Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Steroid Juiced Market on Tap as CPI and the Fed Loom.  There’s Some Buying on the Dips.

June 9, 2024

Hurry up and wait.  You know you’re in the Summer Doldrums when two central banks – the Bank of Canada and the European Central Bank – lower interest rates in the same week and the markets basically yawned. But that’s where we are.

Still, don’t fall asleep in front of your trading screen!

I know that’s asking for a lot these days. But the upcoming week’s trading action, fueled by CPI and the Fed could give the junior staffs on Wall Street’s trading desks a virtual steroid shot – Ugh! Of course, like with any shot of steroids, the effects may be short lived while leaving behind a wicked hangover.

Why Didn’t I take a Longer Vacation?

I’ve been back for a week, and I’m already frustrated by the Summer Doldrums.  Aside from the constant directional changes, I’m not pleased with the suddenly messy relationships between asset classes.

Consider the correlation between stocks and bonds.  On the one hand, some data suggests a slowing economy, which until the most recent employment report was pushing bond yields lower.  Falling bond yields are usually bullish for stocks as they imply that the Federal Reserve is getting closer to cutting rates.

But lately, that’s not a reliable pairing.  You can see it in the relationship between the U.S. Ten Year Note yield (TNX) and the housing sector, as in the S&P 500 Homebuilder Subindustry Index (SPHB).

As the price charts show, until recently, during previous declines in TNX, SPHB would move higher.  Of course, that’s because lower interest rates induce potential home buyers off the sidelines. In fact, I’ve written about this multiple times over the last few months, describing any meaningful decline in interest rates as a potential opportunity for market timing in the housing market.

Yet, of late, even nice drops in yields have had little effect on SPHB, while any rise in TNX immediately takes the wind out of SPHB’s sails.  In addition, building material stocks are starting to lag, which suggests that any fall in bond yields is less a move on an expected reduction in inflation and more of a rise in recessionary expectations; as the price chart for the Materials Selector SPDR Fund shows.

All of which makes me a bit nervous about next week’s CPI report and what the market will do if the number is above expectations.

Evidence of Dip Buying

So, if everything is so bad, then why are we seeing money come into some areas of the market after just about every data induced selloff?  

It’s evident when the news is seen as bad and there is selling in the first half of the day.  By the afternoon, buyers seem to turn up.  In other words, we are in a consolidation pattern, which is normal for the Summer Doldrums. Moreover, there are dip buyers waiting to scoop up stocks at lower prices.  More than likely, it’s market makers replenishing their stock inventory.

You can see the dip buyers came into the iShares U.S. Real Estate ETF on 6/7/24 as the ETF closed well off its intraday low of $85.77.  Note the rise in the ADI line suggesting short covering.  Thus, even though this is not a time to be complacent, in this market patience will be rewarded.  On the other hand, if the current intraday trading pattern is broken, our concern should rise appropriately.

Stick with what’s working. Mind your sell stops.  And trade each position one day at a time.

Mixed Payrolls Number Raises Questions

The market responded to the NFP headline. But inside the report there is plenty of conflicting data, which when sorted out may reverse Friday’s bond rout.

Remember, April’s lackluster non-farm payrolls and worse than expected GDP growth?  Those numbers were forgotten with the May payrolls.  But before that there were plenty of mixed inputs from purchasing managers where the S&P Global and ISM purchasing manager’s came in just above and below the 50 level; offering little direction.

That means that any growth is slow growth, unless you count wage growth, which for most people is fine and dandy, but for bond traders is bad news.  Still, NFP was mixed with the establishment survey (full of statistical models) delivered strong growth, while the household survey (based on people’s answers to questions) delivered much weaker data.  The household survey jibed more with the ADP private payrolls number which came in below expectations as the job openings data (JOLTS) also underperformed estimates. 

4.5% on the U.S. Ten Year Note Holds. Despair in Housing is Evident.

In true Summer Doldrums fashion, there is a lot of jogging in place and little movement, even in the bond market.  Despite the “strong” jobs number, the U.S. Ten Year Note yield (TNX) stubbornly remained below 4.5%.

Meanwhile, mortgage rates edged below 7%, which is an interesting development given the despair which is registering in the housing market, as I detailed here.

QQQ Makes New High

And as I noted last week, money continues to move into the Invesco QQQ Trust (QQQ), an excellent bellwether for the overall market as short sellers continue to move out.  Note the rise in the ADI line while the OBV line is rolling over.

Meanwhile, we may be closing in on a bottom in the oil stocks as the recent selling may be overdone and there are rumors that the U.S. is about to start refilling the Strategic Petroleum Reserve as crude oil prices have recently fallen.  The U.S. Oil Fund (XLE) is increasingly oversold and bears watching.

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.

For its part NVDA, just ahead of its upcoming 10 for 1 split is very overbought, although in no danger of a long term breakdown, while offering a chance to buy dips on moves to the 20-day moving average.  Still, there is plenty of potential in other AI related chip stocks.  I just recommended one at the Smart Money Passport, which you can check out here.

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.

I’ve been bottom fishing stocks which have been hammered after bad news and still have excellent prospects.  You can see which ones with a FREE Two Week trial to Joe Duarte in the Money Options.com.

NYAD Treads Water. NDX Makes New High.

In true Summer Doldrums fashion, the New York Stock Exchange Advance Decline line (NYAD) is treading water while trading near a new high. NYAD is testing short term support at the 20-day moving average but remains well above its 50-day line, which is reassuring. At the same time, I’m watching the lack of confirmation from NYAD on the new highs from SPX and NDX.

The Nasdaq 100 Index (NDX) made a marginal new high, as short sellers continue to move out of the market (rising ADI line). On the other hand, buyers are starting to pull away, which is of some concern (OBV line seems to be stalling).

The S&P 500 (SPX) ended the week with a bullish engulfing pattern (most recent rising candle is much larger than previous bearish candle).    As with NDX, short sellers covering positions (rising ADI), as buyers are less bearish than on NDX (OBV is still rising).

VIX Still Hugs 12

The CBOE Volatility Index (VIX), again ended the week 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.

To get the latest up to date information on options trading, check out “Options Trading for Dummies”, now in its 4^th Edition – Available Now!

#1 New Release in Options Trading

Now in Audible Audiobook Format

Options Trading for Dummies (4th Edition)  Audible Audiobook – Unabridged

Joe Duarte MD (Author), Terrence Kidd (Narrator), Tantor Audio (Publisher)

4.5 out of 5 stars    61 ratings

#1 New Release in Investment Analysis & Strategy

# 1 New Release on Options Trading

Good news! I’ve made my NYAD-Complexity - Chaos charts featured on my YD5 videos, and a few more available here.

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.

A Washington Post Color of Money Book of the Month is now available.

To receive Joe’s exclusive stock, option, and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

JoeDuarteInTheMoneyOptions.com is independently operated and solely funded by subscriber fees. This web site and the content provided is meant for educational purposes only and is not a solicitation to buy or sell any securities or investments. All sources of information are believed to be accurate, or as otherwise stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com have no financial interest in any of the sources used. For independent investment advice consult your financial advisor. The analysis and conclusions reached on JoeDuarteInTheMoneyOptions.com are the sole property of Dr. Joe Duarte.