Tag: qqq

What’s the Downside Risk for QQQ?

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KEY

TAKEAWAYS

  • A bearish momentum divergence and declining Bullish Percent Index suggests rough waters ahead for the QQQ.
  • The 50-day moving average and Chandelier Exit system can serve as trailing stops to lock in gains from the recent uptrend.
  • If stops are broken, we can use Fibonacci Retracements to identify potential downside targets for the Nasdaq 100.

The Nasdaq 100 ETF (QQQ) is beginning to show further signs of deterioration, from bearish momentum divergences between price and RSI to weakening breadth using the Bullish Percent Index. How can we determine whether a pullback could turn into something more disastrous for stocks? Let’s look at how the 50-day moving average, Chandelier exits, and Fibonacci retracements can help anticipate downside risk for the QQQ.

To kick things off, we need to acknowledge how the QQQ has a place of distinction on the growing list of charts showing bearish momentum divergences.

This classic sign of a bull market top is when price continues to trend higher while the RSI (or some other momentum indicator) begins to slope downwards. Think of this pattern as a train running out of steam as it reaches the top of a hill. This weakened momentum usually occurs at the end of a bullish phase, when buyers are exhausted and there just isn’t enough momentum left to push the markets much higher.

But it’s not just about weakening momentum. Breadth conditions, which remain fairly constructive for the broader equity space, have really deteriorated in the past ten weeks.

Here, we’re showing the Bullish Percent Index for the Nasdaq 100. This is a market breadth indicator based on point & figure charts, and basically measures how many stocks in a specific index are currently showing a bullish point & figure signal.

Note how, in late December, this indicator was around 90%, meaning nine out of every ten Nasdaq 100 members were in a bullish point & figure phase. This week, we saw the indicator finished just below 50%. This shows that about 40% of the Nasdaq 100 members generated a sell signal on their point & figure charts in 2024.

What’s very interesting about that particular development is that point & figure charts usually have to show quite a bit of price weakness to generate a sell signal. So names like TSLA, AAPL, and others are breaking down, which suggests that further upside for the QQQ would be limited until this breadth indicator improves.

Are you prepared for further downside for the QQQ and leading growth names? The first item in my Market Top Checklist has already been triggered. Join me for my upcoming FREE webcast on Tuesday, March 19th, where I’ll share the other six items on the checklist and reflect on what signals we’ll be watching for in the coming weeks. Sign up HERE for this free event!

So what if the Nasdaq 100 does continue lower? At what point can we confirm that a corrective phase has truly begun? I like to keep things simple, so, in terms of an initial trigger for a tactical pullback, I always start with the 50-day moving average.

The 50-day moving average currently sits about $6 below Friday’s close, and also lines up pretty well with the February swing low around $425. So as long this level would hold, the short-term trend actually remains in good shape. A break below that 50-day moving average would tell me there is a much higher likelihood of further price deterioration.

But the 50-day moving average, while a simple and straightforward situation, is perhaps not the most effective way to gauge a new downtrend phase. Alexander Elder popularized the Chandelier Exit system in his books, and it represents a more nuanced version of a trailing stop because it is based on Average True Range (ATR).

Look back at the price peak in July 2023, and notice how the price remained above the Chandelier Exit through that price high. Soon after, the price violated the trailing stop to the downside, suggesting the uptrend phase was over and a corrective move had begun. Since the October 2023 low, the QQQ has consistently remained above the Chandelier Exit on pullbacks, as the price achieved higher highs and higher lows into March. After Friday’s drop, the Nasdaq 100 remains just above this effective trailing stop indicator.

So what if the Chandelier Exit is violated next week, and the QQQ begins to drop to a new swing low? What’s next for the Nasdaq 100?

Fibonacci Retracements can be so helpful in identifying assessing downside risk, because they measure how far the price may pull back in relationship to the most recent uptrend. Using the October 2023 low and the March 2024 high, that would give an initial downside target around $408. Further support could be at the 50% level ($395) and the 61.8% level ($382).

Note how well these levels line up with previous swing lows, especially the 61.8% retracement level. That last support level lines up with the swing low in December 2023, as well as the price peak in July 2023. I refer to that sort of level as a “pivot point” because it has served as both support and resistance, and these are often important levels to monitor.

A number of the mega-cap growth stocks, such as TSLA and AAPL, have broken down in recent weeks. But the latest patterns of bearish momentum divergences and declining breadth conditions tell us that there may be further downside in store for the Nasdaq 100. By keeping a watchful eye on trailing stops and potential support levels, we can perhaps navigate choppy market waters using the power of technical analysis.

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

David Keller

About the author:
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.

David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
Learn More

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How Overextended Are You, QQQ?

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We’ve highlighted all the warning signs as this bull market phase has seemed to near an exhaustion point. We shared bearish market tells, including the dreaded Hindenburg Omen, and how leading growth stocks have been demonstrating questionable patterns. But despite all of those signs of market exhaustion, our growth-led benchmarks have been pounding even higher.

This week, Nvidia’s blowout earnings report appeared to through gasoline on the fire of market euphoria, and the AI-fueled bullish frenzy appeared to be alive and well going into the weekend. As other areas of the equity markets have shown more constructive price behavior and volatility has remained fairly low, the question remains as to when and how this relentless market advance will finally meet its peak.

I would argue that the bearish implications of weaker breadth, along with bearish divergences and overbought conditions, still remain largely unchanged even after NVDA’s earnings report. The seasonality charts for the S&P 500 confirm that March is in fact one of the weakest months in an election year. So will the Nasdaq 100 follow the normal seasonal pattern, or will the strength of the AI euphoria push this market to even further heights into Q2?

By the way, we conducted a similar exercise for the Nasdaq 100 back in November, and guess which scenario actually played out?

Today, we’ll lay out four potential outcomes for the Nasdaq 100. As I share each of these four future paths, I’ll describe the market conditions that would likely be involved, and I’ll also share my estimated probability for each scenario. And remember, the point of this exercise is threefold:

  1. Consider all four potential future paths for the index, think about what would cause each scenario to unfold in terms of the macro drivers, and review what signals/patterns/indicators would confirm the scenario.
  2. Decide which scenario you feel is most likely, and why you think that’s the case. Don’t forget to drop me a comment and let me know your vote!
  3. Think about how each of the four scenarios would impact your current portfolio. How would you manage risk in each case? How and when would you take action to adapt to this new reality?

Let’s start with the most optimistic scenario, involving even more all-time highs over the next six-to-eight weeks.

Option 1: The Very Bullish Scenario

The most optimistic scenario from here would mean the Nasdaq basically continues its current trajectory. That would mean another 7-10% gain into April, the QQQ would be threatening the $500 level, and leading growth stocks would continue to lead in a big way. Nvidia’s strong earnings release fuels additional buying, and the market doesn’t much care about what the Fed says at its March meeting because life is just that good.

In this very bullish scenario, value-oriented stocks, including Industrials, Energy, and Financials, would probably move higher in this scenario, but would still probably lag the growth leadership that would pound even higher.

