Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Summer Trading Guide: Markets are Due for a Break. Prepare for a Continued Grind.

May 26, 2024

Iconic rock vocalist Robert Plant, while he was fronting Led Zeppelin once crooned: “The Song Remains the Same.” When it comes to the stock market, you can bank on that.

A couple of days after a lackluster milestone (40,000 on the Dow), stocks delivered the traditional options expirations week Thursday spectacle with a 600 point drop in the same Dow Jones Industrial Average (INDU), which sent the index back down to its 20-day moving average.  As options expirations go, on Friday, the index bounced back, but remained below 40,000.

Grinding on my wayward son.  I’ll stop with the classic rock references now.

The Seasons Are Changing

The first trading day after Memorial Day is traditionally the start of the so called Summer Rally, which extends until the Friday before Labor Day. It’s also a period when the big money on Wall Street traditionally goes on vacation, leaving the “junior staff” in charge. 

That’s why the months of May-August on Wall Street are sometimes known as the “Summer Doldrums” which give way to the “Dog Days” of August.  But don’t be fooled, things can still happen, as in next week’s response to the PCE inflation data.

The summers used to be where young traders “held down the fort” for the big guys. Now, the fort is held down by newly hired algo programmers (aka quants).  That’s because the algos run the shop year round. So, if there is a summer rally, it’s because the algos like the order flow and the technicals are ripe for a rally.

And just to be clear. I prefer a market run by algos to one run by crafty Wall Street old timers who sit behind their desks plotting the demise of other traders.  The beauty of algos is that they just trade, whether the market rises or falls.

On the other hand, it’s quite plausible that, as they dim the lights for the summer, the machine handlers will tune the programs down some to where they do the least harm on dull trading days and focus on responding to news headlines.  Maybe.

I for one, will be slowing down a bit over the next few days, but still watching things, so there may be fewer posts and alerts until next week (hold the applause, I’ll be back). 

So, is the market going to change this summer?  I think not. I expect a mix of dull trading days where prices drift lower interspersed with days of rapid trading action when numbers are released. 

Above all things, keep an eye on the action in the New York Stock Exchange Advance Decline line (NYAD, see below for full details), the U.S. Ten Year Note yield (TNX) and stick with what’s working. 

The Housing Market is at a Critical Point.  4.5% on the U.S. Ten Year Note Continues to Hold.

The housing market is poised to make a big move based on how the supply shortages of single family homes and interest rates play out. Lately, sales of new and existing homes have fallen. Yet, as I detailed here, if interest rates remain stable, or drop, I expect supply and demand will rebalance with a rise in sales, especially in new homes.  There may be some turbulence in the next few days as the PCE data could come in stronger than expected and push bond yields higher.

Ahead of the number, the bond market is stuck on neutral.  Every time new data suggests inflation is rising bond yields rise. The opposite happens when the news suggests otherwise.  Yet, the ceiling of 4.5% on the U.S. Ten Year note (TNX) is holding.  Let’s see what happens after the PCE is released.

If TNX falls below 4.34%, which coincides with the 200-day moving average, it would push mortgage rates lower.  Moreover, as I noted here, mortgage rates are currently flirting with an important long term buyer decision level as they just broke below 7%.

The iShares Homebuilders ETF (ITB) is holding at a key support level while nearing an oversold reading on the RSI.  It has good support all the way down to the $95-$100 area.

Watching the Out of the Mainstream Sectors

What can you say about those AI stocks other than WOW!  Aside from the impressive results of the sector kingpin NVIDA (NVDA), the spillover effects into the semiconductor and related software sector haven’t been too shabby. 

Still, all this computing power and data center building needs fuel, which is why I’ve focused on the energy sector quite a bit lately, mostly with picks in the uranium and natural gas sector, which you can view in full detail, along with the results of a blockbuster options trade which I detail below via a FREE Two Week trial to Joe Duarte in the Money Options.com.

One of these stocks in our Momentum Plus Portfolio is Canadian uranium miner Cameco Corp. (CCJ), whose shares are on the verge of a potentially meaningful breakout.  Cameco specializes in fuel grade uranium, the stuff that powers nuclear plants. This uranium grade will likely increase in demand over the next few years as power consumption increases from AI related demand. Smart money continues to build positions here.

I’m also keeping an eye on the large cap oil stocks, as in the Energy Select Sector SPDR Fund (XLE).  Big oil has taken a bit of a pounding lately as they ramped up production in the shale basins in the U.S. while OPEC cut back production.

Keep an eye on the $88 area in XLE.   That’s where the 200-day moving average and a shelf of VBP bars suggest the support is.  Simultaneously, the RSI is closing in on 30, which sets up the conditions for a rally in response to events.

Natural gas is due for a rest, but not before delivering a nifty 400-Plus percent gaining option trade, which we recently closed out featuring the U.S. Natural Gas Fund (UNG).  I think, after a pause, UNG may be worth another look.

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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 Keep Bullish Tone

The NYSE Advance Decline line (NYAD) remains in an uptrend and is no longer overbought as the RSI fell to 50 this week. Expect some short term backing and filling. Support is at the 20 and 50-day moving averages.

The Nasdaq 100 Index (NDX) again remained well above its 50-day moving average and 18,000.  Much of the move in NDX was related to NVDA’s gains last week. ADI and  OBV held on to uptrends, but the index may register some flat days in the short term.

The S&P 500 (SPX) is set to enter a consolidation pattern between 5150 and 5350, although a move back down to 5000 is not out of the question in the short term. Midpoint support is at 5250.

VIX Falls Below 12

The CBOE Volatility Index (VIX), broke below 12.  This is a very low level, which means we may see an increase in volatility if negative events develop.

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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