Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Sell Signal Possible but Upside Reversal Could be Just as Sudden
Editor Joe
Duarte in the Money Options
Algo
driven markets can swing on dime. Therefore, despite the recent volatility
investors should not discount the possibility of another up leg once the dust
clears in the next few days to weeks as the Federal Reserve won’t be raising
interest rates or stopping its asset purchases anytime soon.
Certainly the writing’s been on the wall for the past few weeks as
the market’s breadth, as I’ve noted repeatedly, and as I will expand
upon below, has been weakening. Nevertheless, even as it seems that
dark clouds are gathering it’s also important to recognize that if
the algos stick to their usual way of operating, when the market rebounds
it will likely be as spectacular as the recent decline has been unsettling.

Stay Focused as Selloff Could be Temporary
It’s always disconcerting to watch an algo fueled selling binge materializes,
but these days it’s a fact of life if you’re an investor. As a result,
when prices start to decline rapidly, it’s important to keep a dual
mindset. First, protect your current investments. But second, and equally
important, prepare for the next change of the trend; the almost inevitable
and eventually sizeable bounce.
Above all, consider the primary factor which favors higher stock
prices, the Federal Reserve’s liquidity machine. It’s not going anywhere
for the foreseeable future, which means that once the selling is over
the algo programs that recognize the Fed is still in easing mode will
likely kick in and prices will rebound. Moreover, with COVID-19 attempting
to move to the background as a focal point for the moment, the U.S.
presidential election and related issues such as the economy and social
unrest now become the primary focal points on Wall Street and investors
should expect continued price volatility, especially with polling data
suggesting a tightening race and news items suggesting a highly contested
post election period.
Finally anyone who doubts the volatility thesis should look back
to last week where a 450 point Dow Industrial Average gain was followed
by an 800 plus point drop the next day and even more volatility on
September 4 as pre-holiday thin trading exacerbated the down side.
But be that as it may, the story developing inside the market is just
as important as what the indexes tell us. That’s because as investors
vote with their money we can gather valuable information not just about
the market’s general trend but also about where the money is flowing
and where the odds of success are highest.
At the February 2020 Money Show in Orlando I correctly predicted
that COVID-19 was likely to be a chaotic event and advised investors
how to stay on the right side of the markets. Now as the stock market
is starting to show signs of stress I am returning to the Money Show
with my latest analysis and predictions. To learn how to manage what
lies ahead and how to pick stocks with explosive potential in any market,
join me at the Virtual Money Show Expo on September 16, 2020. Go here to
register Free of charge.
Market Sets Expectation on Major Investment Themes
When allocating money into market sectors it’s useful to consider
what the major theme that brings money into any particular sector is.
For example, in the case of biotechnology (IBB), in the not so distant
past money flow was most affected by the potential for COVID-19 vaccines
and/or cures. And although initially the sector benefited from this
trend, most recently money has been flowing out of this area.

Digging deeper into the dynamic we can see the difference between
two stocks and what the market is betting on. First, we can see that
antiviral drug leader Gilead Sciences (GILD), whose remdesivir drug
has recently received a broad approval for the FDA in treating COVID-19
does not have the market’s confidence. That’s because the studies show
that remdesivir is barely effective against the virus and even though
the company sold the government a large supply, the market sees little
further gain from the drug.

Meanwhile, the vaccine angle on COVID-19 is still somewhat viable,
which is why Pfizer (PFE) is showing some relative strength given that
the company expects to have what it considers a fairly definitive answer
regarding its vaccine candidate by October. If the vaccine is effective
PFE would likely have first mover advantage.
The problem, however, is that even if Pfizer’s vaccine is at least
adequate in its ability to prevent COVID-19 infection and the FDA gives
it accelerated approval, there is no way to know whether
- Pfizer can get the vaccine to the market before flu season starts
or
- Whether the immunity will be long lasting or will be adequate
against a virus which is likely to continue mutating
My point is not to deliver a scientific presentation, but to illustrate
the level of analytical digging that is likely to be necessary when
trying to invest in a market where the volatility and the risk, as
exemplified by an 1100 swing in the Dow Industrials in two days are
on the rise due to the election.
Meanwhile, there are plenty of other secular themes that are moving
market sectors and individual stocks, as I discuss directly below.
CarMax Rides Out First Wave of Selling
Shares of used car sales giant CarMax (KMX) held up during the recent
wave of selling suggesting that, at least, for now, one major on the
ground trend, the move away from public transportation due to COVID-19
is still considered valid.

