Bear Markets Don’t Happen when NYAD Makes New Highs. The Trend is Up Until It’s Not.

August 18, 2024

The bulls are back in charge, in the short and the intermediate term, until proven otherwise.  Inside the market, as I describe below, the big news is the recovery in large cap tech. Yet, of equal importance is the stable performance in housing and REITs, and most of all, the stealthy momentum run in the utilities.

NYAD Says We’re in an Algo Fueled Uptrend

I’ve said it before, and it’s worth repeating. There are no bear markets when the New York Stock Exchange Advance Decline line (NYAD) makes a new high. And that’s just what’s happened, which means the uptrend is back, at least until the next liquidity event.

It seems like a long time ago now, yet, 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. I then suggested that this selloff was puzzling, and that I wouldn’t be surprised if a buying opportunity materializes sooner than later.

The following week, in this space, I noted “the jury is still out but there are encouraging signs.” And on 8/15/24, NYAD made a new high, giving at least a short term “all clear” signal.

What’s most important, as a trader, is to adopt a practical mindset where the central piece of any strategy is the understanding that in this market, the only things that matter are liquidity, the order flow, how it translates into money coming in our out of the markets, and how the algos are programmed to respond.

Of course, in a world where machine traders (algos) trade each day as if nothing happened the prior day, which means things could reverse rapidly.  All of which means that something can come out of nowhere which affects the order flow and leads the algos to sell.  And with the FOMC minutes from the last meeting due out mid-week, it can happen.

Some Pointers about the Way the Stock Market Works

The market is dominated by machines, aka, program traders, bots, or algos. Unlike humans, these machine traders have no doubt.  They just follow their “if this happens, do this” programming, which includes trading every day as if it was a new day, based on the way the money is flowing into or out of the market.

They have two primary directives, making money, and protecting their accounts. The market maker algos know the order flow before anyone else does.  Right after the market makers know, high frequency traders (HFT) gain access to the order flow.  So, by the time you and I trade, big money is already trading based on the primary trend, based on the order flow.  In addition, they are hedging their positions, as they prepare for a change in the flow of money.

As a result, the old saying, “don’t fight the tape,” is more applicable now than it ever was.

QQQ is Back

The Invesco QQQ Trust (QQQ) is an excellent way to keep tabs on what the big money is doing.  And, of course, following the big money is often a great way to make successful trades.

As the price chart shows, the $450 price point on QQQ had been a tough resistance level, which has now been crossed, along with the 50-day moving average. Bots love to pile on when big resistance levels are vanquished.   In addition, both the ADI (short sellers) and OBV lines (buyers) have turned back up as money is moving back in.  The thing to watch now is the RSI. Once it hits 70, the big money is likely to start fading the rally.

So, stay awake, remain calm and trade one position at a time:

• Expect the unexpected;
• Stick with what’s working – if any position holds up, keep it;
• If you get stopped out, move into strength;
• Let the price charts do the talking; and as always;
• Don’t fight the tape!

Amazon Bounces.

Last week, I suggested keeping an eye on Amazon.com (AMZN).  This stock is a market bellwether because of its diversified businesses which focus on diverse clientele: consumers, corporations, and the U.S. government.  The stock has recovered, but still has some work to do.  For more on Amazon.com, check out a Two-week Free trial to Joe Duarte in the Money Options.com.

Keep an eye on the 200-day moving average as a support level now. It will also be challenged by the three big VBP bars extending up to $185.  ADI has recovered, as short sellers get squeezed, and OBV is on the mend. 

Oil Perks Up.

This one goes into the “expect the unexpected” category. As hurricane season, Ukraine, and the Middle East heat up, it’s a good idea to keep an eye on oil prices. The United States Oil Fund (USO) has quietly rebounded after testing its 200-day moving average, and has the potential to move back to the top of its trading range.  It’s hard to gauge what may happen after that, although the U.S. government has announced it will start to replace the Strategic Petroleum Reserve (SPR). 

Housing Holds Up Despite Bad Data

The U.S. Home Construction ETF (ITB) continues to hold steady as stable interest rates and the long standing structural changes for supply and demand in the housing sector continues to develop.  Last week’s data showed a sixth consecutive decrease in permits and new single family housing starts while the number of multifamily permits rose.  The data continues to suggest tightness in the markets, which until financial conditions change means steady sales and wide margins for homebuilders due to tight supplies.  Here’s a great summary of the current situation.   And if you missed it, you can read about the connection between homebuilders and AI, here.

Utilities Mount Stealth Momentum Run

Finally, the Utilities Sector SPDR Fund (XLU) are stealthily moving higher as big money moves in behind the AI related demand for power isn’t going away any time soon.  Note the steep up trend in the OBV line as buyers continue to stream in.

Bond Yields and Mortgages Take a Break

The U.S. Ten Year note yield (TNX), is now in consolidation mode, holding below 4%. This type of trading pattern, at these low yields, is a positive for stocks as stable yields are a sign that the bond market isn’t worried about the current state of liquidity.

Mortgage rates, rose slightly las week, but remained below 7% for the eleventh straight week, remaining below 6.5% for 30-year conventional loans.

Stable interest rates are a positive for REITs.  The iShares U.S. Real Estate Market ETF (IYR) is holding near its recent highs. Look for sideways action here, not a decline.

For winning REITs and homebuilder stocks, grab a FREE Two Week trial to Joe Duarte in the Money Options.com. 

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

AD Line Holds Up. Market Stabilizes.

The New York Stock Exchange Advance Decline line (NYAD) made a new high last week, and has plenty of room to run, as its RSI is nowhere near overbought.

The Nasdaq 100 Index (NDX) found support at its 200-day after hitting an oversold RSI level of 30and has now moved back above its 50-day moving average. We may see some consolidation here. But the uptrend is back.

The S&P 500 (SPX) has rebounded above the key 5400-5500 area.  Money is flowing back into the market as both the ADI (short covering) and OBV lines (buyers coming in) are rising.

VIX Recovers After Blowout

The CBOE Volatility Index (VIX), is back below 15, a very reassuring move. 

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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