Analysis, Perspective, Trading Strategy

There is Unrest in the Forest. Heading Off the Beaten Path.

Editor Joe Duarte in the Money Options

In a classic tune called “The Trees,” Retired Canadian rockers Rush cleverly dissects the outcome of a political game gone wrong, which just happens to describe the current situation in the world and the financial markets. It starts with the haunting lyric “there is unrest in the forest, there is trouble with the trees, for the maples want more sunlight and the oaks ignore their pleas.”

As in all political disputes, there are at least two sides to the story: “the trouble with the maples, and they’re quite convinced they’re right, they say the oaks are just too lofty and they grab up all the light. But the oaks can’t help their feelings if they like the way they’re made. And they wonder why the maples can’t be happy in their shade?”

Of course, the point of conflict arrives: “there is trouble in the forest and the creatures all have fled. As the maples scream ‘oppression’ and the oaks, just shake their heads.”

And the conflict escalates: “so the maples formed a union and demanded equal rights. ‘The oaks are just too greedy; we will make them give us light!’

And then the unintended consequences: “now there’s no more oak oppression, for they passed a noble law. And the trees are all kept equal by hatchet, axe, and saw.”

All of which brings us to the present where the U.S., China, and the Federal Reserve are playing a dangerous game involving trade and interest rates while the political parties around the world –France, the UK, Germany, Russia, Turkey, etc. are at odds with one another and within their own ranks. Meanwhile cities are burning (Paris) and mudslinging in Washington is the order of the day. Closer to home, Wall Street is being run by robot trading algorithms which react to every single headline that comes out of China, the Fed, and the global political establishments.

Moreover, strictly speaking, it seems that the stocks of companies with reasonable or even strong prospects are being sold off aggressively even in the face of good news. This of course is a big red flashing light for the short and perhaps the longer term and suggests that active traders should consider trading areas beyond the stock market at the moment.

Market Breadth Fails Again

The short lived and temporarily encouraging action in the New York Stock Exchange advance decline line, the most accurate indicator of the stock market’s trend since the November 2016 presidential election, evaporated by December 4; as the bears flexed their muscles in spectacular fashion.

Note the complete failure of the NYAD to rise above its 50 day moving average and a subsequent break below its 200-day moving average raising the odds of more action to the down side. Momentum seems to be close to accelerating to the down side, barring yet another move toward the top of the recent trading range.

Indexes Trade in Whipsaw Range

Perhaps the most frustrating aspect to this market is the volatility displayed by the market indexes within a fairly tight range. For example the S & P 500 (SPX) has been trading between 2600 and 2825 and the Nasdaq 100 (NDX) has been rising and falling violently between 7300 and 6450 or so for the past few weeks accomplishing little more than whipsawing investors, often with 100 plus point swings within minutes of one another.

Most confusing is the fact that both the On Balance Volume (OBV) and Accumulation Distribution (ADI) indicators have been trending positive over the last few days as the market seemed to bottom, yet prices have again turned lower.

Meanwhile the U.S. Ten Year Note yield (TNX) has decidedly broken below 3%, a sign that the bond market is pricing in economic weakness. At least on Federal Reserve governor (Bullard) has hinted that the Fed will bypass its expected December rate increase. This waffling from the Fed is adding to the confusion by traders, human or otherwise.

Elsewhere crude oil (WTIC) may have found a price bottom near $50 per barrel, although there is price resistance at $55, and there is always uncertainty after an OPEC agreement given the potential for cheating form OPEC nations after their recent agreement to cut production.

There is unrest in the forest

Last week it seemed as a worthwhile bounce was in the cards for the stock market. Alas, that was yet another algo driven false flag. And as every day passes, it’s becoming crystal clear that the current market is not truly tradable for any extended period of time, as the odds of mistiming both entries and exits are extremely high even for experienced traders. Thus, cash remains the most viable alternative.

Still, those with high risk appetites can use inverse ETFs on a short term basis such as the ProShares Ultrashort Dow ETF (DXD) when the market offers the opportunity to sell stocks short. Those with a more aggressive bent may also look into commodities via the Invesco DB Commodity Index Tracking Fund (DBC).

At some point, I suspect the proverbial buying opportunity of the next bull market will arrive. Yet, I suspect that this won’t be for a while. Thus, wearing a steel hat and looking up and around once in a while seems prudent. You just never know when a tree can come crashing down in the neighborhood. After all, there is unrest in the forest.

I own shares in DXD as of this writing but who knows where I’ll be in a few hours given the current market.

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.

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.