Not a day goes by when I’m driving that I don’t see countless temporary
plates; with the majority of them on used cars. Of course, KMX doesn’t
sell all the used cars in the U.S., but it certainly sells its fair
share, both at the retail and wholesale level. This business model
diversification gives KMX an advantage while the company at least two
macro income streams.
Moreover, with earnings due on or about 9/24/2020, it will be very
interesting to see what the company says about the state of the used
car market where price pressures have been increasing of late due to
limited supply and increasing demand. In addition, the company’s shift
to online car marketing and selling, at least as part of their sales
process, by the end of the June quarter, was showing positive signs
of a liquidity improvement along with a return to nearly normal sales
levels.
Investors should also consider that used car demand is rising and
that supplies are lagging, setting up the same type of supply and demand
situation being experienced by homebuilders prior to their big run
in 2020. Indeed, putting all these factors together suggests that the
odds of better than expected earnings are well above decent and likely
explains why the stock is holding up at the moment.
Technically, the stock remains under accumulation with both Accumulation/Distribution
(ADI) and On Balance Volume (OBV) moving higher during the recent consolidation
period.
NYAD Flirts with Duarte 50-50 Sell Signal
Two weeks ago it seemed that the bulls might have gotten a reprieve
as the New York Stock Exchange Advance Decline line (NYAD) found support
at its 20-day moving average and was within reach of a new high, a
fact which would have confirmed the uptrend.

Furthermore, with the RSI indicator for NYAD breaking below 50, we
now have to wait for confirmation from the 50-day moving average, which
did not happen on 9/4/2020 even during a very volatile market session.
However, if NYAD breaks below its 50-day moving average along with
the RSI’s fall below its 50 level, if it remains, we could well have
a Duarte 50-50 sell signal and the odds of a full blown correction,
if that were to happen would be very high.

Furthermore, with the RSI indicator for NYAD breaking below 50, we
now have to wait for confirmation from the 50-day moving average, which
did not happen on 9/4/2020 even during a very volatile market session.
However, if NYAD breaks below its 50-day moving average along with
the RSI’s fall below its 50 level, if it remains, we could well have
a Duarte 50-50 sell signal and the odds of a full blown correction,
if that were to happen would be very high.

Still, as of the close on 9/4/2020, the full signal had not developed,
much as what we saw in July, 2020 after which the market recovered.
Nevertheless, until proven otherwise, the uptrend in stocks is now
suspect and prudent investors should be monitoring their sell stops
or taking profits in order to boost cash levels.
With Uptrend in Question Risk Management is the Number One Focus
Certainly the Fed isn’t going to raise interest rates anytime soon, which means
that until proven otherwise the stock market is more likely than not to have
a floor of support underneath it at some point. Moreover, the fourth quarter
of an election year tends to be bullish.
On the other hand, this market has come a long way over the last few months
and the technical picture has been slowly weakening for several weeks. Putting
it all together, it’s not hard to see that some sort of correction, not only
has been overdue, but that it may actually be developing as we speak.
So as I said last week, 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.
Meanwhile, as with any correction or pull back, the market is giving us an
opportunity to put together a shopping list.
As this correction works its way through the markets I will be putting together
a shopping list of stocks with huge upside potential when the dust clears.
To make sure you are there when the market gives us the all clear take a FREE
trial or subscribe to Joe Duarte in the Money Options.com by clicking here.
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
books.
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.
A
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.
|