Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Bond Sellers, the Fed and The Wall of Worry are a Triple Barrel Gatlin Money Spigot for Stocks
Duarte in the Money Options
Constant Fed liquidity is only one reason for
the recent rise in stock prices. In fact, there is now evidence of
a second and equally important source of capital that is steadily moving
into stocks; money exiting the bond market.
Combined, these two capital sources – a double barrel stealth
money spigot - may keep the bull market in stocks alive
for far longer than many expect. And when you add a third source
of sound liquidity that I will describe directly below, the double
barrel becomes a triple barrel Gatlin gun.
The conventional wisdom, grounded in historical precedent, is betting
that the rally in the stock market will soon crash and burn. This expectation
is based on the fact that history clearly shows that when everyone
is bullish there is no one left to buy stocks and thus prices fall.
And while I am not disputing that is the way all markets work; it
is not clear at the moment, that we have reached the point in which
everyone is bullish. In fact, despite this being a highly bandied about
point, we seem to actually be nowhere near the all-bullish cliff, which
is why the market continues to grind higher. That’s because there is
a vastly ignored third component to this bull market: the proverbial
wall of worry.
So here are the three macro reasons for the bullish case in stocks
for an extended period of time until proven otherwise:
- The Federal Reserve’s QE will be in place for a long time
- Bond traders are selling bonds and buying stocks
- There is a much bigger wall of worry in place than most realize
What this adds up to is the following. Rather than this being a market
where everyone is bullish the current situation seems to be one where
there is an abundance of excessive and somewhat reckless trading behavior
akin to desperation that is being displayed. Of course, this is potentially
dangerous in and of itself, but there is a clear distinction between
excess and total bullishness. But contrary to what one would expect,
it seems as if this display of desperation is actually having a positive
effect on the market; the opposite of what everyone being bullish would
most likely deliver.
Consequently, it is the excesses of the moment – short selling with
impunity, hordes of small investors raiding short seller positions,
raids on penny stocks of companies that no longer exist, and so on
that is fueling the wall of worry and prompting the Fed to keep the
QE rolling. In other words, the reckless behavior of a few is being
mistaken for a more widespread madness.
Instead, what we are seeing as more prevalent behavior is the manifestation
of worry: bond sellers are smelling the potential for inflation causing
bond yields to rise further and money moving into stocks and cryptocurrencies
as hedges for inflation and uncertainty; with both fueling the wall
of worry. Indeed, what most are seeing as signs of pervasive bullishness
are actually signs of rising worry which are preventing the market
from reaching the point where everyone is bullish; the point of no
So, can this go on forever? Of course not. Am I worried? Yes. But
from a trading standpoint, the bottom line is that the stock market
loves to climb a wall of worry. Thus, as long as there is excessive
behavior in the market, the Fed keeps up the QE juggernaut, bond yields
are rising, and cryptos are in vogue, the odds of reaching the point
of no return are lower than those of the wall of worry remaining solidly
in place and stocks moving higher, albeit in bumpy fits and starts.
Bond Yields: On the Verge of Breakout
So far in 2021 the rise in bond yields has had a high correlation
to rising stock prices. This relationship, which is a significant departure
from history suggests that, as the chart below shows, money is flowing
out of bonds and into stocks. Thus, last week’s potential breakout
of the yields on the U.S. Ten Year note above 1.2% and the U.S. 30
Year Bond actually closing above 2.0%, will likely have major influence
on what happens next in the stock market.
Indeed, the odds favor a continuation of the uptrend in yields is
above average, as the combination of higher treasury issuance of bonds
in order to finance fiscal stimulus packages due to the COVID pandemic
– often at higher yields in order to entice buyers – combined with
the potential for inflationary pressures in the economy due to tightening
supply chains, suggests that we are early in this cycle leading to
what could be an extended period of rising yields asset reallocation
from bonds to stocks.
Certainly, there are no guarantees that this relationship or these
trends will continue. Thus, there are three important caveats to consider
which would derail bond money flowing into stocks extending the bull
market in stocks scenario:
- If commodity inflation subsides, and supply chain pressures ease
and yields fall
- If the Federal Reserve raises interest rates unexpectedly and
stocks fall or
- If there is a COVID-19 resurgence in the near future which derails
any hope of recovery and bond yields once again collapse
Still, the burden of proof is on the bears. And if bond sellers continue
their current tactics while the Fed continues with QE simultaneously,
the worrying will continue, and the favorable odds of higher stock
prices will remain in place.
Have you thought about where to invest as bond yields rise? Find
out with a Free Trial to my service. Click here .
