Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Stay Calm. Kick the Tires. And Review Your Price Charts.

July 21, 2024

The ball game has changed on Wall Street.  The new consensus is that AI is falling apart and systemic failure is imminent.

I wonder.

It’s better to look around and confirm what I see there in the price charts.  And right now, I’m seeing uncertainty and fear on Wall Street and caution and bewilderment on Main Street.  These signs can be signs of further trouble or better times ahead. 

So, for now, instead of panicking, I’m taking a deep breath and asking questions.  Above all, we follow the money.

Question # 1:  Is AI Really Dead?

Although the Microsoft (MSFT)/CrowdStrike (CRWD) debacle on 7/19/24 certainly caused a lot of problems and tech stocks crashed further, a longer term analysis suggests AI isn’t really anything new. What’s new is the hype.  The truth is that AI has been around a long time.

Think about how pervasive the stuff already was before the NVDIA thing.  All the customer service bot voices that answer phones and waste our time until we can talk to a person are AI. Then there’s all the other AI that’s been in place for years:  Siri, search engines, database management systems, kiosk vendors at fast food stores, GPS systems, Like buttons on You Tube, and all the algo trading black boxes on Wall Street. 

In fact, as time passes, automation and AI will continue to grow its presence.  So, no, AI isn’t dead. Thus, I suggest that AI stocks are overextended, overhyped, and well due for a correction.

Question #2:  Is the technology sector finished?

Please!  That’s what they said after Y2k and the Dot Com bubble.  Since then, we have the Internet, electric cars, music and video streaming platforms, video games, virtual reality (such as it is) and even toasters and coffee makers which run on semiconductor chips.   None of that stuff is going away anytime soon, unless somebody pulls the plug.  A bit more on this in a second.

By the same token, as investors, we can’t ignore that NVDIA (NVDA) and the Invesco QQQ Trust (QQQ) are getting clobbered.  But if you look around, we’re still working on our PCs, and checking stocks on our cell phones. And last time I looked, those data centers are still under construction.

All of which brings me to the next question.

Question #3 – Is this a Market Thing or a World Thing?

I’ve said this many times – forecasting is a fool’s game. So, this is not a forecast or a prediction.  It’s more a set of observations and a plausible investment thesis.

Fist, consider that the technology sector has delivered extraordinary gains in the last six months.  A review of the QQQ and NVDA charts above illustrates the point.  QQQ was up 27.5% for the year before topping out in early July.  Most of its gains were on the back of NVDA and related AI stocks, with NVDA gaining nearly 200% before topping out in mid-June.

In other words, the technology sector was ripe for a pullback. That’s because Wall Street always gets ahead of itself in predicting profits, while companies must face realities such as supply chain, design, implementation and installation and financing problems.  These real world things impact company operations and make news.  Traders respond to news.

Besides, despite all the talk about the fundamentals, Wall Street is all about money flows into stocks.  Buyers buy until there’s no one left to buy and sellers sell until there’s no one left to sell.

What’s my point?  On Wall Street, we may have seen the top in tech and perhaps a significant portion of the market, for now.  But in the real world, the technology sector and the overriding themes driving population shifts and spending patterns are not done.

In the real world, tech designers will design.  Truckers will deliver components, building materials and food.  New gadgets will emerge.  Buildings will be built. Roads will be repaired. The migration to the sun belt will continue.   And the cycle will continue to unfold, with its ups and downs, and drama.

What’s the bottom line? You guessed it.  Stay calm and trade one position at a time. Meanwhile:

• Expect the unexpected; THERE ARE NO SURPRISES – JUST EVENTS AND COINCIDENCES;
• Stay patient and stick with what’s working – if any position holds up, keep it;
• Raise SOME cash, trade small, hedge as necessary;
• Consider trading options to reduce market exposure;
• Let the price charts do the talking; and
• Build that shopping list.

What’s the Key? Power, Infrastructure, and Housing.

As I noted above, technology isn’t going away anytime soon, unless somebody, literally, pulls the plug; which is why I’m watching what happens in the electricity and infrastructure sectors.  That’s because these two industrial areas intimately related.  You can’t run a data center, or a toaster without electricity.  And given the state of global infrastructure, we don’t have enough generating power and what we have is getting old.

So, I’m keeping an eye on the First Trust Nasdaq Clean Edge Infrastructure Index Fund (GRID), which houses companies like Quanta Services (PWR) and Johnson Controls International (JCI).  JCI is a big player in electrical component and control systems – think houses, buildings, and data centers - while PWR is all about the buildout of the electric grid – think anything from transformers to telephone poles. This ETF is rolling over with the tech sector, which is cautionary.

In addition, I’m monitoring the First Trust RBA American Industrial Renaissance ETF (AIRR) which invests in engineering and construction companies. While GRID focuses on electrical infrastructure, AIRR is all about the buildings which are powered by electricity.  In other words, when one does well, the other tends to follow.  Comparted to GRID, this ETF is showing some relative strength, which is encouraging.

The third important sector is housing, where patience is paying off as the recent doom and gloom was a prelude to a great short squeeze.  Last week I noted: “investors who have been patient with the homebuilder sector may be in for better times, if interest rates remain tame.  Patience pays off as shares of homebuilder D.R. Horton (DHI) powered the iShares U.S. Home Construction ETF (ITB) higher.  You can get all the details on Horton’s beat here.

Finally, the Utilities Sector SPDR Fund (XLU) continues to hold its own in a tough market, which suggests that power demand is still rising.

Bond Yields Remain in Bullish Posture

The U.S. Ten Year note yield (TNX) continues to trace a bullish chart pattern of lower highs and lower lows, while trading well below its 200-day moving average.

This is having a bullish effect on mortgage rates, which are below 7% for the eighth straight week, a fact that is accounting for the rebound in 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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Market Breadth Outperforms the Indexes

The Nasdaq 100 and the S&P 500 are in correction mode, but the New York Stock Exchange Advance Decline line (NYAD) remains within striking distance of its recent highs.  This is encouraging.

The Nasdaq 100 Index (NDX) has breached the support of its the 20-day moving average and looks set to test its 50-day MA.  Both ADI and OBV are in short term downtrends. 

The S&P 500 (SPX) is also pulling back in a similar fashion.  There is still support at the 5400-5500 area, between the 20 and 50-day moving averages.

VIX Bumps Up on Panic Tech Selling

The CBOE Volatility Index (VIX), is testing the 16 area. This is cautionary.  A sustained move above 15-16 would be very bearish.

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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