Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Fed’s Waller Juices Momentum. With Homebuilders: Let the Price Charts do the Talking.  Have Mortgage Rates Topped Again?

March 3, 2024

The momentum run in the stock market is gathering steam.  Once again, the major indexes made new highs with clear confirmation from the market’s breadth.  Of course, all good things eventually end. So, the only way to trade this market is day by day.

Friday was a good day for sure as the Fed cleverly hinted it may start a new round of QE based on changes to its balance sheet as it reduces the number of mortgage-backed securities it holds and replaces them with U.S. Treasury Bills.

How To Manage a Confusing Market – Trade One Day at a Time.

Does the Fed know something? Are next week’s private sector and federal jobs numbers going to be dismal?

It’s hard to tell what the algos are thinking at any time. But this market takes the cake.  For one thing, consider that inflationary pressures, may have flattened out, yet remain stubbornly above pre-pandemic levels. It’s so obvious that even the Fed sees it and is thus talking down expectations for rate cuts in the first half of the year, and perhaps even into the third quarter.

More confusing, the data sets from the private sector and the U.S. government don’t seem to jibe, especially when it comes to the jobs market. On the one hand, we read scary comments on Fed regional reports, to go along with frequent news about upcoming layoffs while jobless claims are steady and monthly payrolls numbers are steady.  Competing purchasing manager’s data (ISM vs. S&P Global) are in nearly complete disagreement.  And corporate earnings are hit or miss at any given time.

That leaves investors with two simple choices.  Either stay the course, or get out of the market and risk losing a potentially large sum of money if the momentum run continues.  Of course, if you’re staying in, as I nervously am, being aware of your surroundings and staying selective is the key to success. So once again, I suggest to these simple principles in mind:

• Stick with what’s working; if a position is holding up – keep it;
• Take profits in overextended sectors;
• Consider some short term hedges;
• Look for value in out of favor areas of the market that are showing signs of life;
• Protect your gains with sell stops and keep raising them as prices of your holdings rise; and
• Trade one day at a time.

Bond Yields Deliver Pleasant Surprise as Algos Prepare for Jobs Data

Last week, in this space, I suggested bond yields might have delivered a short term top. That seems to be the case, at least as of press time – things could change in an instant.  This is important because the U.S. Ten Year Note yield (TNX) is a widely watched benchmark for market interest rates, especially mortgage rates, and to some degree automobile loans.

In my last note I wrote that the 4.3% yield area seemed to be a short term top and that a move toward 4.15% was possible as that’s where the 20, 50, and 200 day moving averages for TNX were clustered, and where it was likely that the algos were poised to buy or sell depending on what happened there.

Well, on 3/1/23, TNX fell as low as 4.183, which means that next week, when we get a heavy dose of data, especially both private sector and government jobs, the algos will their next opportunity to go full bore Buy, Buy, Buy! Or Sell, Sell, Sell!

Have Mortgage Rates Topped Again?

Way back in November 2023, I suggested mortgage rates had topped out.  I was correct, at least in predicting an intermediate term top which has so far held in place, even if rates have climbed back above 7%.  The fact, however, is that in November 2023, mortgages were running at close or above 8%. 

The recent backup on bond yields has led to a rise in mortgages back above 7%. But if bond yields don’t back up in the next few days, such as for example as they might in response to a worse than expected jobs number, we may be in for a test of the 4% yield in TNX, which would likely translate to an average 30 year mortgage nicely below 7%. 

Let the Price Charts Do the Talking - Stealth Breakout in Homebuilders Proceeds

And if you’re wondering why the homebuilders are once again rallying, it’s all about the bond market. Indeed, the decline in bond yields, as I expected, juiced the nascent rally in the homebuilder sector, which I highlighted here was getting started a couple of weeks ago. Moreover, as I also noted there seems to be an urgency evident in homebuyers who can make a buying decision.

The S&P SPDR Homebuilders ETF (XHB) is extending its breakout, even in the face of the recent climb in mortgage rates as traders factor in that next week’s mortgage rates are likely to fall in response to the rally in bonds.  You can check out my latest homebuilder picks with a Free Two Week trial to my service, here. 

Inflation is hurting everyone, but there is a solution.  If you’re looking for a to generate a paycheck via actively trading stocks, check out my active trader focused Substack page here. 

For ideas on how to hedge against risk, my latest video offers details on the successful use of put options in real time.  Check it out here.

Energy Stocks Test Key Resistance

The technology stocks are grabbing the headlines, but a more interesting trading set up is developing in the energy sector as West Texas Intermediate Crude (WTIC) is testing the $80 resistance area.  Behind the steady accumulation (rising ADI and OBV) is the situation in the Red Sea.

WTIC

Specifically, the ongoing attacks on transportation vessels have created a situation where shipments to OECD countries, especially in Europe, are being delayed, creating intermittent shortages of crude and gumming up the refining process. 

On the other hand, over the weekend, news hit that OPEC + increased production in January, despite having cuts on the books.  The group will offer new production guidance in the next few days.

The Oil Index (XOI), home to the large multinationals has been quietly moving higher since early January and is approaching the 2000 price point. A move above that would signal that traders are betting on large supply problems for the next few months.

I have several open positions in the energy sector, including options trades. You can review them with a Free Two Week trial to my service, here. 

Another Week. Another Set of New Highs All Around.

The NYSE Advance Decline line (NYAD) made a decisive new high on 3/1/24, confirming the new index highs on both the S&P 500 (SPX) and the Nasdaq 100 (NDX). This indicates that the recent momentum run in the market is intact.  RSI is still below 70 and NYAD is still trading inside the Bollinger Band envelope.  This suggests the rally has more room to rise in the short term.

The Nasdaq 100 Index (NDX) made a new high on 3/1/24.  The index closed above its upper Bollinger Band, which signals that the rally may pause in the short term.  A move back to the 20-day moving average is not out of the question.

The S&P 500 (SPX) made a new high as well. 5000 is short term support.  ADI and OBV remain in bullish patterns, but the index is overbought.

VIX Remains Below 15

The CBOE Volatility Index (VIX), once again remained below 15. This, remains a bullish factor for stocks.  If VIX remains subdued more upside is possible.  A sustained move above 15 will turn things bearish.

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.

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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.

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