Dave’s Vote: 15%

Option 2: The Mildly Bullish Scenario

What if the market remains elevated, but the pace slows way down? This second scenario would mean that the Magnificent 7 stocks would take a big-time breather, and more of a leadership rotation begins to take place. Value stocks outperform as Industrials and Health Care stocks improve, but since the mega-cap growth names don’t lose too much value, our benchmarks remain pretty close to current levels.

Dave’s vote: 25%

Option 3: The Mildly Bearish Scenario

Both of the bearish scenarios would involve a pullback in leading growth names, and stocks like NVDA would quickly give back some of their recent gains. Perhaps some economic data comes in way stronger than expected, or inflation signals revert back higher, and the Fed starts reiterating the “higher for longer” approach to interest rates through 2024.

I would think of this mildly bearish scenario as meaning the QQQ remains above the first Fibonacci support level, just over $400. That level is based on the October 2023 low and also assumes that the Nasdaq doesn’t get much higher than current levels before dropping a bit. We don’t see defensive sectors like Utilities outperforming, but it’s clear that stocks are taking a serious break from the AI mania of early 2024.

Dave’s vote: 45%

Option 4: The Super Bearish Scenario

Now we get to the really scary option, where this week’s upswing ends up being a blowoff rally, and stocks flip from bullish to bearish with a sudden and surprising strength. The QQQ drops about 10-15% from current levels and retests the price gap from November 2023, which would represent a 61.8% retracement of the recent upswing. Defensive sectors outperform and investors try to find safe havens as the market tracks its traditional seasonal pattern. Perhaps gold finally breaks above $2,000 per ounce, and investors start to talk about how a break below the October 2023 low may be just the beginning of a new bearish phase.

Dave’s vote: 15%

What probabilities would you assign to each of these four scenarios? Check out the video below, and then drop a comment there for which scenario you select and why!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

David Keller

About the author:
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.

David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
Learn More

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#Overextended #QQQ

These ETF strategies won big in 2023. How one analyst sees them doing next year.

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Hello! This is MarketWatch reporter Isabel Wang bringing you this week’s ETF Wrap. In this week’s edition, we look at ETF strategies that have exploded in popularity in 2023, and whether they will continue to gain momentum in the year ahead.

Please send tips or feedback to [email protected] or to [email protected]. You can also follow me on X at @Isabelxwang and find Christine at @CIdzelis.

Sign up here for our weekly ETF Wrap.

U.S. exchange-traded funds have had a strong 2023, attracting around $580 billion in net inflows with assets climbing to a record $8.1 trillion as of December 27, according to FactSet data.

ETFs tracking the large-cap benchmark S&P 500 index
SPX,
which has risen 24.6% this year, have seen the strongest net inflows in 2023 among the nearly 700 funds MarketWatch tracks, according to FactSet data.

The SPDR S&P 500 ETF Trust
SPY,
the world’s largest and oldest ETF with $493 billion assets under management, has recorded the largest net inflows of over $47 billion this year to date, followed by the Vanguard S&P 500 ETF’s
VOO
$41 billion and the iShares Core S&P 500 ETF’s
IVV
$36 billion over the same period, according to FactSet data. 

In terms of year-to-date performance, technology-related stock funds have shown a remarkable turnaround in 2023 after facing a tumultuous bear market the year before. Some of the ETFs tracking the tech-heavy Nasdaq 100 index
NDX
as well as semiconductor stocks are on pace to finish 2023 with gains of more than 50%, thanks to the rise of the “Magnificent Seven” stocks.

The Fidelity Blue-Chip Growth ETF
FBCG
has jumped 58.7% in 2023 to become the best-performing U.S. fund, excluding ETNs and leveraged products, according to FactSet data. The WisdomTree U.S. Quality Growth Fund
QGRW
is up 56.2% this year, while the Invesco QQQ Trust Series I
QQQ
has risen 55.6% in 2023. Gains in all of these funds were fueled by a massive rally in mega-cap technology stocks such as Apple Inc.
AAPL,
+0.22%
and Nvidia Corp.
NVDA,
+0.21%,
which have surged 49% and 239% this year, respectively, according to FactSet data. 

Will these ETF strategies continue to thrive in 2024? Will others emerge to deliver greater returns next year? Here’s how one CFRA ETF analyst sees things shaping up in the new year. 

Tech-driven growth ETFs will continue to stand out in 2024

The recent strong performance of technology and growth-driven ETFs is likely to continue in 2024, although with higher volatility, according to Aniket Ullal, senior vice president and head of ETF data and analytics at CFRA. 

The table below summarizes the best performing ETF sub-categories in 2023, excluding leveraged and inverse ETFs. The best ETF sectors have featured tech- and growth-related themes like fintech, cryptocurrency, semiconductors, software and the metaverse. “These themes are very likely to continue to have a strong year in 2024,” said Ullal.

SOURCE: CFRA ETF DATABASE, DATA AS OF DECEMBER 18, 2023

One concern for investors is whether ETFs linked to technology sectors can continue to appreciate in 2024. But CFRA’s analysts think that some of the largest tech firms have strong balance sheets and cash flows, so they should be “safe havens” with “a growth tilt” next year.

“Despite the AI-driven recent run-up, the tech sector is still growing into its multiple, and ETFs like the Technology Select Sector SPDR Fund
XLK
do not yet have frothy multiples,” Ullal said in a Friday client note. 

See: ‘Magnificent Seven’ up for another bull run? What to expect from technology stocks in 2024.

Meanwhile, the massive amounts of cash parked at U.S. money-market funds could also keep the bull-market rally chugging along next year.

As of December 20, there was still $5.9 trillion sitting in U.S. money-market funds, according to data compiled by the Investment Company Institute. But given the stock-market rally in 2023 and the “likely pivot” to interest-rate cuts next year by the Federal Reserve, Ullal and his team see investors moving money out of cash-like instruments and migrating back to 60/40 portfolios by increasing their equity exposure next year, he wrote. 

Continued growth in options-based ETFs

ETFs using options-based strategies, such as covered-call ETFs or defined-outcome ETFs, have exploded in popularity in 2023. They have “long-term staying power” in sustaining investor interest in the year ahead, said Ullal. 

Specifically, the largest U.S. covered-call ETF, the $31 billion JPMorgan Equity Premium Income ETF
JEPI,
has seen $13 billion in net inflows so far this year and is among the top-five funds attracting the most capital in 2023, according to FactSet data.

A covered-call ETF, or an option-income ETF, is a fund that uses an options strategy called covered-call writing to generate income through collecting premiums. In a covered-call trade, investors sell a call option on an asset they hold, which gives the buyer of the option the right, not the obligation, to purchase the asset from them at a specified “strike” price on or before a certain date.

When the price of the asset goes down and doesn’t reach the “strike” price before the expiration date, the call option will expire as buyers walk away, but investors could still keep the premium as their payout.

That’s why the covered-call strategy usually performs well in a sideways or choppy market environment, because investors will be compensated for giving up the upside in stocks with a higher options premium. 

More on covered-call ETF: This type of ETF is designed to hedge against volatility and help investors navigate a stormy stock market

Ullal attributed the growing popularity of options-based ETFs to the success of JEPI as well as ETF firms relentlessly expanding their covered-call and buffer-ETF suites in 2023, even though these strategies tend to underperform in a rapidly rising stock market. 

