Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Green Light for the Bulls?  Bitcoin, Oil, Homebuilders, and the Fed’s Good Cop Bad Cop Act.

March 31, 2024

A flurry of new highs suggests the green light is still on for the bulls. 

Wall Street is betting that the Fed’s talk of eventually lowering interest rates in 2024 will be good enough, in the short to intermediate term, to keep stocks from crashing.  So far so good, as stocks keep making new highs.  Still, the level of complexity in world events suggests that even though the Fed may be truthfully hoping to lower rates, there are too many uncertainties to guarantee anything, including lower rates.

If you’re confused, who can blame you? Take for instance the Fed’s Good Cop, Bad Cop act.  That’s where Chairman Powell says dovish things and the market rallies and then Fed Governor Waller follows up by saying there’s no rush to cut rates, and things get hazy. 

Meanwhile, the data remains benign, at least on paper.  GDP came in a bit stronger, while the GDP inflation data was better than expected. Of course, those were old numbers.  The February PCE number, released on Good Friday, came in as expected, and was followed by Chairman Powell’s interview in which he noted the PCE data was heading in the right direction.

We’ll see how the market responds to the PCE, Powell’s past and upcoming comments (4/3/24), this week’s data: ADP private payrolls, JOLTS jobs opening data, a host of PMI and ISM reports and the official government payroll numbers on Friday.

My recent poll on the economy (expired on 3/31) shows that only 38% of responders are worried about the economy.   I’ve just added a new poll – Will the Nonfarm payrolls number come in above or below 200,000 new jobs.  Vote here. 

In the end, all markets are based on the prevailing risk appetite amidst the trading crowd.  And in this market, there is no better indicator with which to measure the willingness to take risk than Bitcoin.

Bitcoin is a Pure Measure of Animal Spirits

One of the most compelling indicators of money flows in the financial markets is Bitcoin (BTCUSD).  Because Bitcoin is a pure supply and demand market which beats to its own drum – mostly regardless of what bond yields do, or what the most recent economic data or company earnings suggest – it’s an excellent measure of the willingness of traders to bid prices higher – animal spirits.

Bitcoin’s price chart is a pure study in technical trading, in that its price is purely indicative of whether buyers or sellers are in charge or how willing they are to risk their money on the cryptocurrency.  It is thus plausible to consider its price action as a potential predictor of what may happen in other markets.

Currently,  the animals are buying.  Note the early March textbook pullback into the lower Bollinger Band and the display of support at the level, as the ADI line moved higher (short covering) just as the support was tested.   In addition, note that the OBV line (real buyers) turned up a few days after the short squeeze.  Moreover, the cryptocurrency is currently consolidating with support at $62,500.

If you’re skeptical, note the correlation of the rally in BTCUSD to the recent action in the S&P 500 (SPX – lower panel on the chart).  Specifically, consider the nearly simultaneous beginning of the rally in both in October 2023. The key is what happens at or near $74,000 on the upside and $62,500 on the down side.  I suspect that if that resistance level is taken out, we’ll see another leg up, which could well be followed by higher stock prices.

So, as we marvel at the action in Bitcoin, it’s good to keep 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;
• Protect your gains with sell stops. Raise them as prices of your holdings rise;
• Trade one day at a time; and
• Keep an eye on Bitcoin

Bond Yields Set up for Big Move

The bond market remains in a holding pattern after Q4 GDP o Friday’s PCE deflator number from the Fed, which was followed by a dovish interview by Fed Chairman Powell.  A big move in TNX is setting, though, as the Bollinger Bands are starting to squeeze in around yields.  This type of decrease in volatility usually precedes a big move.

The U.S. Ten Year Note yield (TNX) is trading inside the 4.1-4.4% trading range. As I’ve recently noted, a move below 4% or above 4.4% will set the stage for the next trend – up or down. 

Your views on inflation are worth noting, at least based on my recent poll. Despite a small sample, 50% think “inflation is stable,” while 25% voted it’s falling and 25% think inflation is stable.

No matter what, I have a solution for inflation and your wallet.  Grab a paycheck via actively trading stocks, via my active trader focused Substack page here.  New trades are posted on Mondays.

A Surge in Home Buying Activity May be Around the Corner

The trading range in TNX has kept mortgage rates below 7% creating a climate of market timing in the housing sector, akin to a game of cat and mouse. That’s because anytime mortgage rates dip, sellers decide to sell and buyers are more willing to buy.

The S&P SPDR Homebuilders ETF (XHB) made another new high, as stable bond yields and steady mortgage rates boosted the sector’s potential.   

The key mortgage rate remains 7%. And last week’s average rate of nearly 6.8% could well bring in some of the market timers, who’ve been sitting on the sidelines into the market.   If rates remain below this key point, we are likely to see an increase in sales.  That would be another bullish influence for homebuilders.

You can check out my latest homebuilder picks with a Free Two Week trial to my service, here. 

Oil Gushes. Short Squeeze Develops.

West Texas Intermediate Crude (WTIC) is holding above $80, as economic data and potential supply issues fuel gains.  Add a potential short squeeze to the mix and we may get some fireworks as ADI is moving higher (short covering) and OBV is turning up (buyers coming in).

Meanwhile, the energy stocks are moving nicely higher. The iShares U.S. Oil & Gas Exploration & Production ETF (IEO) just broke out.  Both ADI and OBV are moving higher, again suggesting that there may be more upside ahead; perhaps after a short pause, as the RSI is well into the overbought territory.

You can review my energy sector picks with a Free Two Week trial to my service, here. 

NYAD Remains in Uptrend.  NDX Cools Off. SPX Holds Steady.

The NYSE Advance Decline line (NYAD) made yet another series of new highs, keeping the bullish light on.  NYAD is overbought (RSI tagging 70), but remains resilient.  A pause certainly is overdue. Short term support remains at the 20-day moving average.

The Nasdaq 100 Index (NDX) is consolidating now as NVDA is cooling off. The index is due for a pullback toward !7500-18000.

The S&P 500 (SPX) made a marginal new high, but has less momentum than NYAD.  At some point, SPX will test the 5000 area or drop as far as the 50-day line.  ADI is moving lower (short sellers moving in) OBV is steady (buyers are not giving up).

VIX May Have Made a Short Term Bottom.  Put/Call Ratio Surges.

The CBOE Volatility Index (VIX), remains below 15, and moved lower during the week.  The Put/Call ratio rose last week, suggesting some bearish sentiment is setting in. If VIX reverses its recent upturn, more upside is possible for stocks.  A sustained move in VIX above 15 will turn things increasingly 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.

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