Follow the Smart Money; Technology and Homebuilder Stocks Loved Last Week’s Reversal in Bond Yields

The fear on Wall Street is rising to a fever pitch, as put option buyers recently accelerated their bets against the market while sentiment surveys reached levels of bearishness not seen since last October. As I’ve noted recently, fear is often the prelude to a tradable bounce. When fear runs high, it pays to follow the smart money, which is starting to flow back into stocks.

Fear is Reaching Extreme Levels

With so much fear among investors, stocks have now entered a familiar type of uncomfortable period; specifically, the type where even though the market is oversold, investors continue to fret and sell stocks in panic, as worries of higher interest rates continue to rise. The CBOE Put/Call ratio reading of 1.60 on 10/4/23 and the recent reading of 17 on the CNN Greed-Fear index are both bullish from a contrarian standpoint.

Of course, oversold markets can stay oversold for longer than anyone expects. Yet as long as the market does not make new lows, the odds of a tradable bottom building continue to rise. On the other hand, there is a light at the end of the proverbial tunnel, and that light is not an oncoming train. A sustained top and a subsequent retracement in bond yields will likely trigger a rebound in stocks.

Here’s the laundry list of worries:

  • The Fed continues to push for higher interest rates;
  • The market’s breadth has broken down; and
  • Bond yields remain near multi-year highs.

Yet that may all change rather quickly, as the market’s breadth is showing signs of recovery and bond yields are looking a bit top-heavy. Moreover, it looks as if bargain hunters are moving into two key areas of the market.  

Smart Money Sneaks into Tech Stocks

It wasn’t long ago that Wall Street realized that AI stocks had risen too far too fast, and we saw a breakdown in the entire technology sector. Yet, money is quietly moving back into many of the same stocks that broke down when the so-called “AI bubble” burst in August.

The Invesco QQQ Trust (QQQ) is heavily weighted toward a handful of large-cap tech stocks, including Microsoft (MSFT) and Alphabet (GOOGL). And while it’s still early in what could be a bumpy recovery for the market, given the Fed’s continuing talk of “higher for longer” interest rates, QQQ, which often bottoms out before the rest of the market, may have already made its lows for the current pullback. At this point, the $350 area seems to be decent support, while $370 is the key short-term resistance level. Accumulation/Distribution (ADI) and On Balance Volume (OBV) are both improving as short sellers leave (ADI) and buyers start moving in (OBV).

A perfect example of the quiet flow of smart money can be seen in shares of Alphabet, which has remained in an uptrend throughout the recent market decline and is now within reach of breaking out.

Bond Yields Are Now Totally Crazy

Much to the chagrin of regular readers, I remain fixated on the action in the bond market. That’s because, if you haven’t noticed, stocks are trading in a direct inverse lock step to bond yields. In other words, rising bond yields lead to falling stock prices and vice-versa. You can thank the robot trader farms for that.

Recently, I’ve noted the U.S. Ten Year Treasury Note (TNX) yield has been trading well above its normal trading range. Specifically, TNX has been above the upper Bollinger Band corresponding to its 200-day moving average since August 11, 2022, except for a small dip back inside the band. As I noted in my recent video on Bollinger Bands, this is a very abnormal trading pattern, which usually precedes a meaningful reversal.

Indeed, something may be happening, and we may be in the early stages of the reversal I’ve been expecting. On 10/6/23, we saw an intraday downturn in TNX after what was initially seen as a bearish jobs report delivered an early rise in yields which took TNX to 4.9%.

The above chart shows that bond yields reached a greater extreme reading recently, as TNX closed three standard deviations above its 200-day moving average on 10/2/23 and 10/6/23 (red line at top of chart), expanding the distortion in the market and likely raising the odds of bond yields reversing their recent climb. Rising bond yields have led to rising mortgage rates and weakness the homebuilder stocks, which as I recently noted to subscribers of and members of my Buy Me a Coffee page here, may be poised for a rebound.

As the chart below shows, rates (MORTGAGE) have skyrocketed in what looks to be an unsustainable move.

Such a move would be expected to trip a major selloff in the homebuilder stocks. But what we saw was the opposite, as the SPDR S&P Homebuilders ETF (XHB) is starting to put in a bottom as bond yields look set to roll over.