“The flows are probably moderate [in 2024] relative to what we’ve seen so far, but I don’t think the flows will be negative or this category will go away,” Ullal said in a follow-up interview with MarketWatch on Thursday. “What’s happening is there are investors who are willing to trade off or sacrifice some [stock] performance for income or downside protection.” 

With that backdrop, Ullal sees options-based ETF strategies continuing to grow in 2024, though they will be put to the test if the current bull-market trend continues. 

Also see: An ETF that can’t go down? This new ‘buffer’ fund is designed to provide 100% protection against stock-market losses

Emerging-markets ETFs without China-related drag

ETF investors may want to “unbundle” their emerging-market exposure by reconsidering China-related assets in their ETF portfolios, according to Ullal.

Having a high exposure to China in emerging-market holdings was challenging for ETF investors in 2023, as China significantly underperformed other emerging markets this year due to a slower-than-anticipated post-Covid economic recovery, weakness in the country’s property sector and geopolitical tensions with the U.S., Ullal said.

China exposure in two of the most popular emerging-market ETFs, the Vanguard FTSE Emerging Markets ETF
VWO
and the iShares Core MSCI Emerging Markets ETF
IEMG,
stands at 31% and 24.4%, respectively, according to FactSet data. In turn, VWO has risen 8.3% this year, while IEMG has climbed 10.7% in 2023.

Meanwhile, the SPDR S&P China ETF
GXC
has slumped 12.8% year to date, per FactSet data. But the iShares MSCI Emerging Markets ex China ETF
EMXC,
which has no China exposure, has advanced 18.9% over the same period.

One option for investors would be to calibrate their exposure by combining emerging-market ex-China ETFs like EMXC with China-focused ETFs, Ullal said.

Alternatively, investors could construct the EM sleeve of their portfolios with country-specific ETFs, or use active ETFs like the KraneShares Dynamic Emerging Markets Strategy ETF
KEM,
as that fund’s China exposure is dynamically adjusted based on fundamental, valuation, and technical signals, he added.

Rising demand and competition in active bond ETF category 

The U.S. fixed-income ETF sector is dominated by funds passively tracking Treasury bonds like the 10-year Treasury note
BX:TMUBMUSD10Y,
which has seen declining yields lately as discussions around the Fed’s interest-rate path, and a possible pivot to rate cuts, continue to take center stage heading into 2024.

But MarketWatch reported last week that demand for active bond ETFs has picked up, with Vanguard launching two new active bond funds earlier this month. The desire for active bond ETFs among the firm’s clients has grown significantly over the past two years, John Croke, Vanguard’s head of active fixed-income product management, told MarketWatch.

Meanwhile, the firms that dominate the indexed and active bond ETF categories are different, Ullal noted. In the indexed bond ETF category, Vanguard competes with traditional rivals BlackRock and State Street, while in the active bond ETF category where it is now expanding its footprint, Vanguard is competing with managers like JPMorgan, First Trust and PIMCO. 

“This competition will put pressure on the incumbent players, but will be good for investors, and will be an important trend to watch in the next year,” said Ullal.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top Performers

 %Performance
AdvisorShares Pure U.S. Cannabis ETF
MSOS 		12.7
Amplify Transformational Data Sharing ETF
BLOK 		10.5
SPDR S&P Biotech ETF
XBI 		9.9
ARK Genomic Revolution ETF
ARKG 		8.3
ARK Innovation ETF
ARKK 		6.4
Source: FactSet data through Wednesday, Dec 27. Start date Dec 21. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater.

…and the bad

Bottom Performers

 %Performance
iMGP DBi Managed Futures Strategy ETF
DBMF 		-2.9
Vanguard Total International Bond ETF
BNDX 		-2.2
iShares 20+ Year Treasury Bond BuyWrite Strategy ETF
TLTW 		-2.1
VanEck BDC Income ETF
BIZD 		-1.2
Vanguard Short-Term Inflation-Protected Securities ETF
VTIP 		-1.2
Source: FactSet data

New ETFs

  • TCW Group filed to convert its TCW Artificial Intelligence Equity Fund TGFTX into the TCW Artificial Intelligence ETF, and is seeking to convert its TCW New America Premier Equities Fund TGUSX into the TCW Compounders ETF, according to the fund’s prospectus filed with the Securities and Exchange Commission on Tuesday.

Weekly ETF Reads



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Why the Santa Rally Stumbled; QQQ Sets Up for Big Move, Be Careful

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Next week could make or break the Santa rally.

The Fed meets on 12/12 and 13, and CPI and PPI are due out simultaneously. As a result, it wouldn’t a bad idea to review portfolios carefully, to consider taking some profits and to game out some potential ways to hedge. Still, the Nasdaq 100 Index (NDX) is forecasting a large, and potentially bullish move soon. Given the bullish seasonal trends, further upside is not out of the question.

This is especially notable given the recent liquidity scare and serendipitous recovery in the financial system, which I describe directly below. Let’s start by looking at the price chart for the Invesco QQQ Trust (QQQ).

Cutting to the chase, the Bollinger Bands are tightening around QQQ’s prices. That’s a sign, as I detailed here, that a big move is coming. Moreover, money flows, as indicated by Accumulation/Distribution (ADI) and On Balance Volume (OBV) are perking up. A move in QQQ above $394 would likely trigger a whole lot of algo trading programs queued up to trade breakouts.

Why the Santa Rally Stumbled Last Week

Stock traders who have profited from the October 2023 bottom should be thanking the bond market for their good fortune, which means that any major reversal in bond yields will likely be followed by what could be a major selloff in stocks. On the other hand, as can only happen in the strange world known as Wall Street, the recent rally in bonds nearly pulled the plug on the entire financial system on December 1.

In fact, the recent hiccup in the Santa Claus rally, from which the market has largely recovered, may have resulted from a reduction in the financial system’s liquidity brought about by, wait for it, the rally in bonds. According to reports, the speed with which the bond rally developed put a squeeze on Wall Street’s money lending machine (the repo market), whose money powder keg was squeezed by the Fed’s QT maneuvers, which led to the huge backup in bond yields.

The whole thing is so bizarre that it took me several reviews of multiple sources to put it together. But here is the simplified version. The Fed’s “higher for longer” mantra and its QT (removal of liquidity from the system), via the sale of treasury bonds, drained Wall Street’s piggy bank for borrowed money, leaving it with less funds than would normally be required further finance the rally in stocks and bonds.

Translation: we had a mini liquidity crisis as Wall Street ran out of money to lend for a couple of days. Stay with me, please. You just can’t make this stuff up.

When the U.S. Treasury Note yield (TNX) was rising to 5% (May to October 2023), spurred by the Fed’s QT and the panicked sellers who joined them in selling bonds, it squeezed the liquidity in the financial system. Thus, even though there was plenty of interest in buying stocks and bonds when sentiment turned, there wasn’t enough reserve money available in Wall Street’s loan machine to lend to hungry traders – the proverbial air pocket.

