Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Out of Favor Stocks with Great Looking Charts Are Multiplying
Duarte in the Money Options
With the Federal Reserve steadily pushing money into the banking
system, the only thing left to happen in order for a significant move
higher, pre or post election is some kind of stimulus package deal.
Moreover, barring something extremely catastrophic, as long as the
deal gets done, even if it can’t be implemented before the election,
the potential for an acceleration of the uptrend remains intact.
In addition, perhaps the most interesting development is the fact
that although money has been rotating out of large cap tech stocks,
it’s been difficult to find where it’s been moving due to the market’s
volatility. Yet, as I note just below, this may be starting to change.
Nevertheless, if there is a caveat that could blunt the bullish thesis
for stocks, at least in the short term, it is the election. This is
especially cautionary given the likelihood of both sides ramping up
sensational news and allegations about the other side over the next
Don’t Fight the Fed as it prints $122 Billion a Month and
The Federal Reserve’s recently released its Permanent Open Market
Operations (POMO) schedule for
the next monthly period, which details that the central bank will continue
to buy $80 billion worth or treasury securities per month, in addition
to $40 billion in mortgage
backed securities plus an additional $1.5 billion in Fannie
Mae Mortgages. Even more interesting, the Fed is also scheduling
the purchase of collateralized mortgage backed securities ( CMBS)
in October. This brings the total amount of scheduled purchases to
nearly $125 billion per month, annualized at nearly $1.5 trillion per
year until at least 2023.
Now, let’s think about that for a bit. The Fed will infuse a scheduled
$4.5 trillion into the bond market and the banking system over time
for the foreseeable future. Furthermore, given past statements and
actions, the Fed also has signaled that there really is no limit to
the amount of money that it will throw at the economy for as long as
it takes in order to keep it from collapsing, as warranted.
Certainly, we can argue whether helicopter money will work or not
or what the implications of these actions will lead to in the future.
But at the moment, the Fed’s actions are having one very simple effect
on the stock market; making every dip a potential buying opportunity
until proven otherwise.
Medtronic Sneaks up on Breakout as Big Tech Money Looks for
a New Home
Shares of medical equipment giant Medtronic (NYSE: MDT) are closing
in on a key resistance area near $110 on very steady volume without
tripping any significant alarms, a sign that some value seeking money
is quietly and finally moving in and that a quiet breakout is within
the realm of possibilities.
The stock took a tumble as the COVID-19 pandemic raised uncertainty
about the company’s earnings and revenue prospects due to the postponement
of elective procedures in the spring of 2020. This was especially painful
since MDT gets its cash flow based on pacemakers, spine related surgeries,
and heart valves among other highly specialized products which are
usually surgically implanted on an elective, scheduled basis rather
than as emergencies.
However, as the COVID-19 medical environment for elective procedures
has improved, MDT has also seen its fortunes improve, while the market
has mostly ignored the situation. That’s why when the company recently
increased its revenue forecast and outlook it took a bit of time for
money to start moving in, although that is starting to change. In fact,
the stock looks to be very early in what could be a 10-15% move over
the short term given the very steady volume over the last few trading
Certainly, the move has not yet begun to be noticed via the Accumulation
Distribution (ADI) indicator, but On Balance Volume (OBV) is starting
to move up confirming raw volume’s positive tilt. More encouraging
is the fact that MDT is above its 50 and 200 day moving averages and
that there is very little price resistance above the $110 area as signaled
by moderate sized Volume by Price (VBP) bars. Thus, all things considered,
a move back to $120 is well within the cards over the next few weeks
as investors start to price in better than expected results when the
company reports on November 24.
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Oil Sector Activity and Consumer Confidence Point to Economic
I took another trip to West Texas this week and saw an increasingly
active oil sector, which is why I’m wondering if oil stocks will continue
to act like dead money for much longer.
Let’s get to the details. You can tell you’re getting somewhere on
I-20 West as you near the Permian Basin. For one thing, as you approach
the Midland, Odessa, Monahans area, there is rising construction activity,
both in the way of highway expansion as well as what I didn’t see there
just a month ago; housing construction. Indeed, massive fields are
being cleared near the highway suggesting that more building is coming.
Whether that means more oil wells, more housing, or something else
will require another visit in the future.
As you drive through, it’s hard to miss the fact that truck traffic
gums up the highway and that truck stops are humming with roughnecks
buying ice and energy drinks as they fill up their pickup trucks and
zoom to the next rig. And it’s not just the highway that is crowded,
the side roads are now full of traffic, especially company trucks zooming
to and fro.
In fact, the number of Pennsylvania and Ohio license plates, suggesting
that oil workers from other fracking states are moving in due to production
increases in Texas, has increased from the last time I was there just
a few weeks ago. Moreover, and most important, the number of oil derricks
that are bobbing up and down is increasing, even as new fracking platforms
are starting to sprout up all over the place confirming the notion
that demand for oil is rising and that the Permian Basin is starting
to answer the call
All of this activity and the haze in the air from all the natural
gas flaring, an indication of rising oil production, is not the picture
of an industry whose bellwether stock, Exxon Mobil is near its 52 week
lows. Indeed, what I saw begs one simple question. Are we near a resurgence
of the oil patch?
Indeed what I saw on the ground confirms the latest data on the Baker
Hughes rig count, which bottomed out a month ago, and which suggests
that the physical oil sector is starting to anticipate a potential
economic recovery. Perhaps most important is to what degree this
sentiment has started to work its way through the economy, as suggested
by the most recent consumer
confidence data and to what extent this emerging dynamic may
have on the presidential election.
The overwhelming opinion in the media is that Wall Street is betting
on a Biden win. But Trump’s calling card is the economy. Stay tuned.
NYAD Still Within Reach of New High
The New York Stock Exchange Advance Decline Line (NYAD) made a new
high on October 8 and October 9 but rolled over in the ensuing few
days. Still, the line remains well inside its uptrend; and more importantly,
well within reach of another new high which would once again signal
further upside potential for the market.
The S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes are also
within reach but remain below their recent highs. Of the two, NDX looks
to be the weaker reflecting the ongoing selling in high priced technology
stocks such as Apple (AAPL) and the volatility in the heavily weighted
Still, even with the most heavily weighted index stocks running into
some selling, the Accumulation Distribution (ADI) and On Balance Volume
(OBV) for both indices remain in up trends.
For a useful tutorial on how to use the NYSE Advance Decline line
to predict the market’s trend, check out my recent Your Daily Five
Out of Favor Stocks with Great Looking Charts Are Multiplying
It’s been a while since I’ve looked at energy stocks and health care
stocks such as Medtronic. Yet, as the market rotates, I’m starting
to see the potential for money to look for a new home away from recent
leadership sectors such as technology. Certainly, as I noted above
the Nasdaq 100 is struggling, even as the most beaten of all market
sectors, energy has yet to show any convincing signs of life.
Nevertheless, as long as the Fed continues to pump money into the
bond market, the odds will continue to favor higher stock prices, barring
something very extreme happening. Moreover, at some point, undervalued
stocks will get their day, especially if the economy continues to improve.
The bottom line is that by keeping our eyes open and by reviewing
all the potential possibilities over time, we will likely continue
to find winning stocks.
I own shares of MDT as of this writing. In my medical practice I
have used and often recommend Medtronic products. I have no insider
knowledge of the company.
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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