Analysis, Perspective, Trading Strategy
At the Edge of Chaos: New Highs Suggest Easy Money Wins this Round
Duarte in the Money Options
Despite reports of rising COVID-19 infections, global lockdowns,
and an evolving U.S. election situation, as I will detail below, the
stock market broke out a new highs on the S & P 500 (SPX) which
was confirmed by excellent breadth numbers. As a result, from a trading
standpoint, until this breakout is convincingly reversed, it makes
sense to lean toward being long this market.
Of course, no market is ever perfect. And this one has plenty of
potential issues, the least of which remains the election and its potential
ramifications. Nevertheless, as I’ve pointed out here on a frequent
basis, in a market where the Federal Reserve is keeping interest rates
near zero until 2023, it’s difficult to fight the tape.
Still, given the intraday volatility, it hasn’t been easy to find
stocks which seem to have the potential to embark on long term momentum
driven uptrends. As a result, success in this market may require short
term time horizons and very precise stock picking.
Has MEL Changed after the Election?
With the stock market seeming to be embarking on what could be a
rally that extends into the end of 2020 it’s important to review the
status of the complex adaptive system comprised of the markets (M),
the economy (E) and people’s life’s decisions (L). Certainly, before
November 3 there were three major trends:
- Population shifts from high tax to low tax states
- A boom in housing fueled by low interest rates and the above migration
- The dominance of the 401 (k) plans as the focal point of MEL
Moreover, we had seen a shift to the financial markets replacing
the economy as the primary influence on MEL as the wealth effect from
a higher stock market drove consumer activity. But when COVID hit,
the situation became understandably fuzzy. Now with the election creating
a new dynamic and COVID becoming a part of everyday life, it’s imperative
to figure out which way MEL will shift.
Understandably, it’s a bit early to know which way things will roll
except for the fact that the key to the entire system has been the
Federal Reserve and that barring something extraordinary, that is not
likely to change for quite a while, if we are to believe the regular
musings of Mr. Powell and his crew. Of course, as the economic data
rolls in over the next few weeks, we will have a better idea. But for
now, all things being equal and given the stock market’s recent performance,
it looks as if MEL has not shifted its posture, at least not yet.
Nevertheless, there is a rotation of sorts which may or may not last
with money starting to flow fairly convincingly into industrial, especially
manufacturing companies, as well as the energy sector. What it all
means, more than anything else, is that MEL is now in flux and that
it may take a bit of time to sort things out more thoroughly. For now,
however, all we can do is trade what we see and see what happens.
This is a great time to have your own set of go to indicators at
your fingertips. To learn how to build your own NYSE Advance Decline
line like I do and how to use it, check out my latest Your Daily Five
video: “How to build my Favorite Indicator.” Click here .
Is the Energy Sector Ready to Rally?
A few weeks ago, after driving to West Texas, I noted that the activity
in the Permian Basin, a highly productive fracking region of the state
had picked up significantly. Specifically, I noted an increase in the
visible number of oil derricks that were active as well as at least
one or two new fracking towers dotting the landscape. More interesting,
a granular look at this week’s Baker
Hughes rig count shows that the Permian Basin continues to ramp
up production, adding seven out of the twelve total rigs that were
activated in the United States during the last week.
All of which brings me to what I can only describe as a huge contrarian
pick in the midst of shifting political waters, Oklahoma City based
fracking giant Devon Energy (NYSE: DVN) whose shares look ready to
move significantly higher after an unexpected bullish crossover of
its 200-day moving average.
At this point, this is purely a technical and highly contrarian play.
But a dig into why this stock could be moving higher suggests that
it’s actually both a restructuring and a cost cutting and efficiency
story which leads to the Permian Basin. In fact, the company has divested
itself of some disappointing properties in Canada and the Barnett Shale
in central Texas of lat. Meanwhile the company has stepped up its presence
in the Permian basin and recently reported improved performance in
its Delaware properties. Even more encouraging was the company’s improved
outlook for the rest of the fiscal year based on cost cutting and expectations
for higher oil production with less expense. This has
Chart analysis shows a nice move above the 200-day moving average
combined with positive Accumulation Distribution (ADI) and On Balance
Volume (OBV). But what’s most compelling is the lack of major overhead
resistance based on Volume by Price (VBP). Certainly, this is a contrarian
play which could go south in a hurry. But given the lack of fanfare
in the improvement fortunes of the company, it seems that the odds
favor DVN to quietly move higher.
NYAD Bolts to New Highs
The New York Stock Exchange Advance Decline line (NYAD) made a new
high to end the week with confirmation from the S & P 500 (SPX)
but not the Nasdaq 100 (NDX). NYAD is well in the Complexity zone trading
above its k20,50, and 200-day moving averages. Even better is the fact
that ROC, a measure of momentum is moving aggressively higher, suggesting,
until proven otherwise that the rally may just be getting started.
The lack of confirmation from NDX is a sign that for now the market
is continuing to bet on an economic resurgence and that they are not
so worried about COVID-19. Inside NDX, one thing is fairly clear, money
is not moving very aggressively into the Amazon.com (AMZN), Netflix
(NFLX) axis, which explains why the index is a bit of a laggard. But
as will NYAD, the key indicator seems to be ROC which is moving higher
aggressively here as well. This, of course could change in a hurry.
The gains in SPX were boosted by heavy money flows into both consumer
staples as well as industrial and energy stocks.
The new highs in the stock market last week were powered by industrial
and consumer stocks while the stay at home tech stocks lagged. This
is an interesting bet for sure given the return of lockdowns in Europe
and talk of the same in the U.S. In fact driving around Dallas this
weekend I saw some large COVID-19 testing lines as people in their
cars waited for testing. My point is to note that what the algos are
seeing and what may be happening in the real world may not jibe. Moreover,
it’s anyone’s guess what that means. So as traders we follow the money,
which at this point is pointing to higher stock prices.
For more on how to deal with the current market check out my latest
Your Daily Five video 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
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