The visual evidence for the hiccup was the December 1, 2023 bump in the Secured Overnight Trading Rate (SOFR), which is best seen in the Zoom thumbnail to the right of the price chart.

As a result, those who got caught off guard and who ended up playing catchup after they missed the rally in stocks and bonds, which I predicted here way back in October, suddenly found themselves with limited supplies of money to borrow in order to trade the reversal. SOFR is back in sync with the Fed Funds rate now. But yeah, that was an interesting development for sure.

Bond Yields Pause, Mortgages Continue Bullish Decline

So where are we now? SOFR seems to be back in sync with the Fed Funds rate, which is why the stock market has resumed its rally. On the other hand, the U.S. Ten Year Note yield (TNX) has come a long way in a short period of time, which means we can expect it to back up some in the short term.

Indeed, a pause in TNX’s decline could last for the next couple of weeks as the CPI and PPI numbers are released and the Fed meets on December 12-13. Keep an eye on the 4.25-4.4% yield range, as any move above that key zone could trip some algo-selling in stocks and bonds.

Mortgage rates have dropped. A breach below 7% on the average mortgage could well take mortgages to 6.8%, where they will test the 50-day moving average for this series.

Consequently, homebuilder stocks, as in the SPDR S&P Homebuilders ETF (XHB), have broken out to new highs, spurred by the bullish beat of earnings expectations and outlook from Toll Brothers (TOL), which I own and recommended in October, 30% below the 12/2/23 closing price.

The long-term fundamentals of supply and demand remain in favor of the homebuilders and related sectors. For the next move in the homebuilders and other important market sectors, join the smart money at Joe Duarte in the Money Options.com FREE with a two-week trial subscription.

For more on homebuilder stocks and real estate stock analysis, click here.   

Interesting Emerging Sectors

Lately, I’ve focused on value investing, as I did in my recent Your Daily Five video, which you can catch here. As it happens, the trend seems to be expanding into sectors which are well off the radar for many investors. Comparing the action in the S&P 500 Citigroup Pure Growth Index (SPXPG) to the trend in the S&P 500 Citigroup Pure Growth Index (SPXPV) index, you can see the dynamic playing out.

One of the most unlikely areas of the market which has benefited from the value trend is the transport sector, where the difficulties being faced by trucking companies are gathering the headlines, but other subsectors are reaping the rewards.

You can see this in the action for the SPDR S&P Transportation ETF (XTN), which has quietly crossed above its 200-day moving average and which looks poised to make a run at its old highs near the high 80s, barring negative developments.

Market Breadth Recovers Post-Liquidity Squeeze

The NYSE Advance Decline line (NYAD) remains in bullish territory, trading above its 50- and 200-day moving averages. This may be slowed in the short-term, as the RSI indicator is nearing an overbought level. But even with a slower rate of climb than NYAD’s, the market’s breadth is holding up.

The Nasdaq 100 Index (NDX) is inching above 16,000. And with the Bollinger Bands starting to squeeze around prices, it looks as if a big move is just around the corner. Both ADI and OBV are flattening out as profit-taking increases.

The S&P 500 (SPX) remained above 4500 and looks poised to move above 4600. This is not surprising, as many value stocks continue to push SPX higher.

VIX Remains Below 20

The CBOE Volatility Index (VIX) remained below 20. This is bullish.

A rising VIX means traders are buying large volumes of put options. Rising put option volume from leads market makers to sell stock index futures, hedging their risk. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying. This causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.

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!

#1 New Release on Options Trading!

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 Benzinga.com 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.

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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In Bullish Trends, Seek Value and Momentum; Three Sectors to Watch as Year-End Rally Progresses

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The combination of a pause in the Fed’s rate hikes and strong year-end seasonal tendencies have created an opportunity for investors to end the year on a positive note. The fly in the ointment, in the short term, could be a bad set of readings on the upcoming Consumer (CPI) and Producer (PPI) price gauges. Aside from that, the negative sentiment on Wall Street is still thick enough to push prices higher.

As I noted last week, “The stock market seems to have bottomed, as short sellers panicked and recently frightened buyers rushed back into the markets. It’s about time, as the signs of a pending reversal have been in place for the past two months, namely a slowing economy and fears about the Fed’s rate hike cycle, which have been mounting as investor’s pessimism rose to a fever pitch.”

On the other hand, Fed Chairman Powell proved once again that a few words can kill any rally, when he noted the central bank was “not confident” that inflation was fully vanquished on 11/9/23 and stocks sank. Whether that was just tough talk or a sign that he knows what the CPI and PPI numbers will show is anyone’s guess. Thankfully, the market recovered, although, as I discuss below, breadth remains weaker than one would hope for.

That said, there is no substitute for being prepared for any eventuality. For now, the trend is bullish, so here are three groups that should move higher, barring any unpleasant surprises.

It’s What’s Inside That Matters; Three Sectors Worth Watching as the Year End Rally Develops

Most investors focus on areas of the market which are exhibiting strength. That’s because, in bull markets, strength usually leads to further strength. This, of course, is the essence of momentum investing.

At the same time, it’s also useful to review the action in weak sectors, as underperformers are often future areas of value. Moreover, it’s important to know what you’re buying. Here is what I mean.

The software sector encompasses a wide swath of companies ranging from security companies to app developers, along with those in the increasingly popular AI sector. With so many companies, it’s often more practical to buy into a diversified portfolio, such as an ETF.

One such ETF is the Invesco Dynamic Software ETF (IGPT), recently renamed Invesco AI and Next Gen Software ETF, which is closing in on what could be a major breakout. But don’t let the title fool you; this ETF holds the usual large-cap tech stocks that typically rally when the tech sector moves into a rising trend, such as what is currently developing and is evident in the price chart for the Invesco QQQ Trust ETF (QQQ). QQQ holds many of the same companies, but currently trades at ten times the price of IGPT.

So, you can pay ten times more for QQQ, or get the same general market exposure via IGPT for a fraction of the price. Consider that IGPT is currently trading below $40 per share, which means you can own shares in Meta (META), Alphabet (GOOGL), Adobe (ADBE), and even NVDIA (NVDA) for a fraction of the price of each of these blue chips.

And here’s what the price chart is telling us regarding IGPT:

  • The ETF is back in bullish territory, as it just crossed above its 200-day moving average;
  • Accumulation/Distribution (ADI) is moving higher after a recent consolidation as short sellers leave the scene;
  • On Balance Volume (OBV) is in an established uptrend, as buyers come in; and
  • A move above $36 will likely take this ETF higher, as long as the bullish trend in the technology sector remains in place.

Another bullish sector which remains undervalued is the uranium mining sector, as in the Global X Uranium ETF (URA), in which I own shares and which is a core holding at Joe Duarte in the Money Options.com. Nuclear power is slowly becoming an option for areas of the world which are trying to find a compromise between clean fuels and reliable power generation.

URA’s appeal has been boosted by the demise of the renewable power sector over the last few months, due to the expense burden and supply chain challenges required to build wind turbines. Note the difference in the performance of URA versus the First Trust ISE Global Wind Energy ETF (FAN).