Academy Sports and Outdoors: The Big Short Which Continues
to Trend Higher
While shares of GameStop (GME) were gathering the headlines of the
recent “Redditt short squeeze” another company, Academy Sports and
Outdoors (ASO) was also being heavily and albeit quietly shorted over
the last few weeks. And while GME’s volatility was extreme, ASO’s uptrend
remains uncannily intact.
So, here’s the big question: why would anyone be short ASO at this
point? For one thing, the company’s most recent quarterly report, its
first as a public company delivered nothing but good news.
And while I could see shorting GameStop since its business model
is in question, I can’t see why anyone would short ASO, as it reported
record sales, sequential sales growth, increasing online sales, expanding
market share in key categories, smart inventory management, aggressive
new customer growth, and balance sheet improvements.
The big short bet seems to be that once the COVID pandemic runs its
course, the new wave of outdoorsmanship: fishing, hiking, camping and
other activities will run its course and people will return to their
former couch potato TV habits. Of course, if this happens, it could
crimp ASO’s sales.
But that’s a highly speculative bet in a post COVID world, whose behavioral
trends are not particularly discernible right now. This expectation would
be especially risky with TV sport audiences slowly shrinking and changing
demographics with people moving toward rural and suburban homes, which
lend themselves to less TV, less frequenting of live sports venues, more
outdoor activities and personal and team sporting events. At the same
time, if sports fans were to return to the arenas, Academy expects to
increase their sales of sports team apparel, which means that it could
win either way.
The fact is that the stock has been trending up steadily for several
months despite the increasing short interest, and every dip gets bought.
And while On Balance Volume (OBV) is moving nicely higher, Accumulation
Distribution (ADI) until recently has been falling. This suggests that
ADI is picking up the increasing short seller presence while OBV, and
the price of the stock are showing that the short sellers are at the
moment getting hurt.
Even more interesting is the fact that the stock has made new highs
after a recent secondary stock offering which came just a few months
after the IPO. Moreover, if the stock’s rally was due exclusively to
short covering, we would more likely have seen a top by now.
Certainly, there is risk here or there wouldn’t be a large short
seller presence. But it’s a tough call for sure. We will see which
way this works out in the next few weeks as the vaccine rollout continues
and sports venues attempt to reopen and the push for TV events increases.
The price action will also likely intensify after ASO’s next earnings
report, which is unscheduled at the moment but is likely to come up
in March. For now, ASO is in an excellent uptrend and the higher it
goes, the more likely that shorts will get squeezed. Nothing wrong
with staying with it and raising the sell stop as the shares move higher.
I own ASO as of this writing. For more stocks like ASO consider a
FREE trial to Joe Duarte in the Money Options.com. Click here .
Market Breadth Makes New Highs. Indexes Confirm.
The New York Stock Exchange Advance Decline line (NYAD) made a series
of new highs last week, again pointing to higher stock prices over
the next few weeks.
It is important to reinforce the fact that
as long as NYAD continues to make new highs, remains above its 50
and 200 day moving averages and its corresponding RSI reading remains
above 50, the trend is up. This combined set of observations has
been extremely reliable since 2016.
For its part, the S & P 500 (SPX) also delivered a new high,
confirming NYAD although the large cap index is due for a short-term
consolidation, which will likely provide yet another dip buying opportunity.
The Nasdaq 100 index (NDX), is in a similar
position to SPX. Look for a very short term consolidation in both
indexes at some point in the not too distant future with short term
support at the 20-day moving average.
Worry is a sign of Fear not Greed.
Last week I noted that the relationship between stocks and bonds
had changed, meaning that higher bond yields may now be an unexpected
source of liquidity for stocks. Moreover, with the Fed continuing with
its QE program for an indefinite period of time, the combination could
deliver a positive surprise for stock traders for quite a while.
Certainly, I don’t expect stock prices to rise without corrections;
some of which may be quite severe and frightening. I am also not ruling
out a similar decline to the March 2020 COVID mess. Nevertheless, if
a correction does come, until proven otherwise I would expect it to
be relatively short lived and once again to be an opportunity to buy
on a dip.
Does that mean we buy stocks and hold them blindly? Of course not.
Adherence to sound trading principles remains the key to success, especially
using sell stops in the range of 5-8%.
At its most basic worry is a sign of fear not of greed. And fearful
markets don’t usually crash unless the fear is caused by ridiculous
levels of optimism, which means that if you suddenly feel so bullish
that you can’t sleep, it’s time to sell.
For more on how to deal with the current market checkout my latest
Your Daily Five video here .
For more details on bonds, currencies, and stocks check out my recent
interview with Wall Street Reporter.com 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
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