Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Bonds and Volatility Will Influence 2021 But the Trend Remains Up Until Proven Otherwise
Duarte in the Money Options
Thanks to the Federal Reserve and the ever present
“Buy the Dip” crowd, I don’t expect this market’s uptrend to pause
for long periods of time in the foreseeable future. Of course, it would
be foolish to assume that any pause, regardless of its duration would
not be potentially painful.
In other words, this volatile stock market is most likely to continue
to grind higher, albeit in fits and starts influenced by the news cycle
as well as scheduled events such as last week’s options expiration.
Certainly, this type of trading, especially in an overvalued market
can make short term trading quite challenging. But that’s what’s happening,
so those who trade for a living will have to continuously evaluate
conditions and adjust their strategies and expectations accordingly.
And just to add some icing to the volatility cake, the tug of war
between the Federal Reserve and the bond market will likely add to
the uncertainties of the year.
Bond Yields Face Important Test
The financial story of the year could well be that U.S. treasury
bond yields may move decidedly higher. So far, the story remains viable,
despite two good treasury auctions last week which knocked yields down
from their recent highs.
Yet, by Thursday and to some degree Friday during the day, the sellers
were back in business as the expectations of more government fiscal
stimulus and the stealthy inflation seen in commodity prices once again
exerted their influence.
So, at this moment here is what we know about the U.S. Ten Year Note
- Long term yields seem to have bottomed out as TNX is well above
its 20, 50, and 200-day moving averages
- There is short term resistance at the 1.2% area with support at
- The potential for a move to 1.5% remains above average barring
a breakdown in the current trend
Still, even if bond yields fail to rise meaningfully from here, it
seems likely that the bond market is no longer in an all-out bull market
as it has been for the last decade. And certainly, there is no way
to know how this is going to play out. Moreover, with the Fed keeps
pumping money into the banking system and with no solid sign of a return
to employment growth, the usually dominant factor which stokes bond
yields, a lot will depend on inflationary expectations.
Thus, all we can say is that the odds favor a potential for a lasting
change in the long-term trend for the U.S. Treasury market. And if
that’s the case then it is also plausible to expect a change in the
stock market. Whether that is a change in the trend or a change in
leadership is a viable question and something that may take some time
to be fully apparent. At this point, as I note directly below, there
is clearly a very notable change is the action in the financial stocks,
which suggests the market is betting on a leadership change and a sector
Nevertheless, Our sound trading rules still apply:
- Don’t fight the Fed
- Trade in small lots
- Use well placed sell stops (5-8%)
- Take profits in positions that have gained 20% or more
- Stick with strong stocks in strong sectors
- Consider option strategies
- Look for emerging potential winners in overlooked areas of the
- Look to buy dips
Are bonds important to your portfolio? Find out how to be on the
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American Express Quietly Nears Breaks Out Despite Federal
Shares of upscale credit card bank American Express (AXP) have been
moving steadily higher despite news of a Federal Probe that is reportedly
in its early stages. The probe alleges inappropriate sales tactics
aimed at business owners whom the company was targeting as potential
cardholders. Yet the stock is moving higher, which suggests that either
the probe is not likely to go anywhere, or that perhaps the expectation
is for a low-level penalty which allows the company to move on.
Aside from that, however, AXP is interesting because of its customer
base, a group which has been know to travel and to own businesses.
As a result, the stock, along with the rest of the financial sector
is likely to at least be partially moving on the expectation of a return
to some level of normalcy as the COVID-19 vaccine rollout continues.
Moreover, a factor that is little noted is that recent Fed rules allow
financial companies to buy back their stock just as their credit card
delinquency ratings improved at the end of 2020. Thus, the stock is
likely to have a floor under it as AXP is in the midst of a 120 million
share buy back program which started in September 2019 and is expected
to continue until September 2022.
Technically, the stock is under steady accumulation with Accumulation
Distribution (ADI) turning up, while On Balance Volume (OBV) has bottomed
out. The stock is trading well into the Complexity zone (above its
20,50, and 200-day moving averages) and has very little resistance
overhead above $125.
So here is the bottom line:
- If bond yields continue to rise, the financial stocks may move
decidedly higher, at least in the intermediate term
- AXP is nearing a major breakout
- As stock buybacks increase the stock should move higher
- AXP’s business should improve if the economy improves
I own shares in AXP as of this writing.
Market Breadth Remains Positive
The New York Stock Exchange Advance Decline line (NYAD) broke out
to impressive new highs during the first week of 2021 and delivered
more on week two, notwithstanding the pullback on 1/15. Thus, the operative
word remains that the trend in the market remains up.
Of course, as I noted above, I expect the market to be increasingly
volatile, but the key to the trend is whether NYAD remains above its
50-day moving average on any pullback. If the 50-day is broken decisively
the next test would be the 200-day.
The S & P 500 (SPX) rolled over by week’s end and could see some
short-term choppiness as the news cycle develops over the next few
days to weeks.
The Nasdaq 100 index (NDX) is joining SPX
and NYAD in its general trend. All of which means that for now the
large cap tech stocks, as a whole remain in an uptrend. However,
when you look under the hood, there seems to be a rotation under
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with a Free Trial to my service. Click here .
It’s Likely to be Another Spectacular Year
Volatility will increase in this market, especially if bond yields
continue to rise. That said, until the Federal Reserve pulls the rug
out from under the market, the odds favor an upward trend in stocks.
Nevertheless, profits will only come to those who can find the right
sectors and stocks to own as well as when to take profits, and when
to buy on the dips.
For more on how to deal with the current market checkout my latest
Your Daily Five video here .
And for my live take on the markets, join me on 1/21/2021 at 3:00 PM
Eastern time for a live chat at Wall
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
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