Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Last Week was Just a Prelude.  A Big Move is Coming in Stocks.  Will it be Up or Down?

June 2, 2024

The conditions for a big move in both stocks and bonds are in full motion, as I describe in detail below.  The question, of course, is the direction. 

Why I Don’t Like to Take Vacations

Every time I take a vacation, the market goes nuts.  So, as usual, as I took a week off, things got bumpy. 

As I noted over the past few weeks, we are in the “Summer Doldrums” for Wall Street. This is a time when senior traders go on vacation and leave the junior staff in charge.  Of course, these days that means that the experienced quants who program the algos are away while the younger quants, perhaps some just out of MIT and Stanford’s high flying math programs are in charge.

What that means is that, for better or worse, days without meaningful data are usually sleepers, while data days can be quite exciting or harrowing, depending on the data.  Thus, last week’s volatility was not surprising.  What’s more important is what’s next, as foreshadowed by an indicator which is warning about a big move which is on the way.

What’s Really Happening

There are no coincidences.  Last week’s weird market brings to mind an interesting passage in Michael Lewis’ account of the misadventures of the now disgraced crypto king, Sam Bankman Fried (SBF) and his early days on Wall Street – “Going Infinite.” According to Lewis, SBF was a gifted quant, and his firm loved him so much that they put him in charge of a significant amount of money related to the 2016 election.  SBF along with many people on Wall Street bet heavily on a Trump defeat.

We all know what happened, of course.  The bet, according to Lewis, cost SBF’s firm hundreds of millions of dollars.  

My point is not to talk politics, especially after recent events, but to point out what can happen when a young computer wizard is given large sums of money and free rein to use it.  In other words, even though SBF’s bet wasn’t during the summer, it’s logical to consider the possibility that there are youngsters like SBF was at the time, who were in charge of hundreds of millions of firms’ trading capital last week. 

Yeah!  The inmates are running the asylum.

But here’s the flip side. When the big guys are away and the junior staff is given a free hand, unexpected stuff can happen.  Lucky for us, the price charts are excellent tools for discerning what the big money is doing.  And, unless I’m wrong, some big guys took advantage of the inexperienced last week.

It’s going to be a long summer. 

The Economy is Slowing.

The decrease in the quality of economic data started with last month’s lackluster non-farm payrolls and worse than expected GDP growth. 

Last week we got downward revision of GDP with a mixed bag of jobless claims as earnings for retailer Kohls (KSS) and database software giant Salesforce (CRM) missed expectations.  Both suggest that the economy is weakening and that large businesses as well as consumers are starting to pull back their spending.

Inside of GDP the PCE deflator (a measure of inflation) was lowered.  All of which brings us to the big number of the week, the Fed’s PCE which came in close to expectations.  On the other hand, the Chicago PMI index came in well below expectations with a reading the likes of haven’t been seen since the worst levels of the pandemic.

Next week’s non-farm payrolls should be a big market mover.  The market is already setting up for it.

4.5% on the U.S. Ten Year Note is Now Support.  Big Move is Coming.

All of which brings us back to the bond market where despite the increasing evidence of a weakening economy, the U.S. Ten Year Note yield (TNX) breached the 4.5% level on the upside, which means that resistance is now support. 

The game is certainly afoot in bond land as TNX is caught between the 20 and the 50-day moving averages. Thus, a break above or below these important lines will set up what happens next.  To add to the drama, note the shrinking Bollinger Bands, which means that a big move is coming.  Bollinger Bands measure volatility. When the bands shrink, it signals that volatility is coiling up and that a big move is coming.

Get ready.

Mortgages bounced back above 7%, although they remain below the all-important 50-day moving average.

Perhaps the sleeper of the week was the homebuilding sector, which remains in a consolidation pattern with bullish potential despite all the volatility we’ve seen in the sector over the last few weeks. 

The iShares Homebuilders ETF (ITB) is still holding above a key support level while nearing an oversold reading on the RSI.  Moreover, both the ADI and OBV have both turned up as short sellers (rising ADI) are covering their tracks and buyers are buying the dip (rising OBV).  The consolidation suggests long term players are being patient as they know supply and demand remain in favor of the homebuilders.

Short Sellers Prop Up QQQ.  Big Move is Coming Here Too.

The Invesco QQQ Trust (QQQ) is a prototype for what’s happening in the overall market.  Despite the recent volatility, QQQ:

• Closed the week above its 20 and 50-day moving averages;
• Is in the midst of a short covering rally as ADI is rising;
• Buyers are not convinced yet, as OBV is heading lower;
• RSI looks set to test 50.  A move below 50 would likely take the RSI to oversold, which would take further selling; and
• The Bollinger Bands are closing in around the 20-day moving average.

In other words, a big move in QQQ is imminent and the direction of the money flows here are likely to tell us a whole lot about what happens in the overall market.

Meanwhile, the hot money continues to move into the utilities sector  The Vanguard Utilities ETF (VPU) is nearing a breakout as the Bollinger Bands shrink around the 20-day moving average.  What makes this most interesting is what you see when you compare it to the SPDR S&P Software & Services ETF (XSW), where some large AI related companies live.  Note, however, that RSI is nearing 30, which means that XSW is getting very oversold.

And perhaps the most contrarian play of the moment is the small stock space.  Check out the action in the iShares Core S&P Small Cap ETF.  Talk about relative strength.

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.

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NYAD Shows Resilience

As I noted above, it’s hard to be bearish when the market’s breadth holds up. And that’s where we are.  The NYSE Advance Decline line (NYAD) survived some tough days and ended the week above its 20 and 50-day moving averages and within striking distance of a new high.

The Nasdaq 100 Index (NDX) had a short covering led reversal on 5/31/24 and is still above its 50-day moving average and 18,000.  Much of the move in NDX was related to NVDA’s gains last week. ADI is bullish but OBV is turning negative.

The S&P 500 (SPX) is in slightly better shape than NDX as both ADI and OBV are rising.  That means short sellers are being forced to cover (ADI) by buyers (rising OBV).

VIX Falls Below 12

The CBOE Volatility Index (VIX), almost hit 15 last week, but ended just above 12.  A move above 15-16 would be very bearish.

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.

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