Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

NFP-Mageddon: Bond and Stock Markets Freak Out on Ugly Jobs numbers.  Don’t Let it Get You Down. 

August 4, 2024

On 8/2/24, I sent an alert to all my subscribers (JDIMO, Substack, and Buy Me a Coffee) to raise cash and wait for the smoke to clear in the markets.   As a follow up, I suggested that this selloff is puzzling, and that I wouldn’t be surprised if a buying opportunity materializes sooner than later.

Let’s stay patient and see how things go.

Bonds and Stocks Suddenly Bet on Recession

If you’re uneasy about this market.  You’re not alone.  As I pointed out on 8/2/24 (linked above), the fear gauges went from subdued to panic mode overnight.  Fear eruptions often preceded market bottoms.

So, here’s the slippery slope – especially if you’re the Fed, which on 8/2/24 told the market that inflation is heading down and that they are now focused on the job market, which seems to be crashing.  Indeed, the markets are acting as everything is crashing now and seems to be begging the Fed to cut rates now!

In case you missed it, Microsoft (MSFT), Amazon (AMZN), Starbucks (SBUX), McDonald’s (MCD) and others missed their earnings as cost wary consumers and cautious COOs are watching their pennies.

On Friday, the bottom fell out of stocks and bond yields, as after usually delivering “strong jobs numbers,” yet quietly revising them down the next month in the recent, the BLS delivered a weaker than expected NFP (non-farm payrolls) number (114K new jobs vs. an expected 176K) on 8/2/24.  It was prefaced by an impressive rise in jobless claims, falling job openings (JOLTS) and fewer than expected private sector jobs (ADP) announced prior to NFP. 

In addition, prior to the NFP “surprise,” the latest ISM data, which had been weakening for the past few months, but which the markets had mostly ignored (soft data? – not this week), described a potentially. Stalling U.S. manufacturing sector, just as the Middle East is heating up, and Japan is raising interest rates.

Where does it End?

Money flows count.  And given the concentration of the money flows related to the Invesco QQQ Trust (QQQ), gauging its direction offers clues as to where things are and where they may be headed.

Last week, I wrote that if $450 didn’t hold, the next important level to watch was the $430-$440 trading range, where a cluster of major technical indicators offer support.  Moreover, I noted if these levels hold, the selling is likely over.  A sustained failure would indicate more selling is coming.  

Here’s where we are after NFP-Mageddon:

• QQQ is back trading inside its lower Bollinger Band.  That means that the trading pattern is now “normal.” At some point we can expect a rebound and move back to the 20-day moving average - like we saw in Mid-April;
• The intermediate term trend down as QQQ is below its 50-day moving average and has twice failed to rise above it since topping out in late June
• The long term trend is still up as QQQ remains above its 200-day moving average, at 428;
• The ultimate support is the two large VBP bars between 420 and 450. This is where traders will make their final Buy or Sell decision.
• The RSI for QQQ is nearing an oversold reading of 30; and
• Both the ADI (indicating active short sellers) and OBV lines (illustrating more sellers than buyers) are in slowly evolving downtrends.

The other important area to watch is the small stocks, as in the S&P 600 Small Cap Index (SML), which has been the beneficiary of the money flowing out of large cap tech stocks for the recent past.  SML held up until 8/1/24 when sellers overtook buyers and short sellers increased their bets.  SML is testing short term support at its 20-day moving average.  Both ADI and OBV are heading down as selling pressure here mounts.

Together, these indicators suggest that in QQQ we are in an intermediate term down trend (correction) in the large cap stocks while remaining above long term support and nearing an oversold level.  If this final support area fails, we are likely to see more aggressive selling and a test of the 200-day moving average.

On the other hand, if the market’s recent leadership, the small stocks give in to selling pressure, we may be in for more trouble.

Stary calm and trade one position at a time:

• Expect the unexpected; THERE ARE NO SURPRISES – JUST EVENTS AND COINCIDENCES;
• Stay patient and stick with what’s working – if any position holds up, keep it;
• Raise cash; as you get stopped out, stay patient before moving back in;
• Use options to reduce capital exposure;
• Let the price charts do the talking; and as always
• Build that shopping list.

Not Everything is Crashing, if You Believe the Charts.

Beyond the fear, the rotation continues.  Until recently, the biggest macro trend has been AI, followed by the projected increase in power generation, power consumption, and infrastructure.   But after the jobs report, Wall Street thinks everything is about to stop.

The First Trust Nasdaq Clean Edge Infrastructure Index Fund (GRID), crashed and burned last week, as investors are suddenly pulling back their horns on data centers and electrical grid enhancements.  I wonder.

The First Trust RBA American Industrial Renaissance ETF (AIRR) invests in companies which design, build, roads, bridges, and Ai related buildings.  This ETF also crashed and burned, even as America’s roads and bridges need repair and rebuilding.  As far as I can tell, people are still migrating to the Southern U.S., while bumpy roads and floppy bridges didn’t just disappear.

Homebuilders, on the other hand barely budged as the structural change in the housing sector is taking hold, just as mortgage rates are likely to fall, perhaps as low as 6.5%, as early as next week, barring a reversal in bond yield..  Note the bullish upturn in both ADI and OBV.  Here’s a great summary of the current situation.

Finally, the Utilities Sector SPDR Fund (XLU) is still holding its own, suggesting that investors are still betting on a sustained rise in power demand.

Bond Yields Crash. Mortgages Will Likely Follow.

The U.S. Ten Year note yield (TNX) ended the week below 4%, but it is well beyond a sustainable decline having fallen too far too fast.  Thus, a move back toward 4% is likely.  But, given the current environment we may have seen the top in interest rates for the next few months.

Mortgage rates, remained below 7% for the ninth straight week. Look for a further decline next week.

REITs are also acting well.  The iShares U.S. Real Estate Market ETF (IYR) has just broken out to new highs, although along with utilities a consolidation is warranted. Look for sideways action here, not a decline.

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AD Line Holds Up Better than Market

As has been the case for the past few weeks, the New York Stock Exchange Advance Decline line (NYAD) is outperforming the major indexes.  Last week, NYAD remained above its 20-day moving average.

The Nasdaq 100 Index (NDX) is in what seems to be a sustainable down trend, even as it approaches oversold territory, with the RSI indicator nearing 30.  Look for a potential test of the 200-day moving average before things get sorted out. 

The S&P 500 (SPX) fell below its former support band at the 5400-5500 area.  The next support is at 5000-5300.  A test of the 200-day line may be required before a tradable bottom sets up.

VIX Explodes Above 26

The CBOE Volatility Index (VIX), broke above 26, signaling panic selling by algo triggered programs.  The rate of rise is unsustainable, but that doesn’t mean it can’t move higher in the short term.

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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