Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Stick with the Trend as the Fed Fuels Higher Stock Prices
Duarte in the Money Options
the Federal Reserve admitting it wants inflation and injecting $80
billion per month into the banking system for the foreseeable future,
regardless of what traditional analysis and history suggest, until
proven otherwise, the odds favor a continuation of the uptrend for
stocks. That said we should not throw caution to the wind, as much
may change in the not too distant future, depending on the results
of the election and the possibility of unknown and otherwise catastrophic
developments beyond anyone’s control.
Still, because of the Federal Reserve’s ongoing money creation and
the general change in the way the public seems to be perceiving the
COVID-19 situation at the moment, the sluggish action of the past two
weeks, unless something changes, seems more like a consolidation and
sector rotation instead of a full blown correction. What that translates
to for investors is that making money in the current market is not
so much about owning stocks but more about which stocks are included
in a portfolio and how much trading discipline and planning is applied
to every single position.
MEL is in Motion; often in Subtle and Undetectable Ways
Sometimes it pays to take a step back and give the action in the
stock market a bit of abstract thought. And most certainly, this is
one of those periods of time where connecting the dots from a different
angle is crucial in investing profitably.
Specifically, due to the seismic effect of the COVID-19 pandemic,
the extraordinary monetary stimulus response from the Federal Reserve,
and the advent of artificial intelligence algorithms (algos) doing
80% of the trading on Wall Street, we are living through what may prove
to be a once in a lifetime secular change in the complex adaptive system
composed of the markets (M), the economy (E) and people’s lives. As
a result, exclusively relying on recent history as a guide to the future,
especially when it comes to investing, is not as useful as it once
For example, where the economy was once the leading influence in
MEL, because of the Fed’s actions the stock market is now the leader
of the system. Of course that sounds bizarre. But it’s demonstrable.
Consider the fact that those who own 401(k) plans and IRAs, along with
those otherwise actively trading or are invested in stocks are likely
experiencing a significant wealth effect. Certainly that could be fleeting.
Yet in the present, the rising stock market is a major influence on
their spending decisions, which in turn are affecting the economy.
In addition, in order to maximize investment results it’s important
to understand the major influences and themes that are affecting the
markets. And here are three of them, as I listed in this space last
- COVID-19 is fading as the lead headline story and becoming the
major underlying influence in the public and the government’s behavior,
thus affecting long term and widely encompassing trends in MEL
- Lingering Consequences: Exodus from major cities and a positive
effect on housing, a disruptive effect on the workplace and the supply
and demand equation for everything
- The Election – where seasonal tendencies lead toward higher stock
prices in the fourth quarter
Each of these major influences is creating megatrends which are being
displayed in the stock market via the flow of money into different
stocks and sectors. And what is becoming increasingly evident is that
the stock market is at least equally focused on the world beyond COVID-19.
Consider this interesting example regarding Albemarle (ALB), a specialty
chemical company with a major footprint in Lithium related compounds
especially those geared toward lithium batteries such as those used
in electric vehicles and consumer electronics. It also has its legacy
divisions focused on Bromine and chemical catalysts used in a wide
array of industries ranging from pharmaceuticals to oil drilling and
I recommended the stock a few weeks ago and it had mostly been dormant,
continuing its consolidation pattern until it recently showed signs
of life as it moved toward the upper end of its recent trading range.
Note that even as the stock sagged below $90 recently, it has remained
above its 20 and 50 day moving averages as the dip buyers materialized
consistently to bring the stock back into the trading range.
So the obvious question is why would anyone be buying shares in ALB
when the expectations are for a stagnating electric car market, especially
when the company recently idled two lithium plants due to weak demand?
The answer is actually fairly simple, albeit requiring some digging
beyond the obvious. Even if electric cars may not be the dominant transportation
for people, at least not yet, there is a perhaps more important and
silently growing trend for electric delivery vans. Consider Amazon’s
(AMZN) recent order of 1800 Mercedes electric vans for delivery in
Europe on top of its order from U.S. startup Rivio for 100,000 delivery
Moreover, both Ford and GM are ramping up both electric van and car
productions. What that means is that even though Chevy Volts are not
household items and that Teslas are still at the boutique end of the
auto industry, there is a steady and dynamic change under way in the
industrial sector of the economy toward electric vehicles.
