Fear is Rising. Time for a Megatrend Review and How to Prepare for What’s Next Update.

September 8, 2024

I’ve said it before, but it’s worth repeating:

“You can observe a lot just by watching.” – Yogi Berra.

Adapted to today’s markets, those words of wisdom from Yogi may be translated to:  when in doubt, take a step back and look at the big picture.

After an initial sigh of relief upon the release of the August payroll numbers, traders panicked. And comments from the Fed’s Waller made things worse as the market interpreted them as suggesting the Fed was worried about the economy rolling into a recession.  Yet, before making regrettable buy or sell decisions, it makes sense to look at the megatrends which are the biggest influences on money flows and see what they’re telling us.

From a macro viewpoint, we can start with the notion that when the market’s breadth, as measured by New York Stock Exchange Advance Decline line (NYAD) does not break down along with the major indexes and the heavily weighted stocks therein, it pays to focus on stocks and sectors which are not falling, as they will likely be the leaders when the current volatility subsides.

As things ended last week, the NYAD (see below for details) bent, but didn’t quite break. Keep an eye on it.

In addition, the fear gauges, VIX (back above 20) and the CNN Greed-Fear Index (clocking in at a Fear reading of 39) are confirming the market’s concerns. In the short term this may spur more selling, and hurry things along toward the next dip buying opportunity.  In other words, we may be closer to a bottom than anyone expects.  CPI and Fed talk will likely move things along. 

The Megatrends and Where They Stand

There are several megatrends (trends that will last for years) dominating money flows; the housing shortage, the energy transition, and the expansion of artificial intelligence (AI) throughout global systems.  They all converge into a derivative megatrend, the rise in demand for electricity.  Moreover, because megatrends require financing, they are all further bound by interest rates.  Cue the Fed.

For more on megatrends and how to spot them, check out my video on the subject.

Why NVDA is Down But not Out

Most recently, the so called AI bubble has been slightly deflated after its poster child, semiconductor producer NVDIA (NVDA) “missed” its earnings expectations.  The truth is that NVDA didn’t really miss anything. It made plenty of money and will continue to make money for the foreseeable future.  But Wall Street is ironically run by robots, so the stock is getting clobbered over a few million bucks here and there.

The truth is that NVDA, and AI, finally got a bit of a reality check. Regardless of what “analysts” agree on, in the real world, sometimes it’s hard to get things across the finish line in time.  Supplies, key materials, and manufacturing capacity doesn’t always adapt to predictions or expectations.  It’s called life and is defined by the concept of Complexity – multiple moving parts interacting with one another looking for a payoff.  The payoff for each entity is different, leading to multiple potential outcomes for any situation.

NVDA is wounded, perhaps critically in the short term, but it’s not dead by any means. None of what it does is going away anytime soon. And a successful test of the 90 area may be a nice starting point for a recovery.  As a result, it’s important to keep an eye on NVDA, along with the rest of the semiconductor sector, as in the VanEck Vectors Semiconductor ETF (SMH).  That’s because in this complex system there are other highly capable semiconductor companies out there which could well flourish even as NVDA and the AI sector struggles. I’ve got my eye on a couple of them.

In the short term, the stock is acting as it did in early August, testing its lower Bollinger Band while the RSI is nearing 30 – spoiler alert -  it may bounce from here.  Meanwhile the ADI and OBV have not made new lows suggesting the selling pressure is not as great as it was in early August.

SMH survived a test of its 200-day moving average, and is nearly oversold (RSI of 30).  Both ADI and OBV have rolled over as sellers panic.  The key is what happens at 210, which is where those large VBP bars draw the line in the sand.

Getting to the Nitty Griddy

To monitor the energy transition, keep an eye on companies involved in the expansion of the infrastructure required to increase the deployment of electricity and utilities.   That’s because no matter where the electricity comes from – traditional or new sources – it can’t power anything without a capable grid.  And the FT Nasdaq Clean Edge ETF (GRID) offers an easy way to do so.

GRID is currently testing its 50-day moving average and is in danger of breaking below a very large VBP bar at $120.  If this important support area fails to hold, a test of the 200-day moving average is likely.

Still, the increase demand for power has delivered a gift to the utilities sector, as in the Utilities Select Sector SPDR ETF fund (XLU), a fund which I own, and a core holding of the Sector Selector ETF service.  This ETF is due for a pullback, but any support at the 20 or 50-day moving average is likely to be a buying opportunity.

So, while it seems the market is getting cold feet about AI, and the grid expansion, the utilities are still in great shape as the number of existing data centers, and those which are near completion have made the new vibe structural.

Short Squeeze Possible in Homebuilders

The fifth megatrend is the housing shortage, related to the above stated dynamics via the increasing demand for electricity required to power new communities and related commercial infrastructure – grocery stores, gas and recharging stations, municipal buildings, street lights. Even though the post pandemic migration to suburbs, rural areas, and the sunbelt may have slowed, it hasn’t stopped.  It is also structural, and along with an aging cohort of existing homes and sellers with low mortgages unwilling to sell, it has created a sweet spot for builders.

Yet, as I’ve stated recently, new homes are increasingly unaffordable and many are opting to rent, creating a shift in money flows away from homebuilders toward REITs which focus on residential rental properties and storage and moving logistics specialists.

The iShares U.S. Home Construction ETF (ITB), remains in a consolidation pattern after its recent rally.  A consolidation is to be expected.  We may even get a short squeeze as ADI is falling while OBV is rising.

The iShares U.S. Real Estate ETF (IYR) is due for a pause, yet the uptrend remains intact. 

For strong REIT and homebuilder picks, check out a FREE Two- Week Trial to Joe Duarte in the Money Options.com.

Bond Yields and Mortgage Rates Are in Consolidation Mode

The U.S. Ten Year note yield (TNX) remains in a bullish consolidation pattern, holding below 4%. But TNX has come a long way and is unlikely to move much lower in the short term as 3.7% seems to be the bottom for now.

Mortgage rates, while in bullish territory, below 7% for the thirteenth straight week are also due for a pause with 6.3% likely to be the low rate for the near term.

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 Remains in Uptrend as it Tests Key Support

The New York Stock Exchange Advance Decline line (NYAD) finally rolled over last week, but remains in an intermediate term consolidation pattern.  The 20-day moving average held, but a move toward the 50-day average is possible.

The Nasdaq 100 Index (NDX) broke below its 50-day moving average. The selling still has some room to go as the RSI has not reached 30.  Critical support is at 17,500.

The S&P 500 (SPX) is also in a short term bear trend, as the 5500 support area gave way.  Again, this index can still fall further as the RSI remains above 30.  5350 is the next important support level.

VIX is Back Above 20

The CBOE Volatility Index (VIX), is sending out a bearish signal as the 20 level is threatening to become support instead of resistance.

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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