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By Joe Duarte Editor Joe Duarte in the Money Options
June 18, 2023
In a Double Barrel Bull Market AI and Housing Rule the Roost.
The Federal Reserve is still talking tough via its dot-plot which forecasts two more interest rate increases before the end of 2023. But the markets are not agreeing. My money, for now, is with the markets.
As I pointed out in my January 2023 video, despite constant worries from perplexed traders and dark pundit banter, a credible bottom formed. Since then, stocks have risen and, now look set to move higher, likely with occasional pauses. That’s because the rally is broadening out via a rapid improvement in the market’s breadth accompanying the new highs on the major indexes, as I describe below.
In fact, we are currently in what I call a Double Barrel bull market, where two major groups are pulling the rest of the market higher. The one everyone knows is AI. The other, more quiet but equally bullish sector is housing.
And since lots of people have missed the rally and are now playing catch up, which will keep the upward momentum going for a while.
Of course, this rally can’t, shouldn’t, and won’t last forever. But if history is any guide, the rest of 2023 and much of 2024 have a built in upward bias, at least based on the phenomenon known as the Presidential Cycle; whose major premise is that the Fed raises rates in the first two years of a presidential term (which it has) and lowers them in the last two years (which seems highly likely).
AI Poster Child Makes New Highs
The poster child for the AI rally is the Invesco QQQ Trust (QQQ), as it houses the large cap tech stocks which are moving higher based on expectations of large profits in the future from increasing automation and whatever AI eventually delivers.
Last week, QQQ made another series of new highs. But by Friday, it looked at bit tired. Thus, it makes sense to expect some sort of consolidation. A move back to the 20-day moving average is not out of the question.
Lennar’s Goldilocks Quarter
For the past several years, I’ve written extensively about the homebuilder stocks and related sectors. That’s because this area of the market continues to move higher. Moreover, the more negative investors become on the sector, the higher it goes.
In fact, as I detail in this video, the homebuilders are in what can only be described as a bullish Megatrend, which shows no sign of slowing.
Take for instance the recent action in leading homebuilder Lennar (LEN), a long standing holding in my Joe Duarte in the Money Options portfolio, and a personal holding. Its most recent earnings report blew past analysts’ expectations on both earnings and revenues as the company again offered a positive outlook. Of course, the shares broke out to a new high.
What makes Lennar’s earnings most interesting, is the company’s management its inventory – not too hot, not too cold. Moreover, the company’s Executive Chairman Stuart Miller noted that home buyers have come to accept the "new normal" status of interest rates, adding “demand has accelerated.” He concluded by noting: “Simply put, America needs more housing, particularly affordable workforce housing, and demand is strong when price and interest rates are affordable."
In other words, unless interest rates climb significantly higher, the housing sector, from the point of view of homebuilders, is in better shape than many investors may think.
And here is something else to consider.
Lennar is trading at a P/E of 9.46, while Nvidia (NVDA), the biggest benefactor of the AI trend is trading at a P/E of 54.91.
Bond Yields Hold their Ground
Bond yields remained below their recent top level of 3.8% as 262,000 Americans filed for unemployment benefits, an increase of 17,000 from the prior week. In addition to the stable inflation pictured in CPI and the rolling over of producer prices (PPI) released earlier in the week, bond traders breathed a sigh of relief
Buried in the jobless claims number were over 7,000 new filings in Texas, the highest number of new claims in the U.S. for the week. Let’s put this in some perspective. Based on recent U.S. Bureau of Labor Statistics numbers, the Lone Star State accounted for 7% of the total U.S. GDP. Moreover, in Q4 2022, Texas accounted for 9.5% of total U.S. GDP, which means the largest economy in the U.S. is starting to feel the pinch of the Fed’s rate hikes.
On the other hand, Texas has received the largest number of new residents of any state in the post-COVID period. All of which means that for now, even in a slower economy, there is still a tight supply of housing combined with high demand. Texas is not alone as the sunbelt remains attractive to many people looking to escape high taxes and challenging employment situations.
This confluence of data, rising initial jobless claims, slowing inflation, and a coincident slowing of the Chinese economy has led to an encouraging reversal in U.S. Treasury bond yields, which will likely benefit the homebuilders.
That’s because with lower bond yields, as the chart above shows, we’re already seeing an increase in mortgage activity.
The 3.85% yield on the U.S. Ten Year Note remains 3.85% roughly corresponding to 7% on the average 30-year mortgage. So, if yields remain below this level, the odds favor a continuation of the steady performance of the homebuilder sector.
Incidentally, I have expanded my coverage of the housing and real estate markets in a new section for members of my Buy me a Coffee page, where you will get the inside scoop on what’s happening in these important sectors. This crucial information complements the stock picks at Joe Duarte in the Money Option.com. You can start by reviewing my extensive report on the outlook for the homebuilder sector here.
NYAD Improves SPX and NDX Look to Consolidate
The New York Stock Exchange Advance Decline line (NYAD) continues to improve. As long as it above its 50-day moving average signaling stocks are back in an uptrend.
The Nasdaq 100 Index (NDX) moved above 15,000 and is due for a pause. But in this market, any pause may be short lived. ADI and OBV remain in bullish postures.
The S&P 500 (SPX) moved above 4400 and looks set to take a breather. As with NDX, any pause may not last. Both ADI and OBV look to be in good shape.
VIX Makes New Low
The CBOE Volatility Index (VIX) broke to another new low last week as call option buyers overwhelmed the market. As I noted last week, this is probably a little too much bullishness all at once, so I expect a bit of a bounce in VIX which will likely lead to some backing and filling in the market.
When VIX rises stocks tend to fall as rising put volume is a sign that market makers are selling stock index futures in order to hedge their put sales to the public. A fall in VIX is bullish as it means less put option buying, and it eventually leads to call buying which causes market makers to hedge by buying stock index futures raising the odds of higher stock prices.
Liquidity is Increasingly Stable as Fed Holds Rate Hikes
With the Fed on hold the market’s liquidity is starting to move sideways, which is a positive. The Eurodollar Index (XED). A move below 94 would be very bearish.
A move above 95 will be a bullish development. Usually, a stable or rising XED is very bullish for stocks.
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