Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Momentum is Alive.  When the Unexpected Happens, Just Follow the Money.

July 7, 2024

Momentum is alive.  Both the S&P 500 (SPX) and the Nasdaq 100 (NDX) indexes blew past recent resistance, making new highs.  But the action remains highly selective.  On the other hand, the wall of worry is well established and if CPI and PPI don’t deliver a nasty surprise, investors who focus on where money is flowing will continue to be rewarded.

Don’t Let Events Derail Your Trading.  Buckle Up and Follow the Money.

Over the past few weeks, I’ve focused on money flows and the internal action in the stock market.  I’ve based this on the notion that unexpected events are to be expected during the election season.  And as they say in Texas - “sho nuff” – the unexpected has happened.  You fill in the blanks.  Moreover, it’s quite likely that the unexpected will now be the norm. 

The potential surprises are everywhere, and the odds of just about everything speeding up are rising.  For example, as everyone focuses on the U.S. election drama, Putin is flying trial balloons about ending the war in Ukraine.   So, here is the bottom line once again:

• Expect the unexpected; THERE ARE NO SURPRISES – JUST EVENTS;
• Stay patient and stick with what’s working – if any position holds up, keep it;
• Raise cash, trade small, hedge as necessary; and
• Consider trading options to reduce market exposure.

Just remember, politics isn’t about rhetoric. It’s about home money is dispersed in society.  Thus, I remain focused on how Wall Street is handicapping the current domestic and geopolitical situation, and following the money.

Bonds, Bonds, Bonds and the Quiet 20%

When in doubt, look at the bond market.   That’s because the world runs on debt. And until proven otherwise, the U.S. Treasury market is the premiere bond market in the world; because, traditionally, the U.S. always pays its bills.  Of course, the bills get paid via the sale of more treasury bonds, which in turn guarantees that the bills will never get paid.  But since, no one seems to care, until proven otherwise, the bond market remains an excellent indicator of what Wall Street is thinking.

Thus, even though the stock market grabs all the headlines, what matters in T-bond land is more important.  Furthermore, aside from the trillions traded in the treasury market on a weekly basis, U.S. T-bond and T-Bill yields are often the benchmarks for important consumer and corporate finance rates.

The two most important rates are auto loans and mortgages.  That’s because those two industrial sectors account for approximately 20% of GDP (the quiet 20%) – Housing 16% and automobiles 4%.  Thus, the financing related to a fifth of the U.S. economy’s transactions depend on some sort of U.S. Treasury bond/bill benchmark.  Based on the most recent U.S. GDP of nearly $29 trillion, that’s roughly nearly $6 trillion worth of potential financing.

Now, if you want to define the action in the bond market, just look at inflation. More specifically, think of the bond market as a daily bellwether for inflation expectations.  So, when bond yields rise, it usually means that bond traders think inflation is rising.  When bond yields fall, the opposite is true.

The bond market certainly liked last week’s non-farm payroll (NFP) employment report.  Yet, instead of focusing on the 206,000 new jobs “created,” bond traders focused on the rise, to 4.1%, of the unemployment rate and on yet another downward revision of the prior two months’ NFP numbers.  In other words, even the algos are figuring out that the government’s models are out of sync with what’s going on in private market data such as the recently released private payrolls (ADP) and the rapidly falling employment numbers in the recent ISM purchasing managers data.

All of which brings me to this week, when Fed Chairman Powell faces congress.  His prepared remarks, released Friday suggested the Fed is willing to lower rates if inflation continues to moderate, which means that Thursday’s CPI could set up a rate cut ahead of the election. 

Bonds Likely to Test Lower Yield Range Again. Homebuilder Shares Seem Paralyzed.

After the prior week’s bounce in yields, Chairman Powell’s recent remarks about inflation, uttered before the NFP numbers and in the text of his upcoming congressional testimony, brought back the bond bulls. 

The U.S. Ten Year Note yield (TNX) reversed after tagging its 200-day moving average and seems headed for another test of the 4.1% level. 

Meanwhile the average 30-year mortgage is now below 7% for the fourth straight week.  Yet, the homebuilders stocks are ignoring the bullish nature of this move, a fact that I addressed here in detail.  From a contrarian standpoint, a case could be made for this sector is so shell-shocked and paralyzed that it’s a buy.  Thus, a better than expected CPI print could bring in sideline money both in homebuilder stocks as well as in the real world where potential homebuyers are waiting for mortgage rate relief.

The iShares U.S. Home Construction ETF (ITB) is testing its 200-day moving average.  Note the quiet uptick in OBV as smart money builds long term positions.  Check out my latest on housing and real estate here.

For its part, the home rental market is quietly picking up as new units, which have been under construction, hit the market. The iShares U.S. Real Estate Market ETF (IYR) is on the verge of a breakout.  Check out the quiet rise in OBV here as well.

Where’s the Money Flowing?

Aside from quietly moving into REITs, money is moving back into technology stocks, especially the software sector, while the semiconductor subsector recovers.

You can see this bullish dynamic expressed in the shares of the Invesco Dynamic Software ETF (IGPT), which was one of the first ETFs I recommended at the Sector Selector service, offered FREE to members of my Buy Me a Coffee page.   IGPT just broke out to a new high and seems to be picking up momentum.

Meanwhile, the VanEck Vectors Semiconductor ETF is recovering from its recent NVDIA (NVDA) induced decline, and looks set to challenge its recent highs as other chip stocks are picking up the slack.

If you’re a fan of tech stocks, as I am, I recently recommended an out of favor semiconductor stock . at the Smart Money Passport service which just broke out, along with a software stock which also broke out which you can check out with a FREE Two Week trial to Joe Duarte in the Money Options.com. 

If you’re an ETF trader, consider my new service, Joe Duarte’s Sector It’s FREE with your monthly membership to Buy Me a Coffee.  Sign up here. 

Indexes Make New Highs but Market Breadth Sleeps Through Holiday Week

The Nasdaq 100 and the S&P 500 again made new highs which once again remained unconfirmed by New York Stock Exchange Advance Decline line (NYAD). On the other hand, NYAD has not fallen apart altogether, which means that a bearish divergence is not fully in place, giving the bulls some hope.  In addition, even though, as I state below both NDX and SPX are overbought, the RSI for NYAD is in excellent shape, which suggests the broad market has plenty of room to catch up to the indexes.

The Nasdaq 100 Index (NDX) delivered new highs, closing above 20,000.  Both ADI and OBV remain in bullish territory.  RSI is overbought, though, which means a pause is overdue.

The S&P 500 (SPX) powered through 5500, delivering a new high.  ADI and OBV confirm positive money flows while RSI is overbought.

VIX Remains Below 13.

The CBOE Volatility Index (VIX), is below 13, remaining bullish.  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.

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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