Analysis, Perspective, Trading Strategy
In a Rotating Market, Follow the Money, Trade with Sound Rules
Duarte in the Money Options
The stock market ended 2020 with a moderate bang which
suggests that, at least in the early going, 2021 may be just an extension
of 2020. That said, it is important to note that the market leadership
is starting to rotate away from some of the sectors that were stellar
for large parts of 2020. So, the upshot is a market where two major
factors are at play:
- The Fed’s money pumping and near zero interest rates will likely
continue to favor stocks
- There will be some noticeable winners and losers as money moves
toward sectors with the more favorable fundamentals at the moment
A case in point is the action in the housing sector where big winners
such as homebuilder DR Horton (DHI) ended the year in what unless it
is soon reversed, what seems to be a potentially drawn-out downtrend.
The stock, after roughly doubling in price since the March 2020 bottom
in the market ran into resistance near the $80 area and formed a clear
triple top from which it has not recovered. Moreover, the Accumulation/Distribution
(ADI) and On Balance Volume indicators are in respectively well-defined
down trend. Even more daunting is the fact that stock recently broke
below its 50-day moving average and looks as if its ready to move toward
its 200-day line.
The slow demise of DHI is not accidental and seems to be related
to the action in the bond market, where the U.S. Ten Year Note yield
(TNX) has been bumping up against 1% for the past few weeks. This has
caused a tangible increase in mortgage rates, which combined with rising
housing prices has created a dilemma for home buyers. Also consider
the fact that on 12/30 even as bond yields fell, DHI remained below
key resistance, a sign that the stock is very weak.
Of course, even as homebuilders are running into resistance, the
real estate investment trusts, as in the iShares Real Estate ETF (IYR)
are holding up much better as high home prices may be pushing those
looking to relocate from COVID lockdowns and other issues toward apartments.
Notice the inverse action in IYR compared to that of DHI. Specifically
- IYR is above its 50 and 200 day moving averages nearing a breakout
- Positive Accumulation Distribution (ADI)
- Positive On Balance Volume (OBV)
Indeed, as it was for much of 2020, it looks as if 2021 is going
to be all about selectivity.
So, is there a worry list? Of course, there is a worry list, and
that means that there will be periods of volatility. But what we learned
since 2016 is that the algos buy just about every dip. What that means
is that we continue to trade with discipline, letting the market stop
us out of positions as we watch the action in the New York Stock Advance
Decline line (see below) for clues about the trend of the market while
adhering to our sound trading rules:
- Don’t fight the Fed
- Trade in small lots
- Use well placed sell stops (5-8%)
- Stick with strong stocks in strong sectors
- Consider option strategies
- Look for emerging potential winners in overlooked areas of the
I added two new option trades this week. Check them out with a FREE
trial to Joe Duarte in the Money Options.com. Click here .
Market Breadth Ends Year with New High
The New York Stock Exchange Advance Decline line (NYAD) made a new
high to end the week of 12/30, and simultaneously ended the year with
an all time high suggesting once again that as long as the Federal
Reserve remains accommodative, the odds favor higher stock prices.
Of course, given the potential for negative surprises it is equally
important to monitor the supporting indicators on NYAD, especially
where the line is in relationship to its 50-day moving average and
the RSI indicator. Currently, RSI is closing in on the 70 area, which
would make NYAD overbought and ripe for consolidation. Simultaneously,
it is well above its 50-day moving average which means that it remains
in an intermediate term (weeks to months) uptrend.
Also remember that when RSI falls below 50 and NYAD breaks below
its 50-day moving average it is a Duarte 50-50 sell signal. Not all
of these signals lead to major declines, but the major declines of
the past four years have all started with Duarte 50-50 sell signals.
The Nasdaq 100 index (NDX) is within striking distance of a new high
as well with the internal action of the index looking better than the
index itself. It is often bullish to see breadth outperform the index.
All We Can Do is Trade One Day at a Time
As long as the Fed remains accommodative, the odds favor higher stock
prices. Of course, there is some nuance involved in successfully getting
to profits, as I described above. Specifically, I expect a rotation
out of overbought sectors into those areas of the market that have
some upside potential.
I remain concerned about the action in the bond market. And of course,
there is always the potential for a political surprise or something
else to upset the bullish apple cart. However, if 2021 is anything
like 2020, we can expect a few bumps along the way. Perhaps we may
even see a 10% or larger correction, just as we did in March 2020.
Certainly, there is the potential for a real bear market out there
somewhere. And there is some history to back that up as the first year
of a new presidential cycle, either with a new president or a second
termer, to be a difficult year for stock investors.
Still the bottom line is that barring something very extraordinary,
the odds favor the bulls over the next twelve months.
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
Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The
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