Joe Duarte’s Smart Money Trading Strategy Weekly

Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

In Bullish Trends It Pays to Seek Both Value and Momentum. Three Sectors to Watch as the Year End Rally Progresses.

November 12, 2023

The combination of a pause in the Fed’s rate hikes and strong year end seasonal tendencies have created an opportunity for investors to end the year on a positive note.   The fly in the ointment, in the short term, could be a bad set of readings on the upcoming Consumer (CPI) and Producer (PPI) price gauges. Aside from that, the negative sentiment on Wall Street is still thick enough to push prices higher.

As I noted last week “The stock market seems to have bottomed as short sellers panicked and recently frightened buyers rushed back into the markets.  It’s about time, as the signs of a pending reversal have been in place for the past two months as a slowing economy and hints that the Fed’s rate hike cycle has ended have been mounting as investor’s pessimism rose to a fever pitch.”

On the other hand, Fed Chairman Powell proved once again that a few words can kill any rally when he noted the central bank was “not confident” that inflation was fully vanquished on 11/9/23 and stocks sank.  Whether that was just tough talk or a sign that he knows what the CPI and PPI numbers will show is anyone’s guess.  Thankfully the market recovered, although, as I discuss below, breadth remains weaker than one would hope for.

That said, there is no substitute for being prepared for any eventuality. For now, the trend is bullish, so here are three groups that should move higher if there are no unpleasant surprises.

It’s What’s Inside that Matters. Three Sectors Worth Watching as the Year End Rally Develops.

Most investors focus on areas of the market which are exhibiting strength. That’s because in bull markets, strength usually leads to further strength. This, of course, is the essence of momentum investing.

At the same time, it’s also useful to review the action in weak sectors, as underperformers are often future areas of value.  Moreover, it’s important to know what you’re buying. Here is what I mean.

The software sector encompasses a wide swath of companies ranging from security companies to app developers, along with those in the increasingly popular AI sector.  With so many companies, it’s often more practical to buy into a diversified portfolio such as an ETF.

One such ETF is the Invesco Dynamic Software ETF (IGPT), recently renamed Invesco AI and Next Gen Software ETF which is closing in on what could be a major breakout.  But don’t let the title fool you. This ETF holds the usual large cap tech stocks that usually rally when the tech sector moves into a rising trend, such as what is currently developing and is evident in the price chart for the Invesco QQQ Trust ETF (QQQ), which holds many of the same companies but currently trades at ten times the price of IGPT.

So, you can pay ten times more for QQQ or get the same general market exposure via IGPT for a fraction of the price. Consider that IGPT is currently trading below $40 per share, which means you can own shares in Meta (META), Alphabet (GOOGL), Adobe (ADBE) and even NVDIA (NVDA) for a fraction of the price of each of these blue chips. 

And here’s what the price chart is telling us regarding IGPT:

• The ETF is back in bullish territory as it just crossed above its 200-day moving average;
• Accumulation/Distribution (ADI) is moving higher after a recent consolidation as short sellers leave the scene;
• On Balance Volume (OBV) is in an established uptrend, as buyers come in; and
• A move above $36 will likely take this ETF higher as long as the bullish trend in the technology sector remains in place.

Another bullish sector which remains undervalued is the uranium mining sector, as in the Global X Uranium ETF (URA), in which I own shares and which is a core holding at Joe Duarte in the Money Options.com.  Nuclear power is slowly becoming an option for areas of the world which are trying to find a compromise between clean fuels and reliable power generation.  

URA’s appeal has been boosted by the demise of the renewable power sector over the last few months due to the expense burden and supply chain challenges required to build wind turbines.  Note the difference in the performance of URA versus the First Trust ISE Global Wind Energy ETF (FAN).

For one, URA is in a bullish consolidation pattern after its recent breakout. Note the excellent support at $26 where the 50-day moving average and a large Volume by Price (VBP) bar continue to attract buyers. Moreover, note the bullish uptrend in OBV as buyers sneak into the shares.

