Analysis, Perspective, Trading Strategy

Rising Heat at the Edge of Chaos: Is a U.S.-China Trade Deal about to be announced?

Editor Joe Duarte in the Money Options

Is Wall Street going to get an early Christmas present or a lump of coal? Given the current situation in Washington and the world, it could go either way. Therefore investors should prepare for an eventful end to 2019.

The strong seasonal trend toward higher prices in December, aka the traditional Santa Claus rally may be knocking on the door, but uncertainty remains. Arguably, there are no guarantees, especially when news related to unexpected geopolitical developments, the upcoming release of the Horowitz report, bad news from the Fed, the impeachment drama, and a host of other hot button issues of the moment could derail just about anything including the traditional year-end ramp up in the stock market.

Still nothing would surprise me at this point, even a U.S. China trade deal being announced at some point before the open of U.S. trading on December 16 – maybe late Friday afternoon or early Sunday night - just in time to juice stocks higher before the end of the year.

Certainly I have no inside information on the trade deal, and surely I wouldn’t double mortgage my house to bet on it, but given the way the White House works and how one of my favorite indicators, my gut, feels at the moment, I can’t help but suspect that something dramatic is brewing. Furthermore, given the way that algos are behaving, a trade deal announcement, could lead to a sizable blow off in stocks that could carry the market beyond insanity in the short term,.

Just look at what happened last week. First, the stock market floundered when President Trump, at the NATO Summit in London, noted that he could wait for a trade deal until after the 2020 election. That one item took some 800 from the Dow Industrials in two days. But by midweek, the jawboning on the trade deal was back and by Friday news of “intense negotiations” between the two countries hit along with a strong employment data and improving consumer confidence numbers and the stock market, right on schedule took off to end the week on a high note.

My point is that events seem to be heating up at the Edge of Chaos, where the intricacies of the ruling forces of the Universe, Complexity, do their work. Therefore this could be a pivotal week for all kinds of things that have been brewing to reach critical mass and that the potential for something big to emerge is starting to rise.

By the way, I will be at the Orlando Money Show in February 2020 to discuss “Trading at the Edge of Chaos” and how to use it to find the best investing and trading opportunities for 2020. For information on how to register and details on the presentation go HERE.

One of those high potential areas of the market is Big Pharma, where companies such as Abbott Labs (ABT), Merck (MRK), Eli Lilly (LLY) and the slow and steady turnaround which is Pfizer (PFE) are finally adapting to the health insurance marketplace and are sitting on potential blockbuster drugs and equally healthy pipelines with big things in late stage clinical trials.

These four Big Pharma stocks are increasing their market share and rising as they expand sales of products which have been truly disruptive in health care. Abbot, for one is moving on the success of its cardiac products aimed at treating heart valve disorders as well as its continuous blood sugar monitoring systems, while Merck’s Keytruda is becoming the world’s leading cancer drug as the company continues to broaden the types of cancers that are responding favorably to treatment with the medication.

Pfizer, on its own account, may be the turnaround story for 2020 as it slowly recovers from losing its patent protection for its blockbuster drug Lyrica and a host of management decision mishaps while slowly building a new stable of potential blockbusters including the enigmatic Vyndagel to treat what may not be as rare as it is believed to be type of congestive heart failure.

Not far behind Pfizer in the turnaround category is Eli Lilly, which reeled when it lost its patent protection for ED drug Cialis. Lilly, however, is making inroads in the treatment of migraines with the recent approval of its Lasmiditan 5HT-1 blocker for the treatment of acute migraines to go along with its migraine prevention injectable drug Emgality. The combo gives it a potential one-two punch in the sector which could lead to a sizeable increase in its market share for the condition.

Interestingly, Pfizer and Eli Lilly (LLY) also have a potential billion dollar drug in their nerve growth factor inhibitor (tanezumab) which is aimed at treating chronic low back pain. The allure of this drug is that it is not an opioid, which means that the likelihood of it being accepted quickly in the marketplace upon FDA approval would be significant, especially as insurance companies would be pressured to pay what is likely to be a fairly steep price for a drug which could reduce opioid usage and thus the potential for drug overdoses and which could positively impact the health care and societal costs of opioid addiction.

Tanezumab may also work for osteoarthritis, and for cancer related pain, which, if true, would expand its potential market share dramatically on a global basis, especially as the global population ages. More importantly, Pfizer and Lilly have no competition in nerve growth factor inhibitors as several other companies have shelved their own candidates due to severe side effects which were not widely present in the most recent trial for tanezumab.

Bullish Trend Pattern Remains Intact

Despite the daily volatility the New York Stock Exchange Advance Decline line (NYAD) continues to ride a bullish trend with two major characteristics, see directly below, remaining intact. So as long as the NYAD:

• continues to make at least one new high per week and
• remains above its 50-day moving average

It will be very difficult, no matter how absurd or out of place or incompatible with economic fundamentals it seems, to fight the notion that the bull trend remains in place. Of course, if the fundamentals don’t catch up soon enough, NYAD can’t keep this up forever. But for now, momentum remains intact.

Simultaneously, a slight divergence is taking place between the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes, which may be foreshadowing some sort of meaningful pullback along the way.

Specifically, NDX is starting to lag SPX as the technology stocks are struggling to move higher despite the frequent jawboning on the U.S.-China trade situation. Specifically, SPX’s outperformance, at this point, is largely due to the steady rise in pharmaceutical and healthcare stocks found in SPX and the late week bounce in energy.

Of course, the bond market continues to be of major interest. And last week’s action was worth watching for sure as the U.S. Ten Year Note (TNX) fluctuated in a narrow range between 1.65 and 1.9%. The key for the bond market is what happens to stocks if and when TNX moves above 1.9% decisively.

Accordingly, if TNX breaks out above this key resistance level, it is likely that we would see significant selling pressure in the housing stocks, which even though they have not fully recovered from their late October decline, are still showing some resilience.

Odds Still Favor end of year Rally in Stocks

The U.S.-China trade war, the release of the Horowitz report, and the likely impeachment of President Trump by the U.S. House of Representatives remain potential roadblocks to higher prices in U.S. stocks. Still, despite the ongoing volatility and geopolitical uncertainty, stocks continue to move higher as they climb one of the largest walls of worry in history. As a result, it’s difficult to argue the bear side, other than fully accepting the fact that nothing goes up forever and that any day could be the day that stocks top for the long term.

Nevertheless, at the moment as long as we trade what’s working, we continue to make money. As a result, little has changed from a strategic point of view, which means we own stocks that work, we keep an eye on sell stops, and we look to hedge if and when it’s called for.

Finally, it seems the odds are still favoring an end of the year Santa Claus rally, barring an unpleasant surprise from geopolitical issues or the Federal Reserve which has its last meeting of the year early this week.

I own ABT, LLY, MRK and PFE as of this writing.

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 sellingTrading 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.

Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The Everything Investing in your 20s & 30s at Amazon and The Everything Investing in your 20s & 30s at Barnes and Noble.

A Washington Post Color of Money Book of the Month is now available.

To receive Joe’s exclusive stock, option, and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

JoeDuarteInTheMoneyOptions.com is independently operated and solely funded by subscriber fees. This web site and the content provided is meant for educational purposes only and is not a solicitation to buy or sell any securities or investments. All sources of information are believed to be accurate, or as otherwise stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com have no financial interest in any of the sources used. For independent investment advice consult your financial advisor. The analysis and conclusions reached on JoeDuarteInTheMoneyOptions.com are the sole property of Dr. Joe Duarte.