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Analysis, Perspective, Trading Strategy
Roll with the Trend - Don’t Fight the Fed. Don’t Fight the Market’s Momentum
Editor Joe
Duarte in the Money Options
Let’s be clear. This is not a low risk market. Yet
it’s the perfect time to act as the late Marty Zweig always said: “Don’t
fight the Fed and don’t fight the market’s momentum.”
It certainly is a weird market and a stranger world for sure, so it’s not
really surprising to expect that the party could be over at any time. But,
even though things are messy, it doesn’t feel like 1999 or 2007 yet. What
is evident is that as the wall of worry rises and the endless talk about
asset bubbles and recessions overwhelms the airwaves and the financial pages,
the stock market rally is picking up momentum as the Federal Reserve has
made it as clear as it can without actually lowering the Fed Funds rate,
that it is on the verge of a new easing cycle.
More important, the bond market has not broken above its recent yield down
trend, which suggests that as long as external events, such as the U.S.-China
trade war and the election cycle don’t get out of hand, the stock market,
algo warts and all, is more likely than not on its way to higher highs in
the short and intermediate term.
It’s time to put MEL to a Test
Familiar readers are plugging into my Market, Economy, Life Stream concept,
(MEL) where the actions of the financial markets, the economy, and individual
and family life decisions converge into a streaming continuum of activity
forming a real-time self perpetuating cycle.
This time really is different. In the past, it was reasonable to consider
markets, the economy, and people’s lives as being much more loosely connected
than in the present. In fact, because of the Glass-Steagall Act and the time
required for actions in the markets to affect the economy what happened in
the markets was more dependent on the economy than in the present.
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Now, however, because of the repeal of Glass-Steagall
there is no dividing wall between the economy and the markets. And given
the presence of market trading algorithms in world where there is total interconnectedness
via mobile devices, the 24-hour news cycle, and social media, the markets
have more of an effect on the economy than vice versa and the effects of
one on the other are rapidly transmitted from the former to the latter.
The Markets Lead the Economy and the People
Presently, the prevailing conventional wisdom is that we are heading into
a recession due to the U.S.-China trade war’s effect on the economy coupled
to the fact that many, especially in the middle class have not recovered
from the Great Recession and that job losses and the end of the economic
expansion are upon us.
In fact, the majority of economic thought argues against the Fed lowering
interest rates when the stock market is at all time highs. But if they understood
MEL, they would know that as the economy slows, the trading algos start to
bet on lower interest rates. They would note that the algos trade based on
prevailing money flows, which means that at the moment, money is moving into
stocks based on expectations that the Fed will lower interest rates. Therefore
because of the new MEL dynamic, the markets, the economy and life’s financial
decisions now move in synchronous fashion fueled by the trend in interest
rates. What it all boils down to is that the new highs on the market are
based on expectations that the economy will fare better as the Fed lowers
rates. Thus as the mainstream worries about recession, the cycle of expectations
has already turned.
Certainly, things could change in a hurry and the whole world could crash
and burn. And it’s hard to argue with the fact that the U.S. economy is slowing
while many in the U.S. are struggling financially. Moreover economic conditions
in the rest of the world seem to be fading even faster.
Yet, if I’m right, because MEL is all about the markets, the economy, and
people’s life decisions moving together in the same direction, as the Fed
eases and the news spreads via the 24 hour news cycle and social media, if
there is a recession it may not be as deep or as widespread as the mainstream
line of thinking expects.
Accordingly, based on the basic tenets of MEL and the market’s current
behavior, I expect that the positive psychology of lower interest rates,
new highs in the stock market, and a stable bond market – barring a meltdown
in the latter – will positively impact the major tools of current wealth,
the 401-K plan and the home equity line of credit (HELOC) and that will translate
into a continuation of the economic expansion, thus justifying the new highs
in the market.
All of which brings me to the housing sector, the bellwether for MEL at
the moment. And as I describe in the next section, there are some potentially
powerful ways to play this area.
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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
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Location and Timeliness: Two Niche Housing Stocks with Huge
Upside Potential
Housing stocks have been a hit and miss affair all year, but there are
two companies which should benefit from the current economic climate as long
as bond yields and mortgage rates don’t start a nasty rising cycle and the
job market doesn’t collapse.
One of the two is Skyline Champion (SKY) a designer and builder of mobile
and modular homes. With tight incomes, high demand for housing and rising
prices for traditional single family homes, SKY offers potential homeowners
a lower price alternative, especially for first time buyers.
The company has a large share of the mobile market, has its cost structure
under control and has recently offered positive guidance, which is rare in
the homebuilder sector in these turbulent times. Furthermore, it’s expanding
its manufacturing capacity in the U.S., which suggests management is not
just positive about the company’s prospects but that it’s aware of the changing
global landscape for businesses due to tariffs and related matters and is
making a big bet on the U.S. where the economy and the demographics are in
their favor. This is likely fueled by the 15% year over year growth in SKY’s
home sales in the U.S., rising per unit average pricing, and growth in revenues,
gross profit and margins.
In the short term, the stock may gain further ground if its FEMA, hurricane
season sales, pick up.
The second stock is LGI Homes (LGIH) a regional homebuilder,
whose shares broke out of a multi-month base on July 12. LGIH is well positioned
for growth via its widespread footprint in the Southern and Western U.S.,
especially in Texas, the Carolinas, Florida, Oklahoma, Alabama, Nevada, Tennessee
and Georgia, all areas which should benefit from the migration from high
tax states and stable employment, a MEL related dynanic. LGI recently reported
record breaking second quarter 2019 home closing numbers with earnings due
out on August 6.
Both SKY and LGIH have positive money flow statistics including Accumulation-Distribution
and On Balance Volume.
SPECIAL
Subscription Offer
1. Over Twenty-Seven Years of
Trading Experience
2. Now Joe is
bringing all his years of expertise
to his new options focused web
site with two goals: Risk Management
and Profit Delivery.
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
intraday
buy
and
sell
alerts
as
called
for
by
market
and
individual
positions.
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Higher Prices Ahead Says Most Accurate Trend Indicator since 2016
Once again, the New York Stock Exchange Advance Decline line (NYAD) the
most accurate indicator of the stock market trend since the 2016 presidential
election made a new high this week, building upon last week’s new high.
Furthermore, NYAD’s new high was confirmed by both the
S & P 500 (SPX) and the Nasdaq 100 (NDX) indices creating a positive
convergence suggesting higher prices ahead.
Perhaps the most encouraging sign is that the rally is starting to broaden
to include sectors beyond technology, which is both a bullish and practical
sign for stock investors as when more stocks rise so does the chance of picking
winners.
Roll with the Trend
We seem to be in the early stages of what could be a fairly profitable
momentum run for stocks based on new highs on NYAD confirmed by new highs
on the major stock indexes. Thus the burden of proof is now on the bears.
Therefore as long as the wall of worry is in place, it makes sense to stay
long the market via a sound trading plan:
- Trade with the trend but be aware that momentum markets always
end badly
- Be aware that the trend could turn against you at any moment
- Hedge only if now needed via raising cash, using inverse ETFs
and options, consider bonds as long as TNX yields remain below 2.1-2.25%.
- Use sell stops in the 5% range and let your winners ride while
cutting losses early.
As usual, trusting the market is not an option. Thus vigilance, moderation
in position size, and staying abreast of the overall market trends, macro
economics, the political situation and company fundamentals is a must. Otherwise,
enjoy the ride.
I own, SKY and LGIH 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.
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