Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Throw Out the Old Playbook. The Market is now leading the Economy.
Duarte in the Money Options
people with what they expect; it is what they are able to discern and
confirms their projections. It settles them into predictable patterns
of response, occupying their minds while you wait for the extraordinary
moment — that which they cannot anticipate.”
― Sun Tzu, The
Art of War
Throw out the old playbook. We are near the point of Emergence in
the Markets, the Economy, and People’s Lives as key technical indicators
are pointing to an imminent upside breakout for stocks. While the mainstream
investment gurus and economists search for the elusive V, L, or U shaped
recoveries, beyond their radar screen an entirely different process
is being shaped by the ruling force of the Universe, Complexity, which
acts in a purely non linear fashion and beats to its own drum independent
of anyone’s opinion.
In fact, based on price chart and trend analysis, and fueled by the
Federal Reserve, as I describe below, we are well into a secular –
long term and meaningful change in MEL, the complex adaptive system
composed of the markets, the economy, and everyday people’s lives and
financial decisions. Therefore, even as some are predicting a dismal
outcome, investors should instead be paying close attention to the
reality on the ground, not fighting the Fed or the market’s momentum
and allocating their resources accordingly.
MEL’s Big Move Has Started
COVID-19 has hastened the movement in MEL toward what is known in
Complexity jargon, as the point of emergence; the series of events
which culminates in a decisive move which delivers systems to their
next level of operation; what stock traders call a breakout. Therefore,
if the current trend remains uninterrupted I expect the combination
of the ongoing pandemic, the ensuing social unrest and the rising election
uncertainty to tip the balance of people’s decision making regarding
where and how they live and work.
Moreover, this transition will affect how people spend their money.
Thus from a trading standpoint, it’s becoming increasingly clear where
the next set of winners will materialize in the stock market. Incidentally,
I discuss this topic below and offer further detailed guidance as to
where the best places to invest are likely to be in my recently recorded
Second Half Outlook report titled: “Taming the Uncertainty” which you
can find here.
Certainly, a currently popular view is that the highly indebted global
economy won’t be able to function much longer, especially under the
weight of the pandemic, and that a double dip recession or worse will
deliver long lasting economic pain.
Yet, in many places in the real world, the jury is still out on these
expectations. In fact, what’s actually happening is that MEL is adapting,
albeit in non linear fashion. This means that the activity is not uniform
and seems regionally uneven. Indeed, this lack of linearity is confusing
to many, but in fact it is a naturally occurring phenomenon and the
central concept in Complexity.
Be that as it may, what is increasingly visible is that events are
shaping humanity, and people are reacting. One reaction which is increasingly
evident is the migration from areas of the country where life is increasingly
difficult to other regions where there is more opportunity; whether
it’s a move to the suburbs or a move to a totally different geographic
area. In other words, the system is acting according to the tenets
of Complexity by adapting to the circumstances.
Of course, there are no guarantees of any particular outcome as Complexity
has its own agenda. Certainly not everyone is benefitting from the
current situation, and it is entirely plausible that the mainstream
is correct and the world’s economy will crash and burn. Nevertheless,
it is at least equally plausible, and backed by price chart analysis
and emerging data, that instead of a declining economy what we are
actually seeing is an increased regionalization of the population and
a concomitant reshaping of economic activity.
Indeed, in this space I have frequently discussed the increasing
number of out of state license plates I see on the highways as I drive
to work and the generally upbeat economic activity in my hometown of
Dallas, Texas. Surprisingly, I am now seeing what seems to be an increase
in the number of out of state license plates, the number of U-Haul
trucks from other states, and large truck traffic on the highways as
I haven’t seen in years. Moreover, my business channel checks continue
to provide encouraging, albeit somewhat spotty data at times.
You can certainly argue that my observations are only those of one
person and that if I drove down a different highway I might see a different
picture. Yet, the migration away from big cities is now manifesting
itself in tangible data. For example, the most recent housing
starts and housing permits data overwhelmingly
shows that the new builder focus is on single family units and away
from multiple family units as demand for the former increases and demand
for the latter decreases. In other words, MEL is on the move.
