-- Trading at the Edge of Chaos --

Analysis, Perspective, Trading Strategy

At the Edge of Chaos: Focus on Individual Stocks. Monitor Each Position Separately.

Editor Joe Duarte in the Money Options

It doesn’t feel like it on the surface, but the next month to six weeks could be a major nail biter for investors. But as the action during last week’s Quadruple Witching options expiration showed, wide price swings are possible, and indeed may be likely.

Stocks certainly seem to want to continue to trudge higher, and may certainly do so in the short term due primarily to the Federal Reserve and other global central banks continuing to input money into the banking system via the bond market. But, as I noted last week, bond yields may be in a stealth uptrend which may be confirmed in the not too distant future with the key being what happens if yields breach the 1% mark on the U.S. Ten Year note (TNX). So with less than two weeks left in 2020 regardless of what could be serial new highs in stocks responsible investors will have to balance the ongoing potential rally in stocks with the knowledge that early in 2021 there may be a price reckoning of sorts.

As a result, this market is more about managing current positions than taking big risks. At the same time, it’s also important to take advantage of any new opportunities that arise as long as one is willing to consider any new additions to the portfolio as potentially short-term positions.

So, here is what we know:

  • The COVID-19 vaccine rollout has started but it’s too early to have detailed knowledge of the process, much less results
  • The Fed will keep printing money and buying bonds
  • Bothe the Chinese central bank and the ECB will continue to join the Fed’s QE efforts
  • In essentially a zero-interest rate environment, stocks make sense since there is no other way to make money but this is not without risk and the willingness to trade for the short term is important
  • Political issues may or may not be on the way to resolution. This remains a wildcard.
  • The global economy remains in an uncertain place due to the COVID-19 pandemic and the sporadic regional shutdowns of cities
  • The bond market is being underestimated by investors and could prove to be very troublesome



Specifically, if the U.S. Ten Year Note yield (TNX) crosses above the 1% yield area aggressively and embarks on an aggressive uptrend, the potential, but not necessarily a guarantee, of a severe decline in stocks must be entertained.

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Acadia Pharmaceuticals Finds Success in Troubling Conditions

I recently recommended purchasing shares of Acadia Pharmaceuticals (NSDQ: ACAD), a San Diego based biotechnology company specializing in the treatment of psychoses. Certainly, the toughest nut to crack in central nervous system conditions is Alzheimer’s disease, along with the psychosis and dysfunctional state which can develop in the latter stages. But interestingly and fortunately for its investors, Alzheimer’s disease is not Acadia’s focus.



In fact, Acadia has positioned itself in a relatively unoccupied niche, that of treating secondary psychoses related to other chronic and otherwise irreversible conditions. For example, its NUPLAZID drug is doing about $120 million in annual sales, with a 27% year over year growth rate and proving to be successful in the psychosis condition that can develop in patients with Parkinson’s disease.

Moreover, the company’s next focus is the treatment of dementia related psychoses via its still unapproved pimavanserin drug. If successful in its current FDA review, pimavanserin could be approved by April 2021. Meanwhile the company is working on broadening the number of indications for NUPLAZID.

From a technical standpoint, the stock is clearly under accumulation with Accumulation Distribution (ADI) and On Balance Volume (OBV) turning up nicely over the past couple of weeks. Even better is the fact that a move above the $57-$58 area could lead the stock significantly higher if the momentum crowd jumps in over the next couple of weeks.

The bottom line is that ACAD seems to be an above average short to intermediate term opportunity barring a negative market event.

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Market Breadth Continues to Seesaw Higher

The New York Stock Exchange Advance Decline line (NYAD) continues to seesaw higher, once again delivering several new highs in the past few days. The rate of rise has slowed some and the ROC indicator is moving lower which confirms at least a temporary loss of momentum. A break below 0 on ROC could signal further weakness.



Moreover, the RSI for NYAD has broken below 70 after being overbought for a couple of weeks. Thus, I remain concerned about the market’s vulnerability in the short term, although in the current climate it does not pay to be either an aggressive buyer or seller.



The action in the S & P 500 (SPX) is similar to what NYAD is showing us. Indeed, as I said last week the market looks ready to take a breath.



The Nasdaq 100 index (NDX) has been the strongest area of the market of late, but it too seems to be losing a bit of momentum. Breaks below the 20 and 50 day moving averages could lead to accelerated selling.

Focus on Individual Stocks. Monitor Each Position Separately.

The combination of a bullish seasonal period, a very loose Federal Reserve, and political uncertainty is a difficult combination to manage for investors.

As a result, I continue to expect choppy and volatile trading and continue to suggest that 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.

Still, at the end of the day, it’s all about how any stock one owns is doing against the market. So if the market rolls over, but our stocks are holding up, we will hold onto them until they get stopped out.

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 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.

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