High Liquidity.  Potential Supply Chain Disruptions.  Escalating Middle East Conflict.  And an Upcoming Employment Report.  Stay Awake and Buckle Up.

September 29, 2024

It’s not the event, but how the market responds.

Under normal circumstances it would be a bullish time for stocks, with an influx of central bank liquidity about to be unleashed. But things are shifting rapidly, the market is overbought, and the month of October is just around the corner.

Events in the Middle East, the potential for U.S. supply chain disruptions due to a potential East Coast and Gulf longshoreman strike, a devastating hurricane in the Southeast U.S. and an upcoming payroll number may increase volatility in the next few days.

Stay awake. Be ready for just about anything.

Suddenly It’s the Supply Chain

A few weeks ago, I noted: “A point of emergence is an area of a complex system where all the agents in the system are vying to enter a small aperture simultaneously.  Once a point of emergence is breached and the agents move through the hole, the system emerges to a new level of operation. We are there.”

Since then, we’ve had rate cuts from the Federal Reserve and the People’s Bank of China (PBOC). In addition, the PBOC cut reserve requirements while the Chinese government is about to pump out a large fiscal stimulus package. If that sounds familiar, it’s because that’s what happened after the pandemic, with mixed results.  And now, the potential for a wider conflict in the Middle East is rapidly rising.

On the one hand, the global economy’s pandemic related decline reversed in the U.S. but not so much in Europe, and almost not all in China. On the other sticky inflation is everywhere.  Thus, rate cuts when there are still simmering inflationary pressures may be the next worry.

Thus, even though supply chains have evolved - onshoring and friend shoring taking place to reduce the dependence on China’s manufacturing, they are still vulnerable.  Moreover, consumer sentiment is wobbly, an election is near, and global central banks are about to step on the proverbial QE pedal.

Investors Can Do Better in this Climate than non-investors.

Who’s better equipped for an inflationary resurgence?  Investors who can pinpoint the right stocks in the right sector.

How does this work? As I discuss in detail in my upcoming book “Day Trading 101”, investors who focus on current income by trading stocks and other financial instruments can construct a system to deliver current income, by applying simple to execute methods.  That’s because, the stock market has become a pool of capital which can be accessed by anyone who invests and develops the correct strategic mindset.

Indeed, the stock market via its relationship to interest rates is the centerpiece of the M.E.L.A. system, in which stock prices and trading profits combine to create the wealth effect which in turn shapes consumer behavior and influences the economy. 

Watch the Supply Chain.  Follow the Money.

Three groups are showing signs of life. Their response to events will set the tone for what’s next in the markets.  The action in these sectors is being influenced by the potential for supply chain disruptions.

The Invesco Dynamic Building and Construction ETF (PKB) is on the verge of a breakout from its present lofty levels.  This ETF invests in building materials, engineering, and construction companies.  In the short term, it’s likely being boosted by the potential for reconstruction contracts in the southern U.S. due to a very difficult hurricane season.  Moreover, the demand for new infrastructure related to data centers and a housing shortage are contributing to its resiliency. 

It's been flying under the radar but on October 1, 2024, there may be a port strike which will affect the East Coast and Gulf ports, where more than half of U.S. imports are delivered.  It’s estimated that a two week strike could cost $5 billion per day.

The SonicShares Global Shipping ETF (BOAT) has been quietly moving up over the last few days in expectation of the strike.  Investors may be right as there are few signs of any progress.

The response to unfolding events from the United States Oil Fund (USO) will be worth watching. That’s because currently there are few bulls in the oil market, and potential supply disruptions are not fully factored in. 

That could prove to be a mistake, or not.  Let’s see what happens.  If you’re an ETF trader, consider, Joe Duarte’s Sector Selector.  It’s FREE with your monthly membership to Buy Me a Coffee.  Sign up here.  I just recommended a USO option trade at Joe Duarte in the Money Options.com.

Housing – The Focal Point between Inflation, Supply Chains, and Interest Rates

If there is a place where inflation, supply and demand, and interest rates come together it’s in the housing market.  Aside from the obvious – there is a structural housing shortage – as I recently discussed, even when supply and demand are on the side of homebuilders, there are new and emerging trends in this sector which accounts for 16% of U.S. GDP.

Thus, while real estate is a traditional hedge against inflation, from an investment standpoint, the key to success is to figure out if traditional relationships are still valid.  When it comes to housing, it’s all about whether consumers can foot the bill.

Homebuilder KB Home (KBH) is the latest to report decent earnings, stable revenues, flat forward growth, and stalling margins.  The stock sold off on the news as has become the norm of late. But, just as I noted in the article on emerging trends cited above, after a few days, the stock seemed to right itself.

There are two reasons for that.  One is that the company has an active stock buyback program and used the recent dip as an opportunity to retire shares. That’s good for two reasons. One is boosts per share earnings. The other, is that when earnings look better then everyone’s bonus is better.  That’s how these things work. 

The iShares U.S. Home Construction ETF (ITB), where the big homebuilders are housed, remains very stable and within reach of a potential breakout.

The iShares U.S. Real Estate ETF (IYR) is testing the support of its 20-day moving average in the short term. If it holds, as I expect, we will see a resumption of its recent climb. 

For long term time frame trades on homebuilders and REITs, check out a FREE Two Week Trial to Joe Duarte in the Money Options.com. For short term trades often featuring these bullish trading vehicles click here.

What’s the bottom line? Money flows are starting to lean toward inflationary hedges.  One which is highly favored by the rare combination of falling rates and potential inflation is the housing sector.

A Reversal in Bond Yields Could Cause All Types of Problems.  Mortgage Rates Hug Their Recent Lows.

If bond yields move higher in response to unfolding events, the bullish scenario could reverse. The U.S. Ten Year note yield (TNX) remains in a bullish, lower high, lower low trading pattern.  TNX has been finding buyers when it reaches the 3.8% level of late.  This is bullish as a move above 3.9% would be a negative for stocks.

Mortgage rates, remained below 7% for the sixteenth straight week. Buyers are still hugging the sidelines.

AD Line Powers On. Events Could Affect Short Term Trend.

The New York Stock Exchange Advance Decline line (NYAD) continued its recent climb, notching yet another series of new highs last week.  This is a huge positive for stocks. Unfortunately, NYAD is overbought which makes it vulnerable to unfolding events. A move back to the 20-day moving average is likely at some point; apparently, not yet.

The Nasdaq 100 Index (NDX) breached the 19,500-20,000 resistance area, which now becomes short term support.

The S&P 500 (SPX) made a new high last week, confirming the NYAD’s move.  5650 is now short term support

VIX Tests the 16 Area.

The CBOE Volatility Index (VIX), is still hovering near 16.  This is reassuring. But unfolding events could push VIX up, which in the short term could make things tough for investors on the long side.

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.

Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The Everything Investing in your 20s & 30s at Amazon and The Everything Investing in your 20s & 30s at Barnes and Noble.

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