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Analysis, Perspective, Trading Strategy
Food for thought: Hurricanes in Florida and Wall Street Cause Waves in the Ag Sector
Editor Joe
Duarte in the Money Options
As hurricane Michael was pummeling the panhandle of Florida,
Wall Street was getting blitzed by Hurricane Algo. But in Chicago, the agricultural
commodities were getting a quiet and credible bid. Altogether, stocks are
ripe for a bounce and the agricultural commodities are getting a weather
scare and uncertainty related boost.
A few weeks ago, I noted that what seemed to be an emerging divergence
in the New York Stock Exchange Advance Decline line (NYAD) might be the SELL
signal to be heeded. Well, needless to say I was right and if anyone followed
my suggestions: trade small, hedge, use options, and keep more cash around
than usual there is a decent chance that the damage to their portfolios could
have been worse.
To be honest I’m not happy about being right, especially when it’s hard
to know whether next week will bring more unwinding of weird derivatives
and margin call related liquidation by those who didn’t see it coming. Moreover,
as bruised and battered survivors of the Algo storm all we can do now is
to pick through the debris and see if there is anything worth salvaging.
Still, even if stocks bounce, it seems as if winter is going to be surprisingly
cold and the agricultural commodities seem to agree which is why stocks could
face a bit of competition.
If there is something positive to say about last week’s trading it that
the death of the recent rally was quick. This could well be a sign that the
worst is over and that some sort of bounce is in the cards. Moreover, are
there any hedge funds left to mount some sort of offensive? Will companies
use the dip to buy back more of their own battered stocks in order to make
their earnings look better for longer? And will the algos switch from front
running sell orders to front running buy orders?
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So Indescribably Oversold
I don’t recall ever seeing any swifter and more damaging selling than what
happened last week. Yet, the net result is a market that is so oversold that
the only reasonable direction of prices in the near term should be up*. Yes,
there is an asterisk attached to the prior sentence because, as I’ve said
multiple times, this time is different.
For one, the New York Stock Exchange Advance Decline line, which continues
to be the most accurate indicator of the market’s direction since the presidential
election of 2016, has not been this oversold since the election, as documented
by the RSI reading of 21 it registered at the close of trading on 10//12/18.
In fact, the Algos seem to be following a familiar pattern
of taking NYAD to some key support level and doing the expected thing. Note
NYAD is now testing the 200 day moving average while RSI and ROC are trying
to turn around and mount an advance of some sort.
Ditto for the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes which,
predictably broke just below their 200 day moving averages long enough to
trigger the last bit of panic selling from capitulators who had been hoping
for a bounce on Thursday but didn’t get one.
This of course brings me to the FAANG ETN (FNGU); which is off nearly 50%
from its June 2018 top and which also followed the algo script at the 200
day moving average and is respectively displaying a set of equally legendary
oversold technical credentials.
So where was the money going during the algo hurricane? Aside from going
under mattresses, it seems as if a stealth depository of funds might have
been the agricultural commodities. Consider the action in the Invesco DB
Agriculture ETF (DBA) which seems to have put in a credible bottom over the
last few weeks and which is under some aggressive accumulation as documented
by the Accumulation Distribution (ADI) and On Balance Volume (OBV) indicators.
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Food for Thought
As Wall Street worries about the future, commodity traders seem to be
betting on something, perhaps a colder than expected winter, and are starting
to pile into agricultural commodities. The agricultural stocks certainly held
up better than the tech stocks last week. And this is not something new. I’ve
been bullish on Hormel (NYSE: HRL) and Archer Daniels Midland (NYSE: ADM) for
some time and continue to hold those stocks, whose reasonable resilience during
last week’s stock market carnage, coupled with the stealth assent in agricultural
commodities,
suggests that maybe something very different is on the way and the
smart money is starting to build a long term home there as they exit
the FAANG stocks.
I own shares in HRL and ADM as of this writing.
Joe Duarte has been an active trader and widely recognized stock
market analyst since 1987. He is author of 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. To receive Joe’s exclusive stock, option, and ETF recommendations,
in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.
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bringing all his years of expertise
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3. Weekly
market analysis
and portfolio
updates gives
you the big
market picture.
4. Joe
has designed and
fully tested a select
group of easy to
follow and deploy
option strategies
coupled with on-
point stock and ETF
picks focusing primarily
in the biotech, healthcare,
and technology sectors.
5. In
depth
individual
position
technical
and
fundamental
analysis.
6. Unlimited
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buy
and
sell
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