For one, URA is in a bullish consolidation pattern after its recent breakout. Note the excellent support at $26, where the 50-day moving average and a large Volume-by-Price (VBP) bar continue to attract buyers. Moreover, note the bullish uptrend in OBV as buyers sneak into the shares.

Certainly, FAN is in a consolidation pattern of its own after its recent collapse. Note, however, that neither ADI or OBV have turned up yet, which means that there is currently little interest in these shares from bullish investors. On the other hand, from a contrarian standpoint, it’s not a bad idea to keep an eye on this ETF as the cycle works itself out. All it would take for this sector to bottom out would be something like a large infusion of government cash, such as what may be materializing in Europe, according to reports.

I recently recommended an ETF which is now breaking out in a big way. Join the smart money at Joe Duarte in the Money Options.com, where you can have access to this ETF and a wide variety of bullish stock picks FREE with a two-week trial subscription.

Bonds Retain Bullish Tone Ahead of Inflation Numbers

As I noted last week, bond yields have made at least a short-term top. In fact, just three weeks ago, the U.S. Ten Year note yield (TNX) hit the 5% point, an event that unhinged both stock and bond traders.

Since then, things have quieted down and TNX has settled into a trading range, with 4.5% and the 50-day moving average as the floor.

If the inflation numbers are bullish, and TNX breaks below 4.5%, expect a big move up in stocks.

Keep an eye on the SPDR S&P Homebuilders ETF (XHB), specially the $78-$80 area. If CPI and PPI are bullish and bond yields fall, XHB should rise as short sellers get squeezed. Note the improvement in ADI, as the shorts cover their bets, while OBV is still holding steady, as buyers remain patient.

I’ve recently posted several detailed articles on mortgage rates, bonds, and homebuilders at my Buy Me a Coffee page. You can access them here. For the perfect price chart set up, check out my latest Your Daily Five video here.

Market Breadth Lags Rally as Indexes Outperform

The NYSE Advance Decline line (NYAD) has bottomed out, but has yet to cross above its 50- or 200-day moving averages. So, for now, NYAD is neutral to slightly positive. If it doesn’t show a bit more pop in the next few weeks, it may signal that the rally will have short legs.

In contrast, the Nasdaq 100 Index (NDX) is nearing a breakout after rallying above its 50-day moving average. Both ADI and OBV turned higher as short sellers cover (ADI) and buyers move in (OBV). A move above 15,800-16,000 would likely extend the rally further.

The S&P 500 (SPX) is also lagging NDX, but has delivered a minor breakout above 4400. SPX is well above its 200-day moving average, returning to bullish territory after its recent dip below 4150. Moreover, it has now survived a test of the 4350 support area.

VIX is Back Below 20

The CBOE Volatility Index (VIX) is well below 20. This is bullish.

A rising VIX means traders are buying large volumes of put options. Rising put option volume from leads market makers to sell stock index futures, hedging their risk. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying. This causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.

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!

#1 New Release on Options Trading!

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 Benzinga.com 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.

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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Santa May Be Warming Up His Sled; What’s Next? Watch the Fed and the Bond Market

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The traditional year-end rally may have started with last week’s liftoff on Wall Street, as the Fed’s rate hikes start to bite and the economy shows signs of slowing. Investors hope the economy slows just enough to reduce inflation.

The stock market seems to have bottomed, as short sellers panicked and recently frightened buyers rushed back into the markets. It’s about time, as the signs of a pending reversal have been in place for the past two months, namely a slowing economy and fears about the Fed’s rate hike cycle, which have been mounting as investor’s pessimism rose to a fever pitch. Moreover, the self-perpetuating talk of doom loops led to a bout of panic selling, which reversed as the Fed held rates steady and Friday’s employment report showed a cooling in the labor market.

Of course, there are no certainties in any market. And this rally could easily fizzle. But the longer stocks hold up and bond yields remain subdued, the higher the odds of the rally intensifying.

Buckle up! Santa may be warming up his sled.

The Signs Were There

I’ve been expecting a major reversal in both bonds and stocks since September when the selling in the U.S. Treasury market, and the subsequent rise in yields entered an absurd trading pattern. I chronicled the entire process, including the likelihood of a pending reversal in bond yields on October 15, 2023, when I wrote:

“The slightly-hotter-than-predicted PPI and CPI numbers certainly put a temporary damper on the recent short-covering rally in stocks and bonds, raising investor fears about further interest rate increases. But, as I’ve noted recently, fear is often the prelude to a buying opportunity. Such an opportunity may be developing in the U.S. Treasury Bond market and related interest-sensitive sectors of the stock market, such as homebuilders, real estate investment trusts, and select technology stocks.”

Prior to that, I had suggested that a historic buying opportunity in homebuilder stocks was approaching, while providing an actionable trading plan for such a development here.

Last week, in this space, I wrote: “The stock market is increasingly oversold, so investors should prepare for a potential bounce before the end of the year, especially given the usual bullish seasonality which begins in November and can run through January.”

Bond Yields Crash and Burn and Stocks Respond with Bullish Reversal and Broad Rally

What a difference a week makes, especially in the strange world of the U.S. Treasury bond market. Just two weeks ago, the U.S. Ten Year note yield (TNX) tagged 5%, a chart point which triggered heavy selling in stocks from the mechanical trading crowd, also known as commodity trading advisors (CTAs) and their hedge fund brethren. The selling was further enhanced by headlines about mortgage rates moving above 8%.

But as I noted here, the selling spree had the smell of panic, especially given the lack of a new low in the RSI indicator, when the New York Stock Exchange Advance Decline line (NYAD), as I describe below, made a lower low. The key was whether NYAD broke below its March lows, which it didn’t. This provided the perfect setup for a massive short squeeze, which is currently unfolding.

Here are some details. The U.S. Ten Year Note yield has rolled over, with two significant technical developments occurring:

  • TNX is now trading inside the upper Bollinger Band, which is two standard deviations above its 200-day moving average. This marks a return to a “normal” trading pattern;
  • It is also testing its 50-day moving average and the 4.5% yield area. Normal trading action suggests that a consolidation in this area should occur before TNX makes a move toward 4.3%; and
  • Bullishly for the homebuilder and housing-related real estate stocks, as well as the rest of the market, mortgage rates seem to have topped out as well.

Moreover, as I discuss below, the rally seems be quite broad, as measured by the New York Stock Exchange Advance Decline line. In addition, money is moving back into large-cap technology stocks, as in the Invesco QQQ Trust (QQQ), which also rebounded above its 50-day moving average. Especially encouraging on this price chart is the rally in On Balance Volume (OBV), which signals that the rally is being fueled by real buying along with short-covering, as evidenced by a rising ADI line.

Big tech certainly got a boost, as Microsoft (MSFT) continued its recent climb and is approaching a potential breakout which, if left unhindered, could well take the stock to the $400 area in the next few weeks.

But it’s not just big tech that’s rising. A less obvious member of the QQQ stable, food producer and packager Mondelez (MDLZ), has been quietly moving higher and is now approaching its 200-day moving average. MDLZ’s On Balance Volume (OBV) line is rising nicely as money piles into the shares.

