Analysis, Perspective, Trading Strategy
Caution, Patience and Selectivity Make Sense as Trade Talk Deadline Looms
By Joe Duarte on February 10, 2019
With
stocks in an overbought condition, global central banks neutral or in
easing mode and the global economy slowing, the market is now a hostage to
headlines regarding the trade talks between China and the U.S. The down side
is that there will be some short term pain. The up side is that if things work
out, the bull is likely to charge higher, at least a bit longer.
Over the last few weeks I’ve been cautiously making the case that
the worst case scenario for stocks might have passed. After all, prior
to the recent selling spree, the market had recovered nearly three
fourths of the bear market losses from the fourth quarter’s massacre.
But things may have changed, and if stocks continue to struggle near
the current price range, we may have seen the highs for this rally.
Specifically last week I wrote: “I may be in the minority but it
seems the worst of the market’s blues may have passed. That’s not to
say that there can’t be a price consolidation in the next few weeks.
Certainly a complete washout of the recent gains is not totally out
of the question considering the way this market has traded.” I also
noted: “we may enter some sort of consolidation period in the next
few weeks. After all the market has come a long way in a short period
of time. Thus, it may become a market of stocks instead of a stock
market.”
Thus, I’m not really surprised at the market’s action over the last
few days. What’s most important is to figure out, sooner rather than
later, if the selling is something that is temporary or whether we’ve
seen the market’s highs for the intermediate term and the selling is
going to get worse. Moreover, even though there are numerous external
influences to consider, the selling got worse on Thursday after a media
report noting that Trump and Xi were unlikely to meet before the March
trade talks deadline. This was made worse when another report suggested
that Trump was going to sign an executive order banning the import
of products from the embattled Chinese networking giant Huawei.
Still, it’s worth keeping tabs on the major external influences on
the stock market at the moment, which are as follows:
- The Federal Reserve is on hold
- Global central banks are either on hold or easing as is the case
for China and now India
- The global economy is slowing and in some cases contracting
- The U.S. economy seems to be in better shape than the global economy,
although growth has slowed
- The China-U.S. trade talks are nearing a key March deadline and
are starting to become perilous as the jockeying for position is
likely to increase
- Emerging markets have been benefitting from the general state
of affairs in the world but may be vulnerable to general market trends
- Geopolitical pressures are likely to increase as populist revolts
increase and long standing relationships and power structures are
under attack – Brexit, France, Venezuela
- U.S. politics are increasingly polarized and the 2020 election
is about to start making its mark on the news cycle
- We are in year three of the U.S. Presidential election cycle,
which is usually a bullish year for stocks
Worth noting is the surprise rate cut by India’s central bank, which
may be a signal of the start of a global easing cycle over the next
few months. Certainly the newly minted recession in Italy and the recent
crash of German economic data suggest that the weakness is starting
to spread in Europe. The issue, however, is how the markets respond
to a worsening of economic data and such an easing cycle if it materializes
in response.
Interestingly, and for whatever it’s worth, even though the Superbowl
indicator has lost its mojo over the last few years, the win by the
AFC’s New England Patriots has certainly spawned some short term selling
in stocks.
There May be More Selling Ahead
There are still a good number of attractive looking stock charts
in this market, but New York Stock Exchange Advance Decline line (NYAD)
remains the most accurate indicator of the trend of the stock market
since the 2016 presidential election. And its current message is cautionary.
![](http://www.joeduarteinthemoneyoptions.com/charts/190210-NYAD.png)
Certainly we are still in an uptrend but in the midst of the pause
I noted was likely last week. First, the overbought RSI signal coincided
with the recent top in NYAD and now the RSI indicator is suggesting
that the odds of more selling in the short term are rising. This is
confirmed by a rolling over of the ROC indicator as well. So if technical
tradition holds up, we may see NYAD fall to the 20-day moving average
before we see a pause in the selling.
![](http://www.joeduarteinthemoneyoptions.com/charts/190210-SPX.png)
Second, both the S & P 500 (SPX) and the Nasdaq
100 (NDX) indexes failed to rise above their 200-day moving averages,
which mean that technically they are still on the bearish side of the
ledger. This may be a temporary phenomenon, and a few days of selling
may create enough fear to power these indexes beyond the key resistance
level.
![](http://www.joeduarteinthemoneyoptions.com/charts/190210-NDX.png)
Caution and Selectivity Make Sense in this Market
With roughly three weeks before the U.S. and China decide on what
to do about trade, the markets are likely to remain bumpy. That means
that cautious trading is the best policy. Narrowing your focus and
sticking with what’s working and taking some profits makes sense It’s
not a bad time for using options to lower risk. And it’s still o.k.
to give winners some room to consolidate. But it’s not a good idea
to let the market take away too much from significant gains, and throwing
in some hedges makes sense. Moreover, if you’ve put on some trades
and they aren’t working, it’s best to take them off the table before
they get worse.
Joe Duarte has been an active trader and widely recognized stock
market analyst since 1987. He is author of 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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