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By Joe Duarte Editor Joe Duarte in the Money Options

Got the Wall Street Summertime Blues?  Don’t Panic and Take Care of Business.

June 16, 2024

Got the Wall Street summertime blues?  “Take care of business and work overtime.”

It’s easy to get rattled in this market.  Yet, Canadian classic rockers Bachman Turner Overdrive might have given us the solution with their iconic lyrics.   Yup, this is one of those markets when rolling up your sleeves, and “taking care of business and working overtime,” is the answer.

Getting Your Groove Back

It’s hard to get in a trading groove these days. If you fell asleep at your trading screen you missed one of the best trading days of the year when the May CPI came in below expectations on 6/12.  But by the next day, Wall Street was back in yawn mode, even as the PPI was better than expected.  And the grind resumed by Friday.

That’s because the Fed isn’t likely to lower rates before the election unless the economy starts slipping aggressively, inflation implodes, or some combination of both.  And yes, I know the market is betting on a September rate cut.  I’ll believe it when I see it.

So, does all the gloom and doom and intraday ups and downs mean that there aren’t stock sectors worth trading? Not at all. In fact, even if the Fed doesn’t cut rates, as long as bond yields remain tame, as I discuss below, there are places in the stock market with positive money flows.

Let’s Take Care of Business

The summer trading season is getting dicey.  But panicking is not the answer; sticking to what works is.  So, here’s is the taking care of business checklist:

  • Expect the unexpected; especially during the current shifting economic sands and the volatile political and geopolitical climate – THERE ARE NO SURPRISES – JUST EVENTS;
  • Stay patient and stick with what’s working – if any position holds up, keep it;
  • Hedge if you must, but no matter what raise cash by reducing position size in profitable trades;
  • Consider trading options to reduce market exposure; and
  • Don’t worry – I’m compiling a shopping list.

Bond Yields Are in Long Term Downtrend as Fish Taco Chain Closes One Third of California Shops

Now, as they say, it gets interesting, as the U.S. economy may be sputtering while, as I describe below, the post-election situation in France has spooked European bond traders.  Is it a preview of a post November U.S.?

Spoiler alert.  We’ll get through it.

Even though the stock market is fluttering about in an unsteady consolidation pattern, the bond market is suddenly acting in a more bullish fashion. Of course, when bond traders get bullish, it often means that the economy isn’t on such strong footing, which is where the rise in the most recent jobless claims numbers come in and make you wonder if something isn’t changing in jobs land in a hurry.

Specifically, the latest number of jobless claims came in well above expectations with large increases in California, Minnesota, Pennsylvania, and Texas.  Some analysts are attributing the California numbers to the recently enacted minimum wage laws triggering layoffs in fast food restaurants.  Recently, Rubio’s Coastal Grill closed one third of its 134 Southern California restaurants citing “the rising cost of doing business in California” as the reason.  Two days later, the company filed for bankruptcy.  Rubio’s says its goal is to sell the business. 

Rubio’s is not alone. While companies like Rubio’s and Red Lobster grabbed the headlines, under the radar, other companies like Denny’s, Cracker Barrel, Hardee’s, Outback, Applebee’s, Boston Market and TGI Friday’s are closing restaurants/

Thus, it is now plausible to consider that no matter what the monthly payrolls number tell us, at least one segment of the economy, fast food/casual dining restaurants, are reaching a point where many won’t be able to continue operating.  That means an increase in joblessness may be just around the corner.

In addition, U.S. Treasuries may be benefitting from the developing political situation in France where PM Macron called for snap elections after suffering a defeat in the recent EU election.  Some analysts suggest that a new government may incite a debt crisis in Europe, which may spill into the currency markets.  Yikes!

The U.S. Ten Year Note yield (TNX) is well below its 200-day moving average, which means that until proven otherwise, the bond market is betting on a slower economy with perhaps a slowing, or even a reversal in inflation.  All of which brings me to two important interest sensitive sectors in the stock market.

As I discussed in an earlier post this week, there is rising evidence of  market timing in the housing market.  As usual, given that housing accounts for 16% of GDP, it’s important to keep track of how homebuilders and home rental REITs are faring in response to falling interest rates.  Currently, the action in the homebuilders is a bit dampened as fears of an economic slowdown pushing down new home sales is rising. The iShares U.S. Home Construction ETF has been flat of late. Note the intraday reversal on 6/14/24, a sign that smart money moved in at the end of the day as short sellers covered.

On the other hand, the action in the REITs, fueled by expectations of a rise in rental tenants is moving money into the iShares U.S. Real Estate ETF (IYR).  I have holdings in several well positioned homebuilders and home rental ETFs.  In addition, there are opportunities to buy stocks that have been hammered after bad news.  Note the shrinking Bollinger Bands suggesting a big move is coming.

Finally, in case you missed it, the average 30-year mortgage is now below 7%.  Let’s see what happens in the next couple of weeks when it comes to buyers in the market.

I’ve been bottom fishing in the homebuilder and REIT pond lately and you can review what I’ve caught with a FREE Two Week trial to Joe Duarte in the Money

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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.

No New Highs in Market Breadth Fail to Confirm Index Highs.

The Nasdaq 100 and the S&P 500 made a series of new highs last week. But the New York Stock Exchange Advance Decline line (NYAD) didn’t rise to the occasion. This negative divergence between the indexes and the market’s breadth could be a prelude to more selling as the summer progresses.   Keep an eye on the NYAD’s 50-day moving average which has been an excellent support level since the November 2023 bottom.

The Nasdaq 100 Index (NDX) continues to make new highs behind the AI stocks, but it is overbought and due for a pause.  The RSI has been above 70 for the past couple of weeks although ADI and OBV are still in bullish mode.

The S&P 500 (SPX) is offering a similar technical picture to NDX, with both ADI and OBV rising while the index is overbought.  In both cases, the odds favor more of a sideways correction than an all out decline

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.

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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 - 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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