The Fed Has No Options without Dangerous Consequences
So what’s the bottom line? The old playbook: the economy drives the
markets is no longer operational. In the present, the tail (the market)
is wagging the dog (the economy).
Therefore, even as the Federal Reserve has hinted that it wants to
cut back its QE programs, the odds of them actually doing so seem remote
because the stock market is now the number one factor influencing MEL.
Thus if the Fed stops QE and the market crashes, it will be the market’s
crash, due to the Fed’s actions that will lead to an economic crash.
Now, if you’re the Fed, you know this to be true, which means that
the odds of a meaningful reduction in QE, beyond what’s already in
place is not likely to be in the cards.
MEL Spotlight: DR Horton Delivers Long Awaited Breakout
Investors who are in tune to the changes in the markets, the economy,
and people’s lives (MEL) and how this complex adaptive system works
will likely fare better than those who think of the world in traditional
terms. A great example is the price action of DR Horton (DHI), the
largest homebuilder in the U.S., which is a perfect MEL stock.
Here is how MEL works. The financial markets have become the primary
driver in the economy as zero interest rates push stock prices higher.
This market effect raises the value of 401 (k) and other investment
accounts. What then follows is that people feel as if they have some
wealth and are more willing to spend, especially on big ticket items
such as cars and houses which are sometimes financed by borrowing from
retirement accounts such as 401 (k) plans. In turn, these decisions
drive the economy and the circle is completed as MEL moves onto the
All of which brings me to DHI, a company which is a primary benefactor
of the current state of MEL. Because it is at the demographics crossroads
between millennials looking to form families and empty nesters looking
to downsize, the company has already benefited heavily over its last
several quarters. Moreover with low interest rates forever, rising
demand, and now COVID-19 and social unrest driving decision making,
DHI is well positioned to continue its steady business which means
that the odds of the current stock breakout holding and extending are
Indeed, the stock just cleared a huge shelf of resistance at $62
on very encouraging Accumulation/Distribution and On Balance Volume.
A reasonable short to intermediate term target, barring a market related
event or other external surprise is the $75 area.
I recommended DHI to my subscribers on 6/23/2020, well ahead of its
breakout, and I have an entire portfolio of MEL stocks for your review
via a FREE trial to Joe Duarte in the Money Options.com. Click here for
NYAD Poised for Explosive Upside Breakout
Last week in this space I noted: “the most interesting aspect of
NYAD this week is the shrinking Bollinger Bands (green bands above
and below the line). This is usually a sign that a big move in the
market is coming. Moreover, there are some technical clues that suggest
that the move, when it materializes, may be to the upside.”
In fact, what we saw last week was a continuation of the same positive
dynamic, as the New York Stock Exchange Advance-Decline line (NYAD)
is on the verge of an upside breakout. Bullishly, NYAD found support
at its 20-day moving average, moved steadily and closed the week of
7/17/2020 at the cusp of a new high. Thus barring something very negative,
the odds favor a new up leg in stocks.
The S & P 500 (SPX) defended the support area near 3200, delivering
another positive for the bulls.
Meanwhile, the Nasdaq 100 (NDX) held above key short term support
after some profit taking. NDX made a new high the prior week.
Trade what You See
The mainstream viewpoint is that the global economy will crash under
the weight of insurmountable debt and that the stock market will follow.
My position is that as long as the stock market remains in an uptrend
there won’t be such a crash because the stock market is now the leading
variable in MEL.
Indeed, despite the current pandemic and the ensuing and related
consequences, the Fed’s mega QE, despite its recent
slower pace of injecting money into the bond market, seems to be
keeping the crash scenario from fully unfolding. What this means, only
from a trading standpoint is that the trend is up. Therefore, investors
should be looking to make money on the long side as long as the trend
and the indicators remain reliable.
Does that mean that we are reckless? Of course not; risk management
remains highly important. As a result, keeping positions small, using
sell stops, and monitoring trades on a daily basis remain the basis
of our success.
So what could derail what could be another up leg in the bull market?
Aside from a truly extraordinary event, the fate of the markets remains
in the Fed’s hands.
I own shares in 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
Options Book for 2018 by Benzinga.com - now in its third edition, The
Everything Investing in your 20s and 30s and six other trading
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