Analysis, Perspective, Trading Strategy

At the Edge of Chaos: Think Small Stocks as Tradeable Bottom Likely in Place with Market Risk Remaining Above Normal

Editor Joe Duarte in the Money Options

October 10, 2021

Although risk remains above average and trading is likely to remain choppy, active traders who are savvy in risk management should be on the lookout for selective trades on the long side in the short term.

Here are some trading principles to consider:

• Trade in smaller lots than usual
• Raise cash levels to reduce portfolio risk
• Shorten time frames
• Lock in smaller gains than usual
• Focus on small stocks in key niches – Think energy, central areas of technology

To Taper or Not to Taper…That is the Question

The Fed’s got a real problem after Friday’s bad employment report put their highly advertised QE tapering under the microscope and raises questions about whether the central bank should proceed in what could be a weakening economic situation.  So, until proven otherwise it looks as if the recent low on the S & P 500 (SPX) near the 4380 area may be the floor for prices in the short term. 

Of course, that doesn’t necessarily mean a higher stock market as measured by the indexes alone. But it may be good enough to keep things from totally falling apart, at least in some sectors.  Thus for investors who can pick the right stocks, the odds are more favorable than not, barring a true and all-inclusive market reversal.

Therefore, against all odds, the stock market is developing the feel of what could be a tradable bottom, albeit a shaky one that may or may not last until the Fed actually signals whether it will actually begin tapering in November as they promised.  And for unbelievers, consider the fact that bearish sentiment is rising but the S & P 500 (SPX) seems to have found a bottom just below 4300 as I detail below.  Indeed, when no one wants to own stocks and everyone is expecting the end of the world, it’s often the time to buy.

Indeed, even as Washington politics and energy shortages in Asia, Europe, and South America are grabbing the headlines, there is still one single fact that may prove to be the decider regarding COVID and its effect on the global economy - Merck’s (MRK) new antiviral, Molnupiravir.  Sure, much is unknown about how this medication will play out, and now that the initial enthusiasm has subsided more detailed information is starting to trickle out about it.

Indeed, even as Washington politics and energy shortages in Asia, Europe, and South America are grabbing the headlines, there is still one single fact that may prove to be the decider regarding COVID and its effect on the global economy - Merck’s (MRK) new antiviral, Molnupiravir.  Sure, much is unknown about how this medication will play out, and now that the initial enthusiasm has subsided more detailed information is starting to trickle out about it.

Specifically, the effects of supply chain, transportation, and manufacturing issues on the medication remain unknown, not to mention government approvals, and related costs. There are reports now that a single course may retail for $732. Even more interesting are the questions about long term safety of the drug.

There are still some stocks and option strategies which may yield sizeable gains when properly managed. You can see my latest recommendations with a FREE trial to my service here.  You can also check out my latest video which expands on these strategies here.

Nevertheless, even though the market remains somewhat volatile, one thing is fairly clear, it has yet to break down to the point where the dominant direction is discernible. What that translates to from an investment standpoint is that traders must remain flexible and focus on individual positions rather than on making decisions fully based on the market’s actions.

“The edge of chaos is a transition space between order and disorder that is hypothesized to exist within a wide variety of systems. This transition zone is a region of bounded instability that engenders a constant dynamic interplay between order and disorder.” – Complexity Labs

Apple on the Side – Jampf Holdings Breaks Out

Shares of Apple Inc. (AAPL) have been on the dump lately, but an interesting related company’s shares, Jampf Holdings (JAMF) look set to break out. In fact, JAMF is a prototype for the class of stock which may do well in the current market.

That’s because JAMF has a market cap of $4.75 billion and its product niche, that of protecting and coordinating the interaction between Apple devices in group settings is likely to hold up better than other areas of technology.  For example, any organization which uses Apple phones, laptops, watches, and tablets is eligible for JAMF’s cloud services, which it markets through vendors and manages on its cloud platform.

Moreover, the company just delivered another standout quarter where all its metrics grew at 25% or better.  In addition, its education market continues to grow as its commercial products are starting to gain steam as the company expects to gain from the rising growth in Apple Mac shipments and increased popularity of the Apple maps app.  Specifically, the most aggressive growth is the financial services sector where the switch to Mac at the enterprise level is growing at a 50% YOY clip.

Technically, the stock is on the verge of what could be a strong breakout with the $40-$42 area providing key resistance. Still, Accumulation Distribution (ADI) and On Balance Volume (OBV) are moving nicely higher with the stock trading well above its $50-day moving average, which is fairly strong support in case the stock dips.

I own shares in JAMF as of this writing. For detailed option strategies and stock picks chose a FREE trial to Joe Duarte in the Money Options.com. Click here.

SPY Options Continue to Straddle the Fence

Call buyers came back on 10/7/21 as SPX crossed back above 4400 but by 10/8/21 options traders continued to straddle the fence, literally.  Specifically, I’m describing a type of options trade known as a straddle, in which a call option and a put option on the same stock are bought simultaneously.

What we’ve been seeing over the last few weeks has been just that – options traders hedging against a market crash by buying puts just below key support levels and buying call options above key resistance levels.  The current range seems to be between 435 and 440 on SPY.

The problem is that for every call or put option bought the market makers are doing the opposite and hedging by buying stocks to hedge their call sales and selling stock to hedge their put sales. The net effect is a whole lot of volatility, and a market that mostly goes nowhere because every option trade is essentially neutralized.

In other words, as long as this continues it’s going to be hard for this market to break down or break out.

To get the latest up to date information on options trading, check out “Options Trading for Dummies” now in its 4^th Edition – Out on September 28, 2021 – Reserve your copy now.

Market Breadth: Yet Another Near Miss for NYAD. Indices Oversold.

Market breadth continues to remain range bound as the New York Stock Advance Decline line (NYAD) has yet to make a new high in the last several weeks.  This makes for a very difficult market to trade for anyone who expects long lasting trends in any stock.  

On the somewhat bright side, however, NYAD closed just below its 50-day moving average for the week while RSI also moved back above 50 cancelling out the recent sell signal.

Still, it was good to see the market’s breadth improve.  Moreover, now we will see if it can last.

In addition, the S & P 500 (SPX) also closed the week below its 20 and 50-day moving averages as while also bouncing off an oversold level on RSI.

Meanwhile the S & P Small Cap 600 index (SML) is showing some relative strength compared to the large cap indices. This suggests that the odds of successful trades are more likely in the small stocks at the moment.

Good news! I’ve made my NYAD-Complexity - Chaos charts featured on my YD5 videos and a few more available here.

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.

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