Certainly, FAN is in a consolidation pattern of its own after its recent collapse.  Note, however, that neither ADI or OBV have turned up yet, which means that there is currently little interest in these shares from bullish investors.  On the other hand, from a contrarian standpoint, it’s not a bad idea to keep an eye on this ETF as the cycle works itself out.  All it would take for this sector to bottom out would be something like a large infusion of government cash, such as what may be materializing in Europe according to reports.

I recently recommended an ETF which is now breaking out in a big way.  Join the smart money at Joe Duarte in the Money Options.com where you can have access to this ETF and a wide variety of bullish stock picks FREE with a two week trial subscription.

Bonds Retain Bullish Tone Ahead of Inflation Numbers

As I noted last week, bond yields have made at least a short term top.  In fact, just three weeks ago, the U.S. Ten Year note yield (TNX) hit the 5% point, an event that unhinged both stock and bond traders. 

Since then, things have quieted down and TNX has settled into a trading range with 4.5% and the 50-day moving average as the floor. 

If the inflation numbers are bullish, and TNX breaks below 4.5%, expect a big move up in stocks. 

Keep an eye on the SPDR S&P Homebuilders ETF (XHB), specially the $78-$80 area.  If CPI and PPI are bullish and bond yields fall, XHB should rise, as short sellers get squeezed.  Note the improvement in ADI, as the shorts cover their bets, while OBV is still holding steady, as buyers remain patient.

I’ve recently posted several detailed articles on mortgage rates, bonds, and homebuilders at my Buy Me a Coffee page. You can access them here.   For the perfect price chart set up, check out my latest YD5 video here.

Market Breadth Lags Rally as Indexes Outperform.

The NYSE Advance Decline line (NYAD) has bottomed out, but has yet to cross above its 50 or 200-day moving averages. So, for now, NYAD is neutral to slightly positive.  If it doesn’t show a bit more pop in the next few weeks, it may signal that the rally will have short legs.

In contrast, the Nasdaq 100 Index (NDX) is nearing a breakout after rallying above its 50-day moving average. Both ADI and OBV turned higher as short sellers cover (ADI) and buyers move in (OBV). A move above 15,800-16,000 would likely extend the rally further.

The S&P 500 (SPX) is also lagging NDX, but has delivered a minor breakout above 4400. SPX is well above its 200-day moving average returning to bullish territory after its recent dip below 4150. Moreover, it has now survived a test of the 4350 support area. 

VIX is Back Below 20

The CBOE Volatility Index (VIX) is well below 20. This is bullish.

A rising VIX means traders are buying large volumes of put options.  Rising put option volume from leads market makers to sell stock index futures to hedge their risk.  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.

To get the latest up to date information on options trading, check out “Options Trading for Dummies”, now in its 4^th Edition – Available Now!

#1 New Release in Options Trading

Now in Audible Audiobook Format

Options Trading for Dummies (4th Edition)  Audible Audiobook – Unabridged

Joe Duarte MD (Author), Terrence Kidd (Narrator), Tantor Audio (Publisher)

4.5 out of 5 stars    61 ratings

#1 New Release in Investment Analysis & Strategy

# 1 New Release on Options Trading

Good news! I’ve made my NYAD-Complexity - Chaos charts featured on my YD5 videos, and a few more available 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 selling Trading 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 books.

Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The Everything Investing in your 20s & 30s at Amazon and The Everything Investing in your 20s & 30s at Barnes and Noble.

A Washington Post Color of Money Book of the Month is now available.

To receive Joe’s exclusive stock, option, and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

JoeDuarteInTheMoneyOptions.com is independently operated and solely funded by subscriber fees. This web site and the content provided is meant for educational purposes only and is not a solicitation to buy or sell any securities or investments. All sources of information are believed to be accurate, or as otherwise stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com have no financial interest in any of the sources used. For independent investment advice consult your financial advisor. The analysis and conclusions reached on JoeDuarteInTheMoneyOptions.com are the sole property of Dr. Joe Duarte.