Huge Potential Gains Lurk in Homebuilders

Even better is the unfolding rebound above the 200-day moving average in the SPDR S&P Homebuilders ETF (XHB), where OBV is exhibiting an equally bullish trading pattern. As I noted above, I issued a Buy alert on the homebuilders a few weeks ago, and thus subscribers to my service have been well-positioned for this move in the sector.

Consequently, the rally in the homebuilders may just be starting, especially if interest rates don’t rise dramatically from current levels. As the price chart above shows, mortgage rates may have topped out, along with bond yields. This reversal is already being reflected in the bullish action visible in the homebuilder stocks. Note the following:

  • Rates are still trading above normal long term trends. 
  • The upper purple line on the chart is two standard deviations above the 200-day moving average.
  • Since mortgage rates follow the trend in TNX (above), the odds favor a further decline in mortgage rates, with the first downside target being 6.5%.

Note the nearly perfect correlation between falling bond yields (TNX), falling mortgage rates, and rising homebuilder stocks (SPHB).

Join the smart money at Joe Duarte in the Money Options.com. You can have a look at my latest recommendations FREE with a two-week trial subscription. And for frequent updates on real estate and housing, click here.

Incidentally, if you’re looking for the perfect price chart set up, check out my latest YD5 video, where I detail one of my favorite bullish setups. This video will prepare you for the next phase in the market. 

Market Breadth Reverses Bearish Trend

The NYSE Advance Decline line (NYAD) did not remain below is March lows for long, and has now nearly fully reversed its bearish trend as it approaches its 200-day moving average. The price chart below shows the similarity between the unfolding market bottom and that which occurred in October 2022. The circled areas highlight this super cool technical phenomenon where the lack of a new low in the RSI, when NYAD made a new low, marked the bottom. Also note the double top in VIX, which is also repeated.

The Nasdaq 100 Index (NDX) rallied above its 50-day moving average, with both ADI and OBV turning higher as short sellers cover (ADI) and buyers move in (OBV).

The S&P 500 (SPX) also rebounded above its 200-day moving average, returning to bullish territory after its recent dip below 4150.

VIX is Back Below 20

The CBOE Volatility Index (VIX) didn’t stay above the 20 level for long, which is a bullish development.

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.

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!

#1 New Release on Options Trading!

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 Benzinga.com 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.

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

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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 JoeDuarteInTheMoneyOptions.com 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 JoeDuarteInTheMoneyOptions.com 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!

#1 New Release on Options Trading!

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 Benzinga.com 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.

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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#Follow #Smart #Money #Technology #Homebuilder #Stocks #Loved #Weeks #Reversal #Bond #Yields

Market Breadth Continues Recovery; Watching the NVDA Effect on QQQ as Oil Heats Up

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The dog days of August are mercifully over. And as Wall Street gets back to work, new trends are emerging which could influence what the stock market does for the rest of the year.

Here are the macro crosscurrents to sort through:

  • The Fed is on the bubble as some Fed governors want to pause the rate hikes, while others want to push rates higher;
  • The jobs market seems to be cooling;
  • The bond market is focused on inflation, but is off its worse levels as it ponders what the Fed will do next, whether the job market is going to get weaker, and whether the price of oil will upset the apple cart;
  • Stocks are working on putting in a credible bottom; and
  • The oil market looks set to erupt.

Altogether, these variables suggest the fourth quarter has the potential to be a potentially profitable quarter for investors who can discern where the smart money is flowing and successfully follow it.

Bond Volatility Increases as Data Shifts Rapidly

The bond market’s inflation fears eased over the last few weeks ,but the most recent round of purchasing manager data (ISM and PMI), suggesting festering inflation in the manufacturing sector, erased the glee generated by the apparent cooling of the jobs market via lower-than-expected JOLTS and ADP data, which was boosted by the rise in the unemployment rate and a tame payrolls report.

The U.S. Ten Year Note Yield (TNX) reversed its downward move toward 4% in response to the purchasing manager’s data, which was interpreted as a picture of stagflation. The yield is nervously trading between its 20- and 50-day moving averages.

Smart Money Roundup: Watching NVDA Effect on QQQ

Calls for the death of the so-called AI bubble may have been premature, although the jury is still out for the sector in the short-term. Certainly, the action in AI bellwether Nvidia’s shares (NVDA) is an important metric to keep an eye on.

The stock’s recent volatility suggests that investors are thinking about what comes next, although the company continues with its bullish guidance. On the other hand, the slowly developing downslope in the Accumulation/Distribution (ADI) line is cautionary, as it suggests short sellers are starting to bet on lower prices for the stock.  

On Balance Volume (OBV) is in better shape, which suggests that a sideways pattern or a steady uptrend is the most likely path for the stock after the consolidation. You can see the NVDA effect reflected in the shares of the Invesco Nasdaq 100 Trust (QQQ) which is also consolidating. Support for QQQ is at $370.

Oil is Getting Hot

Tech is consolidating, but the smart money is moving into oil. You can see that in the bullish breakout of West Texas Intermediate Crude (WTIC), which is now above $85. Recall my May 2023 article, titled “Never Short a Dull Market,”, where I predicted that tight oil supplies were in the works and that the odds of higher prices were better than even.

And that’s exactly what’s happened. In the last three weeks, the U.S. Energy Information Agency (EIA) has reported a nearly 30 million barrel drawdown in U.S. oil inventories. Moreover, there are two coincident developments unfolding, which are likely to further decrease supplies:

  • OPEC + is likely to maintain its current production cuts in place for at least another month; and
  • The U.S. is quietly refilling its Strategic Petroleum Reserves.

These two factors, combined with stable-to-possibly-rising consumer demand for gasoline, and perhaps a rise in demand for heating oil as the weather turns cooler, are likely to keep prices on an upward trajectory for the next few weeks to months, and perhaps longer.

Expressed in more investor-accessible terms, you can see the shares of the U.S. Oil Fund ETF (USO) have broken out above the $75 resistance level, with excellent confirmation from a rise in the Accumulation/Distribution (ADI) and On Balance Volume (OBV) indicators as short sellers step aside (ADI) and buyers move in (OBV).

The bullish sentiment in oil also includes the oil stocks including the Van Eck Oil Services ETF (OIH), which is nearing its own breakout. This is due to the rise in global exploration, which has been steadily developing over the last twelve months, but which the market has mostly ignored, despite CEO comments of an oil service “super cycle” unfolding.

Things are happening fast. Oil, tech, housing, bonds, are all making their move. What’s your plan of action in this market? Join the smart money at Joe Duarte in the Money Options.com. You can have a look at my latest recommendations FREE with a two week trial subscription. You can also review the supply demand balance in the oil market and what the future may hold here. And if you’re a Tesla (TSLA) fan, I’m reviewing some interesting developments in the stock, which you can review free of charge here.

Breadth Recovery Shows Staying Power

Last week, I noted the worst may be over in the short term for stocks, as the market’s breadth is showing signs of resilience. This bullish trend is showing some staying power, as the New York Stock Exchange Advance Decline line moved above its 50-day moving average while maintaining its position above the 200-day moving averages. Another bullish sign is that RSI is nowhere near overbought, which means the rally still has legs.

