Analysis, Perspective, Trading Strategy
The New Sexy: Rolled up Sleeve Stocks are In.
Duarte in the Money Options
March 7, 2021
The stock market is adapting to a new macro situation where the leading
perception is that the U.S. economy is recovering from the COVID pandemic
while the Federal Reserve continues to downplay the inflationary side
effect of its policies as its own Beige
Book is full of anecdotal evidence of its existence. Specifically,
the Fed’s ongoing diary of the economy has multiple examples and comments
documenting the fact that there are inflationary pressures building
in a number of supply chains for producers and businesses. There is
also building statistical evidence which shows that inflation continues
to build in the housing market and the grocery
As a result of these converging influences, we’ve seen increasing
volatility in both the stock and bond markets. Nevertheless, the overriding
influence on stocks remains the Fed’s continuation of its QE which
puts $120 billion per month into the bond market with much of that
money making its way into stocks.
Moreover, in this market success depends on which stocks you own
and not necessarily which stocks are in the news. What that means is
that with many high profile tech stocks selling off, the Fed’s QE liquidity
needs to go somewhere. And for all practical purposes, that money is
moving into a variety of sectors and companies which are usually overlooked
by the markets. Ironically, the driving theme shared by stocks that
are breaking out is one of companies which actually make money such
as those who provide:
- Industrial processes
- Applied technology and
Ironically, we may be entering an era where sexy tech is out and
stocks with a working theme, rolled up sleeves, are in.
Bond Yields Enter Consolidation Pattern
As would be expected once the market became focused on rising bond
yields, a phenomenon we described and traded successfully for weeks
ahead of it being widely noted, U.S. treasuries have entered a consolidation
pattern within the broad yield band of 1.2 to 1.6% on the U.S. Ten
Year Note yield (TNX). Still, even if yields continue to move sideways
for the next few weeks to months, because of the broad trading range,
we could still see a good deal of intermarket volatility result.
Meanwhile, as the chart above illustrates, this volatility in the
bond market and the accompanying uncertainty that it’s creating is
having a negative effect on the major indexes (NDX and SPX), but as
I will discuss below, not necessarily on all individual stocks. Moreover,
when we examine the relationship between the U.S. 30 Year Bond yield
(TNX) and the same stock indexes, two things emerge:
- The trading range in TYX is narrower than that of TNX
- TNX made a more dramatic high in yields than TYX
- We may have seen a top in yields for the short term
- We may be entering a consolidation pattern in bonds
Moreover, it’s important to keep these two important concepts in
mind: TNX is seen as an economic variable since mortgage rates are
based on its action while TYX is seen a gauge of future inflation.
As a final thought, I will add that TNX made a new high to end last
week but that TYX did not. That may or may not be a meaningful divergence
but it is worth watching. Perhaps the whole thing can best be summarized
by the fact that money continues to move out of the bond market as
stocks rise, which suggests that bond traders are still deploying money
into stocks, at least some of the time.
Have you thought about where to invest as bond yields fluctuate?
Find out with a Free Trial to my service. Click here .
The New Sexy: Oracle Breaks Out as Tesla Slumps
Tech investors have taken a bath of late with market darlings such
as Tesla (TSLA) rolling over in the last few days. Meanwhile, those
of us who bothered to look beyond the Nasdaq mainstream, found that
shares of “legacy” IT giant Oracle (ORCL) were gathering steam with
the eventual breakout coming on March 5.
Now, I have to be honest. Oracle is one of those companies that makes
money hand over fist and has been doing so for decades. Witness how
its founder Larry Ellison quietly moved to Hawaii and now spends most
of his time sponsoring tennis tournaments, at least prior to COVID
cancelling his favorite ATP tour stop at Indian Wells.
Moreover, Oracle’s problem has always been that even though it makes
money it usually disappoints analyst expectations, which is why the
stock often goes nowhere; except for lately.
In fact, the stock jumped well out of its recent trading range on
3/5/21 ahead of its 3/10/21 earnings on an analyst upgrade which cited
Oracle’s cloud business as being overlooked by investors while raising
expectations for a results beat as well as upbeat guidance. Of course,
we’ll see if this actually pans out.
Nevertheless, much of the bullishness about ORCL these days is based
on the performance of their Fusion ERP (Enterprise Resource Planning)
cloud software; a program which integrates a company’s finances, HR,
supply chain and customers’ needs and experience and allows the visualization
of all aspects of operations to be viewed at once. What it all boils
down to is that the bullishness may be justified as Fusion and Oracle’s
cloud services are growing rapidly, something which may have increased
during the most recent COVID phase where companies required the ability
to look at all parts of their businesses in an integrated fashion more
urgently in order to adjust to the rapidly changing landscape.
In fact, in the company’s November 2020 earnings call, CEO Safra
Catz and Chairman Larry Ellison noted:
- Earnings and revenues likely to continue to continue to grow as
cloud service expands
- Subscription revenues were $2.9 billion, up 5%, with strategic
back-office applications, up 26%, including Fusion ERP, which was
up 33%; NetSuite ERP, up 20%; and Fusion HCM, up 24%.
- Retention rates for strategic back-office cloud applications rose
- Company is having to build numerous data centers in order to meet
demand for service
- Oracle expects high profile customers to leave their competition
aggressively which will increase market share
The stock may consolidate ahead of earnings. And of course, ORCL
being ORCL, the shares could tank after the results, regardless of
how good they are as the algos are hard to predict. Certainly it would
be nice to see the Accumulation Distribution (ADI) and On Balance Volume
(OBV) improve also. But there is little overhead resistance at these
levels with good support at $64-$66. Thus, even if the price pulls
back, the odds of a nice rebound are above average if the earnings
report delivers a big surprise.
I own ORCL as of this writing. For more stocks like ORCL and recent
winners such as AIT consider a FREE trial to Joe Duarte in the Money
Options.com. Click here .
NYAD Survives after Briefly Dipping into Sell Signal Territory
The New York Stock Exchange Advance Decline line (NYAD) is still
consolidating after a multi-week run to new highs which ended in Mid-February.
But on the bright side the key indicator managed to survive a near
sell signal on 3/5/21 as it dipped just below the 50-day moving average
while the RSI remained below 50. Thankfully the double dip sell signal
was temporary, although there is no guarantee that a sell signal won’t
materialize in the near future.
So, for now NYAD gets the benefit of the doubt.
Still, we’ve had no new high on NYAD for the past couple of weeks
which is a concern although this is balanced by the lack of a sell
signal. Remember, 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. Currently NYAD is still in
a long-term uptrend.
But not all parts of the market were lucky as the Nasdaq 100 (NDX)
met with heavy selling in large cap tech names which drove the index
into a short-term Chaos Zone below its 50-day moving average. The silver
lining on NDX is that it is reaching an oversold reading on RSI so
a bounce is likely, although the quality of the bounce is what matters
Meanwhile the S & P 500 (SPX) survived its own dip below the
key technical support level with its own RSI surviving a test of the
50 area. Also positive is the fact that SPX
remained above its recent short-term low near 3700.
Rotation Theme Evolves
As I noted last week the volatility in bond yields seems to be creating
confusion in the stock market. And with tech stocks selling off the
Fed’s money needs to somewhere, which means that stocks out of the
mainstream are now ripe for positive money flows.
In other words, the best way to manage this market is to stick with
sound trading rules and watch each individual position as it relates
to the general trend in the market. And in this case, the big rule
is to look for stock prospects with emerging uptrends in sectors which
have been lagging.
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
Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The
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