The take-home message is that homebuilder stocks are now marching in lockstep to the tune of the bond market. Once bond yields fully reverse, the odds favor a nice move up in homebuilder stocks.

Prepare for the next phase in the market. Join the smart money at where I have just added five homebuilder stocks to the model portfolios. You can have a look at my latest recommendations FREE with a two week trial subscription. For frequent updates on real estate and housing, click here.

The Market’s Breadth Shows Signs of Stabilizing

The NYSE Advance Decline line (NYAD) fell below its 200-day moving average last week, but cemented its oversold status based on its most recent RSI reading near 30. Of some comfort is that the fledgling bottom in NYAD is developing near its recent March and May bottoms.

The Nasdaq 100 Index (NDX) has survived multiple tests of the 14500-15000 support area. ADI and OBV are both bouncing, which means short covering (ADI) and buying (OBV) are occurring simultaneously.

The S&P 500 (SPX) found support just below 4250 and looks set to test the resistance levels near the 20 and 50-day moving averages in the near future. ADI is rising as short sellers cover their positions. If OBV turns up, it will be even more bullish.

VIX Remains Below 20

As it has done for the past few weeks during which the market has corrected, VIX has remained stubbornly below the 20 area. A move above 20 would be very negative.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. 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. This raises the odds of higher stock prices.

Liquidity Continues to Tighten

Liquidity is tightening. The Secured Overnight Financing Rate (SOFR), is an approximate sign of the market’s liquidity. It remains near its recent high in response to the Fed’s move and the rise in bond yields. A move below 5.0 would be bullish. A move above 5.5% would signal that monetary conditions are tightening beyond the Fed’s intentions, which would be very bearish.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

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Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

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 and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

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China’s ‘secret’ police: What does it do? Why is the world worried?

The story so far: China is once again in the crosshairs of the West over its ‘secret police stations’, this time ruffling Germany’s feathers. On May 15, Berlin stated that Beijing was still operating two so-called ‘overseas’ police stations in Germany.

In November 2022, Berlin called upon Beijing to shut down extraterritorial police stations in the country. Beijing, in February 2023, responded that what it called its ‘service stations’ ­were closed.

However, a German interior ministry spokesperson stated that the police stations were “not fixed-location offices, but mobile facilities” from which official duties were being conducted on behalf of Beijing. Berlin said it is reassessing bilateral relations with Beijing, even though China remains Germany’s largest trading partner.

Canada, Netherlands, United Kingdom, and the United States have also confronted China about its ‘secret police stations’ on their soil.

How did China’s secret police stations begin?

China claimed that the rise of ‘online fraud’ by Chinese nationals around the world was why it set up these ‘service stations’, as per an investigation done by Spain-based group Safeguard Defenders.

In 2018, the Chinese district of Fujian launched an operation to stop scammers from going overseas. The operation took stringent steps against suspected scammers, like demolishing their properties, banning them from trains, suspending medical and other government subsidies, and banning their children from schools.

The operation was applauded by the Chinese Communist party (CPC) and expanded in 2021, with a task force of 70 to target people overseas involved in fraud and illegal cross-border travel. The Public Security Bureau (PSB), assisted by local cadres and police authorities, was tasked with taking ‘anti-fraud’ measures abroad. The headquarters of the operation was in China’s Yunnan province and other centres were set up in south-eastern Chinese provinces Nantong, Wenzhou, and Qingtian, apart from Fuzhou.

Fuzhou overseas service station in Italy

As of July 2022, 230,000 Chinese ‘suspects’ were ‘educated and persuaded to return to China’ from overseas to ‘confess crimes related to telecom fraud’, stated the Ministry of Public Security. To further crack down on fraud, China passed the ‘Anti-Telecom and Online Fraud Law (ATOFL) in September 2022, holding overseas Chinese citizens accountable for such crimes.

Nine ‘forbidden’ countries were listed as the main regions for fraudulent transactions by Chinese nationals and the public was warned from travelling to these nations. These include Turkey, UAE, Myanmar, Thailand, Malaysia, Laos, Cambodia, Philippines and Indonesia. Moreover, Chinese nationals were advised to return immediately if they had no ‘emergency reason’ to be in those nations.

