Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Stocks Seem Ready for a Short Term Rest
Duarte in the Money Options
As 2020 comes to a close many of the worries and circumstances
that have driven the market higher all year remain in place, and in
many cases their intensity has risen. The upshot is that fueled mostly
by what I’m seeing in the market’s breadth and the action in the bond
and currency markets over the last few days I have begun to evaluate
the ability of this market to continue on the current momentum run
regardless of central bank intervention unless something else gives.
However, as the month of December rolls on, investors should keep
two things in mind. One is that stocks are in a bullish seasonal period
with the Federal Reserve providing the fuel for higher stock prices.
The other, is that all momentum runs end badly and this one won’t be
any different when its time comes.
Yet, as time passes it is possible that this uneasy truce between
seasonality and central bank easing is reaching a decision point due
to political developments. And how the bond and currency markets respond
to whichever way any of these major situations break will be what dictates
the action in the stock market, perhaps over the next several months
So, here is what we know:
Now, here is where the problem lies. The Fed is buying $130 billion worth
of bonds (treasuries, T-bills, mortgage-backed securities and other debt
instruments) every month and has been doing so since summer 2019. Yet,
the U.S. Ten Year Note Yield
- Options expire on December 18, a fact which could increase volatility
- Pfizer’s (PFE) COVID vaccine rollout in the U.S. begins. Moderna’s
(MRNA) vaccine goes up for FDA approval
- The Fed will keep printing money and buying bonds and results
of banking stress tests will go public this week. Meanwhile FOMC
will meet on 12/16
- Other central banks will continue to join the Fed’s QE efforts
- In a zero-interest rate environment, stocks make sense since there
is no other way to make money but this is not without risk
- There are three major political issues which are weighing on the
markets and which may be decided in the next two weeks: the U.S.
election, a second stimulus package in the U.S., and Brexit
- The global economy remains in an uncertain place due to the COVID-19
pandemic and the sporadic regional shutdowns of cities
- The bond market, because of the economic uncertainty, should be
rallying in prices and yields should be falling but this is not happening
very convincingly at the moment
- There may be some holiday and risk averse related liquidity issues
as the year comes to a close putting the market at risk
Now, here is where the problem lies. The Fed is buying $130 billion
worth of bonds (treasuries, T-bills, mortgage-backed securities and
other debt instruments) every month and has been doing so since summer
2019. Yet, the U.S. Ten Year Note Yield (TNX) is actually rising. Moreover,
TNX is nearing the 1% yield area, where it has not been in quite a
while. And although bond yields did not cross above 1% as of the end
of the week, the trend for yields seems to be up now as long as TNX
holds above its 50-day moving average. What this tells us, until it
is reversed, is that the Fed isn’t buying enough bonds to keep rates
from rising, which means that if the Fed doesn’t crank up their purchases
interest rates are going to rise. And of course, stocks won’t like
that one bit.
Furthermore, when you look at the condition of the U.S. Dollar (USD),
you see that the greenback has been in a bear market for several months.
This, of course coincides with the Fed keeping interest rates low by
buying bonds, since low interest rates usually lead to a lower underlying
currency. But a closer look at USD shows that it is now very oversold
and that usually means that money will look to buy.
But here’s where it gets interesting. A rising currency usually means
that expectations for higher interest rates are creeping into the market.
Even more compelling is the fact that the U.S. Dollar is still considered
a safe haven. Putting the rising bond yields and the bottoming dollar
together, especially when stocks are starting to look a little top
heavy, you can see why this may not be a bad time to cash in some chips,
or do a little hedging.
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Have a look with a Free Trial. Click here.
Starbucks Shares Perk Up on Upbeat 2021 Guidance
Those of us who have owned shares in coffeehouse giant Starbucks
(SBUX) got a nice jolt recently when the company updated investors
on its expectations for 2021. Among the more interesting things related
by the company were the following:
- While reaffirming 2021 guidance the company predicted 10-12% EPS
growth for 2023-204
- Company will open 600 new stores in 2021 with a large China expansion
as “life there returns to normal.”
- International expansion will increase via licensing partnerships
- Increasing reliance on drive-thru for U.S. sales
Of course, it’s a long way from now to 2023. But what’s most important
is the fact that SBUX is essentially a MEL (Markets, Economy, and Life)
bellwether. Because of its central function in people’s lives due to
the wide presence of its stores and the fact that coffee is an instrument
for work and pleasure, its sales and expectations are a fairly reliable
way to gauge the general direction for MEL. Moreover, if their expectations
and observations hold up, that would likely mean that the world might
actually get over the COVID pandemic and return to some sort of normalcy.
Certainly, the stock’s breakout is a good thing if you already own the
shares, which I do as of this writing. But more important is the fact
that as I’ve noted here several times, the stock has been under accumulation
for quite a while. Thus, from a trading standpoint, we will want to see
what happens to the share price after this news related acceleration
of the rally.
The stock did pull back at the end of the week ending on 12/11/20
and it could easily enter a consolidation over the next few weeks.
Thus, it will pay to stay focused on the Accumulation Distribution
(ADI) and On Balance Volume (OBV) which remain supportive of the uptrend
for now. As of this writing, however, although the shares may be a
bit overbought, there is good support at the $98-$100 area.
I recommended SBUX to my subs on 10/1/2020. Find out what my next
SBUX like pick might be by taking a FREE trial to Joe Duarte in the
Money Options.com. Click here.
Market Breadth Narrows Suggesting Momentum is Waning
The New York Stock Exchange Advance Decline line (NYAD) has made
several new highs in the past few weeks but the recent action suggests
the market may be getting a bit tired. Of course, it’s difficult to
tell whether this is a pause that refreshes or something that may last
a while. But it’s not a bad idea to be a little cautious at this point.
Moreover, the RSI for NYAD has been above 70 for the past two weeks
confirming an overbought status for the market while ROC has rolled
over. In other words, the odds of a pullback of some sort, or at least
a consolidation are rising.
The action in the S & P 500 (SPX) is similar to what NYAD is showing
us. Indeed, the market looks ready to take a breath.
The Nasdaq 100 index (NDX) also looks to be finding a way to consolidate
with the 20- and 50-day moving averages likely to be support. Breaks
below these areas, though, could signal lower prices.
Market Looks Ready for Short Term Rest
The crosscurrents between the Federal Reserve and the politics of
the moment are giving the stock market a reason to pause, at least
in the short term. This is being complicated by the action in the bond
As a result, the next few days are likely to be full of sloppy trading
days. A bit of a hedge may not be a bad idea to go along with some
profit taking as well as the removal of any position from the portfolio
which is not showing relative strength.
For more on how to deal with the current market checkout 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
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