The bottom line is that we are witnessing a stealthy behavioral change
in the van sector and that the market seems to be factoring in a rise
in demand for Lithium as business fleets increase their electric vehicle
numbers. In other words, even in the face of COVID-19, behavior patterns
in business and transportation are changing, and MEL is evolving and
the machines are trading.
Check out my most recent edition of Your Daily Five HERE where
I offer crucial details on how to pick stocks that are displaying explosive
A Triple Shot of Portfolio Caffeine: The Fed, Monster, and
In an uncertain world all an investor can do is first follow the
money and second, try to figure out what the flow of capital means.
Certainly that means that sometimes you have to be a contrarian, albeit
with some cautions. In fact, two excellent examples of this dynamic
involve two stocks which I recently recommended and which share one
common characteristic, the provision of caffeine to the masses: Starbucks
(SBUX) and Monster (MNST).
My most recent recommendation in the realm of caffeine is Starbucks,
the world’s leading coffee store operator. The stock got clobbered
along with the restaurant sector in March 2020 in response to COVID-19,
but managed to bounce back with the market in the ensuing months.
It then delivered a lackluster earnings report and began what seemed
to be a significant decline. Until, of course, the dip buyers came
in. More recently, soon after I recommended it on August 11, the stock
has broken out and is now reaching the critical $88 area, above which
there is little resistance. The stock has plenty of momentum, however,
and looks to have a decent chance to move well above $88, although
it could consolidate near $85 in the short term.
Monster, on the other hand, has been in the Joe Duarte in the Money
Options.com portfolio since June 9 and delivered a nifty breakout soon
after I recommended it. Unlike SBUX, Monster delivered a better than
expected earnings report and gapped even higher before entering its
current consolidation pattern.
Still, despite its very bullish action MNST looks ready to break
out and move above its current resistance area of $85. Both stocks
remain under accumulation with On Balance Volume (OBV) and Accumulation
Distribution (ADI) supporting the notion that higher prices are likely.
And while SBUX has three year resistance near $98, well above its current
levels, MNST is trading nearly $15 above its three year highs.
The bottom line is that we are experiencing an unprecedented Federal
Reserve fueled momentum market of indescribable circumstances. And
while things will end at some point, these two stocks, at least for
now seem to be riding on not a double Espresso high but on a continuous
intravenous infusion of extra strength and 100% caffeine.
To learn more about stocks such as Starbucks and Monster that are
poised for chart breakouts click HERE for
a Free trial to Joe Duarte in the Money Options.com.
NYAD Finds Support. Is now Within Reach of New High
The bulls may have gotten a reprieve as the New York Stock Exchange
Advance Decline line (NYAD) found support at its 20-day moving average
and is within reach of a new high which would confirm the recent action
in the major indices.
The S & P 500 (SPX) made a new high while the Nasdaq 100 Index
(NDX) made a marginal new high.
Still, the technology sector is well overextended now and it’s likely
that NDX will slow down and consolidate in the short term or even pull
back to its 20 or 50-day moving average.
However, even as the major indices continue to move higher, if NYAD
fails to make a new high in the near term the case for a possibly meaningful
technical divergence would likely increase.
Fed Fueled Momentum Remains the Number One Influence on Stocks
Regardless of what anyone believes, it’s obvious that the stock market
is biased toward the upside. Certainly, the potential for a technical
breadth divergence remains a potential negative which should not be
Therefore it’s still a good thing to remain cautious but it’s not
a good idea to be outright negative just yet. Moreover, the seasonal
tendencies are in favor of the bulls as the fourth quarter of a presidential
election year is usually bullish.
What it means is that the best anyone can do is to trade wisely by
focusing not just on the market’s trend but on the action in each individual
position. It’s also wise to trade in small lots, to take profits when
warranted, and to keep reasonably sell stops in place.
I own shares in ALB, MNST and SBUX as of this writing.
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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