Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Worry about the Fed and the Market First, then about the Economy
Duarte in the Money Options
investors, at least in the present, it’s not what the economy can do
to the markets that matters most. Instead it’s what the Fed can do to the markets,
to 401(k) plans and to trading accounts that should keep us up at night.
We are in a new world, where in a complete reversal of traditional
relationships, the markets are driving the economy and the Federal
Reserve and global central banks are driving the markets. Moreover,
contrary to the past, the key to MEL, the dynamic system composed of
the financial markets, the economy, and people’s lives is not the state
of the economy, but the current and future status of the stock market
and its effects on the average person’s 401(k) plans and their trading
accounts. This in turn means that as long as the stock market keeps
rising, the odds of an all out recession may be lower than the traditional
economic models would suggest barring a truly extraordinary set of
events beyond what we’ve already experienced.
The Times; They are a Changing
Conventional wisdom and traditional economic theory is based on static
idealized and decades old mathematical models and inflexible observations
and theories which only work when conditions are ideal, which is almost
never. Indeed, it is this simple reason that even traditional economists
admit that their craft is not always accurate, especially during periods
of rapid change. Meanwhile MEL is a real time system whose basic principles
are based on the emerging science of Complexity, the always in motion
invisible forces of the Universe which force events and reactions to
So unlike the traditional models based on perfect world equations
and expectations, rather than standing still MEL never stops. In fact,
MEL’s most basic principle is that the interaction between its components,
its agents such as people and businesses, and the environment: which
are always in perpetual motion. Specifically, it is when the interactions
between all the agents in the system coalesce around a central environment
point, known as the Edge of Chaos, and when the chemistry and physics
that take place at the edge reach the boiling point, like an erupting
volcano, that systems emerge to their next level.
We are at a point of Emergence
Currently, there is no better example of the MEL dynamic than what
we are seeing in the record
setting housing market where the combination of riots in the streets
of large cities, record low mortgage rates and record stock markets
driven by frantic central banks are fueling the migration of people
to the suburbs and other locations where they perceive they will be
safer. In other words, the markets in the form of record low mortgage
rates and record high stock prices are buoying consumer balance sheets,
making it possible for those who can to qualify for a mortgage and
fueling the increasingly meaningful migration.
What it means for investors is that by picking stocks in companies
who are likely to benefit from the emergence of MEL to its new operating
level the odds of success are likely to be higher than for those who
don’t. Still, in uncertain times its best to have a tried and true
method through which to exercise the lowest risk trades and to protect
profits. Therefore, it’s always useful to review the guiding trading
principles most useful in trading along with MEL:
- Stay with the market’s primary trend
- Don’t fight the Fed’s interest rate trend
- Take profits on positions that have made big gains and 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
Especially important is the last bullet in the list, for as U.S.-China
relations deteriorate, from an investment standpoint, the most important
thing to note is not so much what happens, but how the market responds.
This will be especially important if China decides to sell its U.S.
bond holdings. Indeed, on the surface this may seem a negative, but
in fact, it could be just the opposite as the Federal Reserve would
likely buy a lot of new bonds and possibly increase the amount of money
it infuses into the banking system. This in turn would likely fuel
another round of stock buying and could lead to the next emergence
point in MEL.
It may sound strange, but in this new world, what once seemed impossible
is not just plausible but likely. To find out more about stocks that
should benefit from the MEL phenomenon consider a FREE trial to Joe
Duarte in the Money Options.com, click here.
And check out my latest edition of Stockcharts.com’s
Your Daily Five, titled “Five
Stocks with Explosive Potential”where I reveal
five stocks that are poised to benefit in a big way from the latest
trends in MEL.
Against the Grain: Logic Chipmaker Xilinx Bucks Semiconductor
Shares of logic chipmaker Xilinx (XLNX) bucked the general downtrend
in the semiconductor space with good reason. In its last quarter the
company made it clear that it was unsure of its business due to COVID-19
and was going to focus not just on growing the business but on capital
preservation while giving very conservative guidance for the next quarter
but no guidance for the full year.
However, given the action in the rest of the industry where most
companies have delivered better than expected earnings, it seems likely
that Xilinx will likely deliver good news for the current quarter when
it reports on July 30. That said, much of what the price of the stock
does after its earnings will be about its future guidance, which brings
me to potentially good news.
Logic chips are very flexible chips, meaning that they are sort of
a blank slate which can be programmed, even in the field to perform
specific functions. As COVID-19 has developed, so has the demand for
computing power. This has likely increased demand for logic chips to
be used as companies increase their communication and server needs.
The stock is in a bullish and steady rise at the moment, trading
above its 20 and 50-day moving averages, placing it in the Complexity
zone, where stock prices tend to rise. Moreover, Accumulation Distribution
(ADI) and On Balance Volume (OBV) are moving higher in a pattern that
suggests the stock is under long term accumulation while the stock
is not close to overbought yet. If XLNX can move above $107 in the
short term, the odds favor an acceleration of its uptrend.
Recent industry data revealed that the options market is now larger
than the stock market. To learn to trade options with less risk buy
a copy of my bestselling book “Trading Options for Dummies.”
NYAD Holds above Support
The New York Stock Exchange Advance Decline line made a new high
this week before rolling over as rising tensions between the U.S. and
China boiled over. Nevertheless, NYAD held well above the support of
its 20 and 50 day moving averages. That means that the uptrend gets
the benefit of the doubt for now.
The S & P 500 (SPX) also held above key support, not breaking
below 3200, its 20 or its 50 day moving averages.
On the other hand, the Nasdaq 100 Index (NDX) broke below its 20-day
moving average as profit taking accelerated on bad news from Intel
on its next generation chip hit the wires on Thursday afternoon. Of
some concern also was the break below on the ROC indicator which is
a sign that upside momentum has now weakened significantly.
Accumulation Distribution (ADI) and On Balance Volume for NDX and
SPX turned slightly negative.
Watch Your Stocks First, then the Market
Because trading algorithms have a greater effect on the pricing of
the major stock indexes, a very bad day for “the market” may or may
not be as negative for your own portfolio. That’s because your stocks
may not be in the primary sell matrix that the algos concentrate on.
In other words, while the major trend will eventually affect most stocks
if it remains in place long enough, when making buy or sell decisions,
it’s best to primarily focus on the price action of your stocks and
on the value of your account.
Moreover, as the U.S. and China’s relationship sours, expect more
daily market volatility, especially in overnight futures markets and
in the price action of the major indexes. Best of all, by following
the sound trading principles described above, and concentrating on
your own portfolio and how it performs against the market, it will
be much easier to make the right decision with any stock you own.
I own shares in XLNX.
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
Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The
Everything Investing in your 20s & 30s at Amazon and The
Everything Investing in your 20s & 30s at Barnes and Noble.
Washington Post Color of Money Book of the Month is now available.
To receive Joe’s exclusive stock, option, and ETF recommendations,
in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.
JoeDuarteInTheMoneyOptions.com is independently
operated and solely funded by subscriber fees. This web site and
the content provided is meant for educational purposes only and
is not a solicitation to buy or sell any securities or investments.
All sources of information are believed to be accurate, or as otherwise
stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com
have no financial interest in any of the sources used. For independent
investment advice consult your financial advisor. The analysis
and conclusions reached on JoeDuarteInTheMoneyOptions.com are the
sole property of Dr. Joe Duarte.