On the other hand, the Nasdaq 100 Index (NDX) ran into resistance at the 15,600 area, where there is a moderate size cluster of Volume-by-Price bars (VBP) offering a bit of turbulence, as investors who bought the recent top are trying to get out “even”. Accumulation/Distribution (ADI) and On Balance Volume (OBV), may have bottomed out, but are showing some short-term weakness.

The S&P 500 (SPX) is acting in a similar way, although it remained above 4500, but above 4350, and it its 20-day and its 50-day moving averages. ADI is flat, but OBV is improving as investors put money to work in the oil and related sectors.

VIX Remains Below 20

VIX has been a bright point in the market for the last couple of weeks, as it has failed to rally above the 20 area. This is good news, as a move above 20 would be very negative, signaling that the big money is finally throwing in the towel on the uptrend.

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 Remains Stable

Liquidity is stable. The Secured Overnight Financing Rate (SOFR), which recently replaced the Eurodollar Index (XED) but is an approximate sign of the market’s liquidity, just broke to a new high in response to the Fed’s move. A move below 5.0 would be more bullish. A move above 5.5% would signal that monetary conditions are tightening beyond the Fed’s intentions; that 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!

#1 New Release on Options Trading!

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 Benzinga.com 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.

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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The Smart Money Changes Gears; As Tech Weakens, New Leaders Appear

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The Fed is flying trial balloons about the end of the interest rate hike cycle, but the technology sector is ignoring them as the smart money move to energy continues.

Last week, Philadelphia Fed Governor Patrick Harker, in a Philadelphia speech, suggested the central banks should pause their rate hikes. Moreover, even though the CPI inflation numbers were relatively tame, markets seemed to focus on the more negative details inside the report, such as persistently high rents and car insurance prices.

Interestingly, producer prices (PPI) rose as well, but much of the climb was due to an increase in fees by money managers – hardly a widespread expense as compared to gasoline and food. Meanwhile, consumer confidence is flat and inflation expectations are improving.

Still, money flows in bonds and stocks suggest otherwise. That’s not a good turn of events, if not reversed, especially when the Fed is trying to gauge the market’s response to a potential extended pause on its rate hikes.

As Tech Weakens, New Leaders Appear

Last week in this space, I noted “short sellers are starting to smell blood in the water in the tech sector.” This week, the evidence piled up further as the bloom is wearing off the AI rose, at least for now. You can see that sellers have gained the upper hand as the Invesco QQQ Trust (QQQ) has broken below its 50-day moving average, as both Accumulation/Distribution (ADI, increasing short sales) and On Balance Volume (OBV, buyers turning into sellers) have also rolled lower.

But QQQ is not alone. A more focused picture of the selling in AI and robotics-related stocks can be seen in the shares of the ROBO Global Robotics and Automation ETF (ROBO), which has fallen back to what may be long-term support near $54. If ROBO fails to hold in this general area, which features two very large Volume-by-Price bars (VBP) and the 200-day moving average as key markers, the decline will likely accelerate.

A stark example of how rising costs are impacting emerging technology companies was the collapse of solar tech company Maxeon Solar Technologies (MAXN), whose shares cratered after the company missed its earnings estimates and lowered forward guidance, citing “falling demand” for its products while partially blaming the situation on higher interest rates.

Meanwhile, shares of energy stocks, such as refiner Valero Energy (VLO), continue to power higher as the fuel supply and demand balance is steadily tipping toward the energy patch. This view is supported by the steady downward pace in the weekly oil rig count. There are now 125 fewer active rigs in the U.S. compared to the same period in 2022.

VLO is emerging above a stout resistance shelf, marked by a large cluster of Volume-by-Price (VBP) bars extending back to the $107 area. A move above $140 would likely lead to higher prices in a hurry. I recently discussed how to spot the smart money’s footprints and how to turn them into profits; you can check out the video here.

Over the last few weeks, I’ve asked whether it’s time to sell the tech rally. What should you do with your energy holdings? And what about the homebuilder stocks and the REITs? The answers are in the model portfolios at Joe Duarte in the Money Options.com, updated weekly, and via Flash Alerts as needed. You can have a look at all of them and my latest recommendations on what to do with each individual pick FREE with a two week trial subscription. And, for an in-depth review of the current situation in the oil market, homebuilders and REITS, click here.

Bonds, Oil, and Stealth Inflation

The lack of enthusiasm from bond traders about the CPI numbers, quirky PPI numbers and a Fed governor suggesting the central bank may stop raising rates soon suggests there is more going on than meets the eye. The answer may be future inflation related to limited supplies of products and services, which are not likely to increase anytime soon, along with the unknowns about the future of global energy prices.

The U.S. Ten-Year Note yield (TNX) briefly dipped below 4% on the CPI news. But the rally didn’t last. And by week’s end, yields were once again moving toward the higher end of the trading range, which has been in place since October 2022.

More concerning is the lack of interest from bond traders regarding deflationary news from China a day earlier, which suggests the bond market is not a believer in the notion that inflation is slowing to the point where the Fed can stop raising rates.

In the present, you can blame their disbelief on the oil market, where volatile supply data and demand news, combined with ongoing reports that U.S. oil production is being curtailed, is moving prices higher.

Moreover, as evidenced by the action in MAXN, above, it’s becoming evident that the ongoing transfer from traditional energy to renewable energy will be more expensive than initially thought. All of which suggests that inflation is becoming stealthily embedded into the system. When you factor in the expected rise in U.S. Treasury bond issuance by the U.S. Treasury and the increasing budget deficits, the indifference from bond traders makes sense.

In other words, even though CPI may have slowed its gains for now, the bottoming of PPI may be a prelude to the near future. Thus, forward-looking bond traders may be considering future shortages of key minerals, the energy to fuel the transition to clean energy, and tight labor.

Specifically, along with poor demand for solar technology, the bond market may be quietly worried about the ongoing problems in the wind energy industry, where costs are reportedly out of control, to the tune of having climbed 20-40% since February 2022. Meanwhile, reports of major technical problems with turbines continue to plague the industry, while governments are beginning to evaluate how much more money they’re willing to put into subsidies.

NYAD Struggles, Major Indexes Extend Losses

The long-term trend for stocks remains up, but the short term is weakening further. The New York Stock Exchange Advance Decline line (NYAD), has broken below its 20-day moving average and may be headed for a test of its 50-day, and perhaps the 200-day, moving averages.

The Nasdaq 100 Index (NDX) has broken below its 50-day moving average and looks headed for a test of the 15,000 level. Accumulation/Distribution (ADI) and On Balance Volume (OBV), remain weak, as short sellers are active and sellers are overtaking buyers.

The S&P 500 (SPX) remained below 4500, and its 20-day moving average, as it approaches a test of its 50-day moving average. Both ADI and OBV are nowhere near uptrends. Support is now around the 4400 area.

VIX Struggles at 20

I’ve been expecting a move higher in VIX, and it seems to have arrived as the index finally moved above the key 15 resistance level. The good news is that the index has yet to break above 20. A move above 20 would be very negative, as it would signal that the big money is finally throwing in the towel on the uptrend.

