Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

With the Fed on Hold, Santa just Revved Up the Sled.  Think Value.

December 3, 2023

The Santa Claus rally has left the station and is barreling down the tracks, as the Federal Reserve is on hold.  

Before I took a week off from writing this column for the Thanksgiving holiday, I wrote: “Regular readers of this column were not surprised by the rally, given the multiple alerts I posted noting the likelihood of a meaningful market bottom emerging due to the extraordinary technical picture which had developed in the bond market and the ensuing gloom and doom in stocks as early as September 2023.  And although there are no guarantees, the ongoing rally in both stocks and bonds has a great chance of continuing due to the bullish seasonality which kicks into high gear with the traditional Thanksgiving rally.”  

Here's why we’re rallying. At least three voting members of the FOMC, including Chairman Powell have made the following clear:

• No easing in in the cards for now;
• The Fed is prepared to tighten further if needed; but
• Unless inflation data worsens the interest rate hiking cycle is likely over.

All of which adds up to stocks moving higher in the short term unless something bad happens that derails the bullish sentiment; think CPI, PPI, and the FOMC meeting which are all approaching.  Moreover, there is some evidence that overbought sectors of the market, such as technology are starting to struggle, which means that some sort of sector rotation is well overdue.

So far so good; but what’s next? 

Bond Yields and Mortgages Continue Bullish Decline

The first part of the answer to the above question lies in the bond market where rates continue to fall and seem headed lower at a rapid clip.   The U.S. Ten Year Note yield (TNX) is now well below 4.5%, and its 50-day moving average.  Moreover, it just broke below the 4.3%-4.4% support area, and looks headed for 4%.

Even more impressive is the move down in mortgage rates (MORTGAGE), which look set to test the 7% area and may move as low as 6.8%, the 50-day moving average for this series.

As expected, amongst the major beneficiaries of the lower interest rates have been the homebuilders as reflected in the recent price action for the SPDR S&P Homebuilders ETF (XHB), which broke out to a new high on the latest decline in TNX

In addition, the long term fundamentals of supply and demand in the housing market remain in favor of the homebuilders and related sectors. These include  real estate investment trusts (REITs) which specialize in home rentals and related businesses. 

You can see the bullish influence of lower interest rates on Nuveen Short Term REIT ETF (NURE) which is now testing its 200-day moving average.  This ETF specializes in rental properties. A move above $30 in REZ is likely to deliver higher prices.

Sector Rotation is Likely

The REIT sector is certainly a place where value investors can find excellent ways to put money to work. But it’s not the only area of the market which the market has overlooked lately, and which should benefit from a sector rotation.

Over the last few weeks in this space, I’ve been focusing on value investing, a topic in which I recently expanded in my latest Your Daily Five video which you can catch here.  That’s because growth stocks have become overbought and are due for a pause while there are still plenty of investors and money managers who missed the October bottom and are being forced to play catchup before the year ends.

You can see this dynamic playing out by comparing the action in the S&P 500 Citigroup Pure Growth Index (SPXPG) to the trend in the S&P 500 Citigroup Pure Growth Index (SPXPV) index. 

The growth index has been trading ahead of the value index for the past several weeks but is now struggling near the 15800 chart point.  Meanwhile the value index has extended its move with greater momentum.  You can appreciate the differences in the strengths of the move via the Pure Price Momentum indicators (PMO) for both where the PMO for SPXPV is much stronger.

This suggests that the next leg up in the market, barring something bad happening, will likely be led by value stocks.

For more on homebuilder stocks click here.  

The Unloved Energy Sector

After the amazing summer rally in the oil markets, things have cooled off dramatically.  At the center of the decline in crude and the fossil fuel sector has been an oversupply of product.  On the one hand, higher well efficiency in the U.S. shale sector has increased supply.  On the other hand, as usual, OPEC + has not fully stuck to its highly publicized production cuts.

Yet, the recent collapse in the clean energy stocks puts a different emphasis on the traditional energy sector, which is why it’s worth looking at the action in the Energy Select Sector SPDR Fund (XLE), where big oil and gas companies are aggregated.

What stands out the most is that even as crude oil prices (WTIC) have come well off their recent top, XLE’s decline has been a lot gentler. In fact, XLE is still trading above its 200-day moving average, which puts it technically in a bullish trend.  In addition, the ETF is starting to show signs of moving away (to the upside) from a large VBP bar near $85.  Above there is more resistance from the 50-day moving average and a cluster of VBP bars all the way to $89.

Nevertheless, with components such as BP Plc (BP) trading at seven times earnings while yielding 4.81%, you have to wonder how long before value investors come a knocking at the door of this sector.

Aside from recommending multiple big winners in the homebuilder and technology sectors, I recently recommended an energy stock which likely to move decidedly higher regardless of what the price of oil does.  Join the smart money at Joe Duarte in the Money Options.com where you can have access to this ETF and a wide variety of bullish stock picks FREE with a two week trial subscription.

Market Breadth is Now Bullish.

The NYSE Advance Decline line (NYAD) is back in bullish territory, coursing above its 50 and 200-day moving averages. So, while there is improvement, we don’t have a definitively bullish long term signal for the market’s trend, yet. If there is a downside, it’s that the RSI indicator is nearing an overbought situation.  However, at this stage of the rally, NYAD’s rate of climb may slow, but does not look as if it will fully reverse in the short term.

The Nasdaq 100 Index (NDX) looks a bit tired and needs a rest.  The index has struggled to move above 16,000. Both ADI and OBV are flattening out as profit taking increases.

The S&P 500 (SPX) remained above 4500 and could well move above 4600.  This is not surprising as many value stocks are now pushing SPX higher.

VIX is Back Below 20

The CBOE Volatility Index (VIX) continues to fall closing below 15 last week. This is bullish.

A rising VIX means traders are buying large volumes of put options.  Rising put option volume from leads market makers to sell stock index futures to hedge their risk.  A fall in VIX is bullish as it means less put option buying, and it eventually leads to call buying which causes market makers to hedge by buying 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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