Nine ‘forbidden’ countries listed by China for online fraud

Nine ‘forbidden’ countries listed by China for online fraud

These stringent crackdowns resulted in several innocent Chinese nationals being put on the suspect list, leading to mass deportation to China to face stringent action under ATOFL. Reports state that the ‘suspects’ were often lured into fraud through threats, smuggling and intimidation and faced severe measures like loss of power and water supply at their homes or the homes of their relatives.

Expansion of ‘secret police’ globally

In January 2022, reportedly to target ‘Chinese overseas suspects’, China widened its net setting up the first batch of 30 overseas police service stations in 25 cities across 21 countries . This included Canada, US, Italy, France, Spain, Ireland, UK, Suriname, Peru, Brazil, Chile, Panama, Argentina, Venezuela, Angola, South Africa, Tanzania, Myanmar, Cambodia, Kazakhstan, Philippines, Japan, Laos, Kyrgyzstan, Thailand, Korea, Sri Lanka, Ulaanbaatar, Papua New Guinea, Australia, New Zealand, and Fiji.

These were set up to do administrative work for Chinese citizens abroad like renewing Chinese driver licences, passport renewal and aid the diaspora with consular needs. However, extending the police stations’ jurisdiction, these centres also cracked down on all kinds of illegal and criminal activities involving overseas Chinese persons. Reports state that these centres have made arrests of Chinese suspects based on complaints and ‘persuaded’ such suspects to return to China to face legal action.

China has set up 104 overseas police stations in 53 countries

China has set up 104 overseas police stations in 53 countries

Moreover, reports state that these stations have become overseas contact points in Italy and Germany to carry out prosecution work such as transoceanic mediation, cross-border inquiries, video reports and complaints. With these expanded powers, these service stations are being to used to target Chinese nationals abroad, particularly dissidents opposed to the CPC and President Xi Jinping.

Global concern about China’s secret police

China’s tough crackdown on its overseas citizens via these service stations has raised concerns among several nations. They believe that Beijing is using these centres to circumvent bilateral extradition treaties, local authorities’ jurisdiction and United Nations Conventions to set up an alternative policing and judicial system in other countries. As of date, there are 102 overseas police stations in 53 countries, another investigation by Safeguard Defenders revealed.

In November 2022, twelve countries including the US, UK, Canada, Netherlands and Germany launched investigations to ascertain if Beijing established such centres in their territory. However, certain governments in Africa and Asia have entered into an explicit agreement with China to set up joint patrol stations, similar to an agreement signed by Italy signed with China in 2016.

Lu Jianwang, 61, a U.S. citizen charged with conspiring to act as an agent of the Chinese government by helping set up a Chinese ‘secret police station’ in New York, exits Brooklyn federal court after posting bond in New York City, U.S., April 17, 2023

Lu Jianwang, 61, a U.S. citizen charged with conspiring to act as an agent of the Chinese government by helping set up a Chinese ‘secret police station’ in New York, exits Brooklyn federal court after posting bond in New York City, U.S., April 17, 2023
| Photo Credit:
Bing Guan

Three such stations were exposed in Toronto, with the Canadian government issuing a ‘cease and desist’ order to them. Canadian Prime Minister Justin Trudeau raised concerns about these stations with Chinese President Xi Jinping at the G20 summit in Bali, Indonesia in November 2022.

In December 2022, two overseas Chinese service stations in Prague were closed by the Czech Republic authorities. When the Chinese staff were questioned, they refused to divulge any information. Similarly in the UK, four Chinese service stations were found in London, Glasgow and Belfast. While a probe was launched, no action has been taken.

Meanwhile, in the US, two New York residents were arrested by the Federal Bureau of Investigation (FBI) for allegedly operating a Chinese “secret police station” in the Chinatown district of Manhattan. The two accused have now been released on bond following an initial appearance in a Brooklyn federal court.

China’s denial

In the wake of the accusations, Chinese embassy spokespersons have maintained that the ‘secret police stations’ were ‘overseas service stations’ opened during the pandemic to assist nationals abroad with driver’s licence renewal and similar bureaucratic matters.

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