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 Remains Stable

Liquidity is stable, but may not remain so for long if the current fall in stock prices accelerates. The Secured Overnight Financing Rate (SOFR), which recently replaced the Eurodollar Index (XED), but is an approximate sign of the market’s liquidity, just broke to a new high in response to the Fed’s move. A move below 5.0 would be more bullish. A move above 5.5% would signal that monetary conditions are tightening beyond the Fed’s intentions. That 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!

#1 New Release on Options Trading!

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 Benzinga.com 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.

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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In a Double Barrel Bull Market, AI and Housing Rule the Roost

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The Federal Reserve is still talking tough via its dot-plot, which forecasts two more interest rate increases before the end of 2023. But the markets are not agreeing. My money, for now, is with the markets.

As I pointed out in my January 2023 video for StockCharts TV’s Your Daily Five, despite constant worries from perplexed traders and dark pundit banter, a credible bottom formed. Since then, stocks have risen and now look set to move higher, likely with occasional pauses. That’s because the rally is broadening out via a rapid improvement in the market’s breadth, which is accompanying the new highs on the major indexes, as I describe later in the article.

In fact, we are currently in what I call a double barrel bull market, where two major groups are pulling the rest of the market higher. The one everyone knows is AI. The other, more quiet but equally bullish, is the housing sector.

Since lots of people have missed the rally and are now playing catch up, the upward momentum will keep going for a while. Of course, this rally can’t, shouldn’t, and won’t last forever. But if history is any guide, the rest of 2023 and much of 2024 have a built in upward bias, at least based on the phenomenon known as the Presidential Cycle; whose major premise is that the Fed raises rates in the first two years of a presidential term (which it has) and lowers them in the last two years (which seems highly likely).

AI Poster Child Makes New Highs

The poster child for the AI rally is the Invesco QQQ Trust (QQQ), as it houses the large-cap tech stocks, which are moving higher based on expectations of large profits in the future from increasing automation and whatever AI eventually delivers.

Last week, QQQ made another series of new highs. But, by Friday, it looked at bit tired. Thus, it makes sense to expect some sort of consolidation. A move back to the 20-day moving average is not out of the question.

Lennar’s Goldilocks Quarter

For the past several years, I’ve written extensively about the homebuilder stocks and related sectors. That’s because this area of the market continues to move higher. Moreover, the more negative investors become on the sector, the higher it goes.

In fact, as I detail in this Your Daily Five video, the homebuilders are in what can only be described as a bullish Megatrend, which shows no sign of slowing.

Take, for instance, the recent action in leading homebuilder Lennar (LEN), a longstanding holding in my Joe Duarte in the Money Options portfolio, and a personal holding. Its most recent earnings report blew past analysts’ expectations on both earnings and revenues as the company again offered a positive outlook. Naturally, the shares broke out to a new high.

What makes Lennar’s earnings most interesting is the company’s management of its inventory – not too hot, not too cold. Moreover, the company’s Executive Chairman Stuart Miller noted that home buyers have come to accept the “new normal” status of interest rates, adding “demand has accelerated.” He concluded by noting: “Simply put, America needs more housing, particularly affordable workforce housing, and demand is strong when price and interest rates are affordable.”

In other words, unless interest rates climb significantly higher, the housing sector, from the point of view of homebuilders, is in better shape than many investors may think.

And here is something else to consider. Lennar is trading at a P/E of 9.46, while Nvidia (NVDA), the biggest benefactor of the AI trend, is trading at a P/E of 54.91.

Bond Yields Hold their Ground

Bond yields remained below their recent top level of 3.8% as 262,000 Americans filed for unemployment benefits, an increase of 17,000 from the prior week. In addition to the stable inflation pictured in CPI and the rolling over of producer prices (PPI) released earlier in the week, bond traders breathed a sigh of relief.

Buried in the jobless claims number were over 7,000 new filings in Texas, the highest number of new claims in the U.S. for the week. Let’s put this in some perspective. Based on recent U.S. Bureau of Labor Statistics numbers, the Lone Star State accounted for 7% of the total U.S. GDP. Moreover, in Q4 2022, Texas accounted for 9.5% of total U.S. GDP, which means the largest economy in the U.S. is starting to feel the pinch of the Fed’s rate hikes.

On the other hand, Texas has received the largest number of new residents of any state in the post-COVID period. All of which means that for now, even in a slower economy, there is still a tight supply of housing combined with high demand. Texas is not alone, as the sunbelt remains attractive to many people looking to escape high taxes and challenging employment situations.

This confluence of data, rising initial jobless claims, slowing inflation, and a coincident slowing of the Chinese economy has led to an encouraging reversal in U.S. Treasury bond yields, which will likely benefit the homebuilders. That’s because, with lower bond yields, we’re already seeing an increase in mortgage activity, as the chart above shows.

The 3.85% yield on the U.S. Ten Year Note remains 3.85%, roughly corresponding to 7% on the average 30-year mortgage. So, if yields remain below this level, the odds favor a continuation of the steady performance of the homebuilder sector.

Incidentally, I have expanded my coverage of the housing and real estate markets in a new section for members of my Buy me a Coffee page, where you will get the inside scoop on what’s happening in these important sectors. This crucial information complements the stock picks at Joe Duarte in the Money Options.com You can start by reviewing my extensive report on the outlook for the homebuilder sector here. 

NYAD Improves SPX and NDX Look to Consolidate

The New York Stock Exchange Advance Decline line (NYAD) continues to improve. As long as it’s above its 50-day moving average, that’s signaling stocks are back in an uptrend.

The Nasdaq 100 Index (NDX) moved above 15,000 and is due for a pause. But in this market, any pause may be short-lived. ADI and OBV remain in bullish postures.

The S&P 500 (SPX) moved above 4400 and looks set to take a breather. As with NDX, any pause may not last. Both ADI and OBV look to be in good shape.

VIX Makes New Low

The CBOE Volatility Index (VIX) broke to another new low last week as call option buyers overwhelmed the market. As I noted last week, this is probably a little too much bullishness all at once, so I expect a bit of a bounce in VIX, which will likely lead to some backing and filling in the market.

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 is Increasingly Stable as Fed Holds Rate Hikes

With the Fed on hold, the market’s liquidity is starting to move sideways, which is a positive. A move below 94 on the Eurodollar Index (XED) would be very bearish, while a move above 95 will be a bullish development. Usually, a stable or rising XED is very bullish for stocks.

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!

#1 New Release on Options Trading!

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 Benzinga.com 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.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

Joe Duarte

About the author:
Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst going back to 1987. His books include the best selling Trading Options for Dummies, a TOP Options Book for 2018, 2019, and 2020 by Benzinga.com, Trading Review.Net 2020 and Market Timing for Dummies. His latest best-selling book, The Everything Investing Guide in your 20’s & 30’s, is a Washington Post Color of Money Book of the Month. To receive Joe’s exclusive stock, option and ETF recommendations in your mailbox every week, visit the Joe Duarte In The Money Options website.
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