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By Joe Duarte Editor Joe Duarte in the Money Options

Next Week Could be Spectacular.  CPI and PPI Will Set the Tone.

May 12, 2024

The bulls are currently in control of this market.  But the upcoming inflation data could change everything.  The best approach is to wait and see what the numbers tell us and what the market does in response.

Bullish Tone Ahead of CPI

The disbelief in the current market’s upside potential remains bullish, although short term concerns, especially about upcoming inflation data could reverse the recent bullish tone in the market.  Still, as each day passes where stocks don’t break down, so do the odds of an extension of the bull market rise.  Investors who can identify where the money is flowing will continue to prosper. 

Of course, given the nature of the geopolitical situation, the upcoming CPI and PPI numbers, and the daily gyrations in the news cycle related to the upcoming U.S. election, the ride to higher prices, barring a significant event driven derailment, is likely to be bumpy.  Yet, with the CNN Greed/Fear index continuing to register neutral readings as the New York Stock Advance Decline Line (NYAD, see below for details) makes new highs and the major indexes hold above key support, it’s hard to be bearish.

So, while it’s foolish to be wildly bullish, until there is a bearish bend to the trading action, it’s not a good idea to ignore the market’s resilience either - warts, and all.

Is 4.5% on the U.S. Ten Year Note the New Ceiling on Rates?

The “soft” data continues to take a hard turn.  Last week’s consumer confidence numbers plunged to levels not seen since 2021, with expectations for future inflation rising to cycle highs.  This increase in bearish sentiment from the public regarding inflation is like what economists were expecting ahead of the recent non-farm payrolls miss, and could be a sign that a contrarian bearish extreme in opinion is present.

Thus, this collapse in consumer confidence, may or may not be a contrarian sign that the upcoming CPI and PPI numbers may fall short of expectations.  On the other hand, the public may well be right, and the numbers may be worse than expected.  Thus, I’m not making any bets on the numbers, preferring to see what the numbers tell us and what the market does in response.   Needless to say, the bond market will set the tone as to what happens in stocks.

Ahead of the inflation numbers, the U.S. Ten Year Note Yield (TNX) is testing the resistance posed by the 4.5% yield, which until recently was support.  Yields dropped after the recent miss in Non-Farm Payrolls and last week’s higher than expected jobless claims numbers.  Both suggest that the labor market is slowing.  This labor market dynamic is at least partially responsible for the decline in consumer confidence.

As always, the connection between the U.S. Ten Year Note Yield and mortgage rates is worth exploring. And as I recently wrote, barring a negative surprise in CPI and PPI, the bond market is poised for a bullish run, which could potentially bring in large numbers of market timing home buyers in from the sidelines.  Last week’s average mortgage rates rolled over in response to the recent reversal in TNX.

A move below 4.5% on TNX is likely to push mortgages down toward 7%.  If there is a sizeable decline in TNX, the odds of a fall below 7% in the average mortgages will rise.  Then, everything will get interesting.

Where the Money is Flowing. Think Real Estate, Tech, Industrials, Power Generation, and Infrastructure.

Aside from the interest rate driven potential for real estate and homebuilder stocks, money is flowing into some areas of technology with the VanEck Vectors Semiconductor ETF testing the key $220-$225 resistance area sandwiched between the support of its 50-day moving average.  A move above $225 could signal that a new up leg in the sector is developing.

Meanwhile a similar setup is forming in the Invesco Dynamic Building and Construction ETF (PKB), which contains heavy industry construction companies diversified with homebuilders and materials companies. 

This ETF is in a bullish consolidation pattern which should resolve to the up side if bond yields remain tame.  Both the ADI and OBV lines are moving sideways which suggests that both short sellers (ADI) and buyers (OBV) are waiting for what happens with the inflation data before making decisions.

A similar picture is evident in the iShares U.S. Home Construction ETF (ITB), which is testing its 50-day moving average as bond yields test the 4.5% area.  I’ve been adding homebuilders and infrastructure stocks to the portfolios at Joe Duarte in the Money for the last few weeks. Those trades are starting to pay off nicely, but they still have room to rise under favorable conditions. Check them out with a FREE Two Week Trial to the service here.

The United States Natural Gas Fund (UNG), in which I recently recommended an option play at Joe Duarte in the Money, remains very constructive as investors factor in the potential for higher gas prices as the summer heats up. Note the encouraging action in both the ADI and OBV lines as short sellers (ADI) bail out and buyers are starting to move in (OBV).

Finally, the quietest bull market of late has been in the utilities, where we’ve had an open position in the Sector Selector Service for several weeks and which has done well for us.  Note the action in the Vanguard Utilities ETF (VPU), whose accelerated rise is due for a pause.  This rally in the power generation sector makes sense, and goes along with the rally in UNG. That’s because power demand is on the rise and will likely remain elevated for some time as infrastructure projects increase and natural gas is plentiful and inexpensive, for now, as a power generation fuel.

In this video, I show you how to spot the price chart set up for short squeezes and how to trade it. 

No matter what the market does, 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.

Buy Me A Coffee

ETFs make sense in this market as they let you trade sectors which can withstand inflation and volatility. My new service, Joe Duarte’s Sector Selector is all about ETFs and tactical trading.  It’s FREE with your monthly membership to Buy Me a Coffee.  Sign up here.

NYAD, SPX and NDX Recover.  Test of Major Resistance Ahead.

The NYSE Advance Decline line (NYAD) made a series of new highs last week, suggesting that the market is in a new uptrend, barring negative surprises.

The Nasdaq 100 Index (NDX) climbed above its 50-day moving average and 18,000.  ADI is rising as short sellers get squeezed.  OBV is stable but needs to turn up to fuel a continuation of the rally.

The S&P 500 (SPX) has a more reassuring look than NDX.  The index is within reach of a new high, while both ADI and OBV have turned up. A sustained move above 5250 would be a very bullish development.

VIX Rolls Over.

The CBOE Volatility Index (VIX), failed to rise above 20 in the recent correction and has now rolled over. This is bullish. If VIX rises above 20, expect more volatility in stocks.  VIX is back below 15 which is bullish.

VIX rises when traders buy large volumes of put options.  Rising put option volume leads market makers to sell stock index futures to hedge their risk and leads markets lower.  A fall in VIX is bullish signaling lower put option volume, eventually leads to call buying which is bullish as it causes market makers to buy 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 - 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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