward looking data, roughly
six out of ten people that might have died lived because they received
remdesivir. Be that as it may, the analysis which followed the headline
suggested that Gilead was cherry picking results in order to hype the
drug, while suggesting in a thinly veiled fashion that remdesivir doesn’t
really help anyone.
So what gives? Sure, remdesivir is not a certain cure for COVID-19.
And it may never be anything more than decent results when the drug
is used in the right setting. But GILD does not live by remdesivir
alone. For one thing it essentially owns the antiviral market, especially
in HIV where it continues to dominate.
Does anyone remember that Gilead’s Harvoni and Sovaldi cured Hepatitis
C and are still selling well and that the company is now a leader in
generic versions of the drugs with over 60% of that market? Moreover,
Gilead’s Tamiflu is a staple treatment for non COVID-19 flu.
How about its successful treatments for chronic angina, pulmonary
hypertension, and rare forms of cancer? Moreover, the company is preparing
to launch Filgotinib for rheumatoid arthritis in the U.S., Europe,
and Japan while owning a deep pipeline of drugs in key stages of development.
So, why isn’t the market moving this stock higher? After all, remdesivir
is the only drug approved by the FDA and other international regulatory
agencies to treat COVID-19. In fact, remdesivir has recently been approved
in Europe, Australia and India while the company is investing $1 billion
to study an inhaled version of the drug.
Even more interesting, remdesivir is already a money maker. The U.S.
government recently bought all the supply that was available, 500,000
vials at $390 per vial, and little will be available to the world until
September. Interestingly, analyst estimates are for potential yearly
sales of the drug as high as $8.5 billion, which may be optimistic.
But even at $2 billion in annual sales, remdesivir would be a blockbuster.
That’s a potential $500 million per quarter on average.
Moreover, what else do we have to treat COVID-19 with? Similarly,
vaccine data is not particularly encouraging given the fact that even
if one is developed soon, the odds for lifetime immunity from it seem
to be low.
And what are the alternatives? Certainly, the controversial malaria
and lupus drug hydroxychloroquine and the old steroid dexamethasone
have been helpful in some cases. But at the end of the day there is
no universal treatment.
So, why would Gilead spend a billion in researching a drug that they
know doesn’t work? Why are countries all over the world approving the
drug? And why is it sold out? Does any of that make sense when you
look at a price chart in a consolidation pattern? Is management deluding
itself, or is the market getting it wrong?
The lack of answers is bewildering. But this much I know. If I ran
Gilead, and I thought I had a dud, I wouldn’t spend a billion on it.
Be that as it may, the stock is still showing a stop and go trading
pattern with resistance at $80, after it broke out of a long term base
in the 60’s. On the bullish side, the stock remains above its 50 and
200 day moving average with good support near $72. Indeed, if the stock
can move above $80 consistently it could move significantly higher.
In conclusion; owning GILD could be painful. And it could take a
long time before it pays off, if at all. But consider the fact that
COVID-19 doesn’t seem to be going anywhere, at least for at least for
a few more months and that there are few treatment alternatives.
Moreover, even if it slows down at some point, the virus could easily
come back on a seasonal basis. And if that’s the case, just on restocking
sales, Gilead could generate revenue, possibly sizeable revenues from
remdesivir. And if that’s the case, given the existing sales of its
other franchises, its pipeline, and the potential for a lot of intangible
developments, this stock might be the ultimate contrarian play as the
market misses the boat.
Sure enough; like Rodney Dangerfield, a guy with slick hair, big
eyes, a cheap suit, and an out of fashion skinny red tie became wealthy
while getting no respect, GILD may eventually be a pleasant surprise
for patient investors.
We will certainly know more after Gilead reports earnings on July
NYAD Remains Resilient, Sets Up for Big Move.
The New York Stock Exchange Advance Decline line (NYAD) has been
flirting with disaster for the last month as it has threatened to trigger
a Duarte 50-50 Rule sell signal. Thankfully is the signal has yet to
be triggered, which means that the stock market remains in an uptrend.
And while that may change at any time, the longer that NYAD holds above
the sell signal point, the lower the odds of a significant decline.
Perhaps the most interesting aspect of NYAD this week is the shrinking
Bollinger Bands (green bands above and below the line). This, as I
mentioned above, is usually a sign that a big move in the market is
Moreover, there are some technical clues that suggest that the move,
when it materializes, may be to the upside. Of course, there are no
guarantees as there is always the potential for headline risk and/or
Still, note that the most recent dip in NYAD held well above its
previous low. Also note a similar occurrence in ROC and RSI. When you
put these subtle chart findings in perspective, combined with the narrowing
of the Bollinger Bands, they suggest that the odds favor an upside
breakout as investors have been buying stocks during the consolidation.
The S & P 500 (SPX) is mirroring the action on NYAD with an encouraging
upturn in Accumulation Distribution (ADI) and On Balance Volume (OBV).
Meanwhile, the Nasdaq 100 (NDX) has been making new highs under heavy
buying of tech stocks. NDX, however, is now becoming overbought. Also,
the recent pullback in biotech and the consolidation in the semiconductors
could put the brakes on NDX, at least in the short term.
Without the Fed there is No Market
A big move in stocks is likely coming. Certainly there are technical
clues that suggest that the move could be to the upside. But the fly
in the soup is what the Federal Reserve does with its current QE initiative
and whatever earnings season turns into.
Specifically, if the Fed pulls the plug on QE, especially if it does
so in response to the perception that the market is doing well enough
and that central bank liquidity is not necessary, they will be making
a big mistake. In other words, regardless of the technical indicators,
without the Fed, unless earnings are extraordinarily good, which is
doubtful, there is little reason to own stocks at current valuation
levels, especially as the election rhetoric is heating up and the COVID-19
uncertainty is rising.
I own shares in GILD.
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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