Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Contrarian Wonderland Unfolds. A Grinding Uptrend and a Big Power Play Gathers Steam.

May 19, 2024

Tennis players hate playing against grinders. These are the types of players who are more than happy to stay on the court for hours and hit ball after ball. Grinder matches can last hours and are especially difficult in the summer heat. It’s a similar approach to that of football teams who punish their opponents with a hefty ground game. The goal is to wear the opposition out until they just give up and rejoice when the darned thing is over with, even if they lose. 

Trading this market is like playing against a grinder or defending against a “two yards and a cloud of dust” offense.  The secret is to grind back.  Here’s how to do it:

• Start every day as if yesterday never happened;
• When the market gets sloppy, smile and take a short break;
• Focus on what’s working; and
• When the day is done, be glad you’re still standing.

Those of us who can do this will continue to make money while others leave the field battered, bruised, and broke.

The Grinding Uptrend Rolls On.

Stocks and bonds calmed down by the end of the week.  Short sellers got crushed after the tamer than expected CPI number and muted retail sales pushed U.S. Treasury bond yields lower.   Meanwhile, the Dow Jones Industrial Average (DJI) hit 40,000.

If you missed the temporary Dow milestone, don’t worry.  Few seem to care. 

In the past a new round number milestone for the Dow would have been newsworthy.  But not last week.  Ho- hum, doom loop; whatever – just give me meme stocks.  

I’m liking it. The thick and sticky doom and gloom is bullish from a contrarian point of view, for traders in the right sectors.  I’m certainly not taking a victory lap.  The whole thing could unravel at any moment; although not yet, apparently; eyes wide open.

What’s more important is what’s next.  As I said last week: ‘while it’s foolish to be wildly bullish, until there is a bearish bent to the trading action, it’s not a good idea to ignore the market’s resilience either - warts, and all.”

The bottom line is that for now, the Fed is all talk.  It’s willing to threaten that it will raise rates, but it isn’t eager to do so for fear of crushing the economy in an election year.  On the other hand, there are no guarantees that future data will continue to run to the market’s liking. 

Still, more soft non-farm payrolls and more weak private market data -  ISM and PMI surveys-, along with continued softness in consumer confidence may signal that the April CPI wasn’t a one off and that the economy is really slowing.

Let’s hope it’s not falling off a cliff.

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

Last week I asked whether 4.5% was the new ceiling on the U.S. Ten Year Note yield (TNX).  Until proven otherwise it sure looks that way.  That’s because the bond market seems to be focused on the softening data and rolled over after a failed attempt by TNX to climb above 4.7% over the last few weeks.

After CPI TNX initially fell as far a 4.33% before rebounding by week’s end but remaining below the 4.5% resistance area.  This is a positive for the markets.

Meanwhile, mortgage rates eased in response to lower bond yields, with the average U.S. thirty year mortgage falling to just above 7%.  That means that it’s possible that next week’s mortgage average could fall below 7%. That could be a huge boost to the housing market as I discuss in detail here.

The bullish action in bonds and mortgages is likely to fuel another move in the homebuilders. The Invesco Dynamic Building & Construction ETF (PKB) is in a steady consolidation pattern with ADI and OBV moving sideways. This suggests that both short sellers (ADI) and long term investors (OBV) are waiting for the next catalyst.

That catalyst is likely to be a break below 7% on the average 30 year mortgage.  Next week’s existing and new home sales along with more Powell speeches will keep bond traders awake.

The Big Power Play is Unfolding

Over the last few months, a new megatrend has been accelerating as the markets recognize that EV adoption and AI are going to require more power than the current infrastructure can accommodate. As a result, companies which provide power infrastructure, build data centers, and provide power have been quietly moving higher.

A perfect example are the shares in Sterling Infrastructure (STRL) a stock which I recommended at Joe Duarte in the Money Options.com recently, and which we’ve traded profitably at the Smart Money Passport Substack in the past.  Sterling’s long term business has been in traditional infrastructure; roads and bridges. Yet over the last few quarters it has slowly transferred its focus to building data centers.

Guess what? The stock is up significantly, and seems to be building momentum. 

In fact, many similar companies are housed in the First Trust RBA American Industrial Renaissance ETF (AIRR), which has entered a consolidation phase, which may be offering a dip buying opportunity. 

But perhaps the best kept secret of this megatrend is power itself, which is best reflected in two usually out of favor sectors, natural gas and the utilities.  The price chart for the United States Natural Gas Fund (UNG), in which I recently recommended an option play at Joe Duarte in the Money Options.com, which is doing quite well is still in what could be the early stages of a likely bullish move which could extend into the summer.  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).

In addition, the action in the utility sector remains bullish.  We’ve had an open position in the Sector Selector Service for several weeks and which has done well for us.  The Vanguard Utilities ETF (VPU), is certainly due for a pause.  But any sideways action is more likely to be a pause that refreshes, and a likely opportunity for those who’ve missed the rally to participate over the next couple of months as the summer heats up.   

Finally, a I’ve been adding homebuilders and infrastructure stocks to the portfolios at Joe Duarte in the Money Options.com 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.

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.

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 Remain in Bullish Pattern

The NYSE Advance Decline line (NYAD) remains in an uptrend although it is overbought. A short term consolidation is likely. Support is at the 20 and 50-day moving averages.

The Nasdaq 100 Index (NDX) remained well above its 50-day moving average and 18,000.  We may see some volatility due to options expirations next week. ADI and  OBV held on to uptrends.

The S&P 500 (SPX) is in a similar pattern and may experience short term volatility. Bot ADI and OBV have remain constructive. A sustained move above 5250 would be a very bullish development.

VIX Rolls Over.

The CBOE Volatility Index (VIX), is back below 15 which is bullish.  Let’s see what happens during options expiration.

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 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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