Joe Duarte’s Smart Money Trading Strategy Weekly
By Joe Duarte Editor Joe Duarte in the Money Options
Is the Selling in Tech Over Yet? There are no Bear Markets with Positive Breadth.
July 28, 2024
Both China and Canada lowered interest rates last week, but the moves had no immediately tangible positive effect on the markets. Instead, the AI stock massacre continued to be the major focal point for traders, until Friday when we saw a bounce.
The bounce was not unexpected as the wall of worry was climbing during the selloff (CNN Greed/Fear Index broke below 40 on 7/25/24). Yet while the indexes were crashing, the market’s breadth was holding up quite well, suggesting that the rotation out of tech wasn’t necessarily likely to trigger a bear market. Thus, for now, until proven otherwise, we are still in a rotation. And as such, we should act accordingly.
And just in case you’re getting tired, next week is jobs/central bank alphabet soup (JCBAS) week – JOLTS, ADP, WJC (weekly jobless claims), NFP plus the BOE and the FOMC.
What a time to be alive!
What’s the Story?
In Wall Street’s world, stories matter. Recently, the story has been all about AI, and how the world would, almost magically, be transformed by it, almost overnight. This would justify buying AI related stocks forever, since the sky was the limit for their earnings potential.
Yet, as I noted last week, AI isn’t really a new thing. It’s just that now, it’s getting more publicity. So, like with any Wall Street story, eventually reality sets in, and it runs its course.
That’s not to say that AI isn’t a transforming technology. But really, there’s nothing new or remarkable going on here, in terms of how the market works. Once Wall Street’s story machine gets going, things get predictable. All “this time is different” fads (remember the sock puppet?) eventually run their course; and at some point, the “bubble” bursts – end of story.
So, the reality is that AI is already embedded in our lives (just call any Fortune 500 company and try to talk to a person), and still has a lot of potential. But whereas in stories anything is possible, in the real world, especially in Wall Street’s algo driven buy/sell/sell short universe, you only get a finite amount of time to deliver the goods – sustainable earnings and double growth
What’s important now is how things will shake out, and which companies will survive and thrive. In other words, once everything gets sorted, which AI and AI related companies will be the next sock puppets and which will be the new Googles (GOOGL), Microsofts (MSFT), Amazons (AMZN) and Apples (AAPL).
What’s next? If history repeats itself, a group of AI companies will begin to experience problems. Some will fail, while those whose technologies are viable but whose management can’t deliver, will be gobbled up by the usual suspects.
That said, since I’m waiting to buy the dip on the AI stocks, what really matters is whether the selling is over. So, let’s get to the work.
Is it Over Yet? Or is it the Proverbial Dead Cat Bounce?
The most important question for the markets is whether the tech induced rout in the major indexes is over yet. And a look at the Invesco QQQ Trust (QQQ) price chart suggests that the first bottoming attempt is under way.
If $450 doesn’t hold, watch the $430-$440 trading range, where a group of major technical indicators offer support. If these levels hold, the selling is likely over. A sustained failure would indicate more selling is coming.
Consider the following:
- QQQ is intermittently trading outside its lower Bollinger Band. Thus we are near a point where prices may rebound and move back to a normal trading pattern inside the bands followed by a rebound to the 20-day moving average - like we saw in Mid-April;
- Prices are near the 200-day moving average, at 425;
- There are two large VBP bars between 422 and 430. This is where money is lurking;
- The RSI 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.
Together, these indicators suggest that we are nearing an oversold level just as a major support area nears. Usually, this type of setup precedes either a meaningful bounce, a sideways consolidation, or a combination of both.
What’s the bottom line? Stay calm and trade one position at a time:
- Expect the unexpected; THERE ARE NO SURPRISES – JUST EVENTS AND COINCIDENCES;
- Think small stocks until proven otherwise;
- Stay patient and stick with what’s working – if any position holds up, keep it;
- Raise SOME cash;
- Use options to reduce capital exposure;
- Let the price charts do the talking; and as always
- Build that shopping list.
How’s the Real World Holding Up? Power, Infrastructure, and Housing.
As I noted above, on Wall Street, the AI story is running its course. But how’s the real world responding?
The First Trust Nasdaq Clean Edge Infrastructure Index Fund (GRID), is a bit weaker as investors fret about a decrease in AI spending leading to a slowing of the electrical grid buildout. A collapse of this ETF would signal investors are pulling back their horns on data centers and electrical grid enhancements.
The First Trust RBA American Industrial Renaissance ETF (AIRR) invests in companies which design, build, roads, bridges, and Ai related buildings. This ETF is holding up better than GRID, as America’s roads and bridges are in need of repair and rebuilding. I just recommended two companies in this sector.
Homebuilders are prepping for a major breakout as structural change in the housing sector is taking hold. 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) has recovered from its recent selloff, suggesting that investors are still betting on a sustained rise in power demand.
Bond Yields Remain in Bullish Posture
The U.S. Ten Year note yield (TNX) remains in a bullish chart pattern of lower highs and lower lows, while trading well below its 200-day moving average. A move below 4.1% would be very bullish.
This is having a bullish effect on mortgage rates, which are below 7% for the eighth straight week, a fact that is helping the housing stocks.
Aside from the bullish action in the homebuilders (ITB) housing related REITs are also acting well. The iShares U.S. Real Estate Market ETF (IYR) has just broken out to new highs, although a consolidation is warranted.
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There are no Bear Markets when Positive Breadth is in Place.
The Nasdaq 100 and the S&P 500 are clearly in correction mode, while the New York Stock Exchange Advance Decline line (NYAD) is just fine, as it eyes a potential new high. The good thing, is that there are no bear markets while the NYAD makes new highs.
The Nasdaq 100 Index (NDX) is looking to bottom out, and may do so as it is just about oversold, with the RSI indicator nearing 30. But NDX has resistance at its 20 and 50-day moving averages and both ADI and OBV are in short term downtrends.
The S&P 500 (SPX) is faring better, remaining above its 50-day moving average. It is also within the support band at the 5400-5500 area. It is also nearing an oversold reading as its RSI hovers above 30. ADI and OBV are also negative.
VIX Retreats after Hitting 18.
The CBOE Volatility Index (VIX), broke above 16 and found resistance at 18. This is cautionary. A reversal below 16 would be encouraging.
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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