Tag: sphb

Momentum is Back, Breadth Rallies; It’s Truth Time for OPEC and Crude Oil

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The week of June 5 should be momentous as the bears who have been left behind consider whether to fully capitulate.

The stock market is back in rally mode as seasonal tendencies for a summer rally, especially in the third year of the presidential cycle, assert their influence. Especially comforting is the recovery in the market’s breadth, as measured by the NYSE Advance Decline line (see below). The US economy is showing signs of slowing, as the rate of rise in inflation is flattening.

Of course, things could change instantly, especially if, as I discuss below, OPEC does something dramatic at its June 3–4 meeting. Moreover, it’s all about whether the Fed leaves rates unchanged in June in order to see if the current flattening out of inflationary pressures is a prelude to an actual decline and what that does to bond yields.  

I’ll have more on bonds below. First, a few words about the oil market.

OPEC’s Credibility is on the Line

Last week, I suggested that shorting a dull market is not a good idea. I was referring to the nearly complete lack of bulls in the oil market and suggested the energy sector was ripe for a bounce.

As I went to press on this post, rumors were circulating that OPEC was considering a 1 million barrel per day production cut, to be announced at the conclusion of its June 3–4 meeting. This cut, if it happens, will be in addition to production cuts previously announced, which are starting to make their way through the system and could reduce global oil supply meaningfully.

Crude oil ($WTIC) rallied on June 2, 2023, on the OPEC rumors and signs that oil production is already being reduced. For example, the US Rig count fell for the fifth consecutive week. Meanwhile, Canada’s oil sands giant Suncor announced 1500 job cuts. There are also rumors that job cuts are coming in the fracking sector in the US, as the number of active crews finishing wells is also shrinking. 

Here’s the bottom line:

  • The US oil industry is dialing back production, and OPEC seems to be on a similar course.
  • If OPEC flakes out, they risk losing their ability to influence the price of oil, at least for the foreseeable future.

Watch the market’s response to OPEC’s announcement. If WTIC’s price rises above $75 decisively, then current market relationships, especially bond yields, stock prices, and what the Fed does at its upcoming FOMC meeting (June 13–14), will likely be affected.

I’ve recently recommended several energy sector picks. You can look at them with a free trial of my service. In addition, I’ve posted a Special Report on the oil market, which you can access here.

Bond Yields Test Resistance

The latest monthly payroll numbers were well above expectations, but the bond market is focusing on other signs that the economy is slowing. As I noted last week, bond yields are likely to fall once the economy shows signs of slowing and the Fed admits that it must at least stop raising rates. Here are some signs that perhaps we’re not too far from that point:

  • Dallas Fed Survey crashes, falling for the 13th consecutive month; one respondent noted: “There is nothing encouraging on the horizon.” Other notable quotes: “orders canceled,” “order volume has stalled recently,” and “seeing a massive slowdown.”
  • Dallas Fed services survey fell for the 12th straight month. Comments worth noting: “Businesses are preparing for a recession by looking for ways to cut back, which in some ways, works to create a self-fulfilling prophecy.”
  • Chicago PMI Collapses—new orders, prices paid, production, inventories, and employment fell.
  • China manufacturing PMI fell below 50, signaling contraction.
  • U.S. PMI and ISM surveys fell again.
  • China’s economy is showing signs of slowing.

Beige Book Confirms Slowing U.S. Growth

Confirming the negative news above, the Fed’s most recent Beige Book offered the following:

  • Prices are rising but are doing so more slowly.
  • New York and Philadelphia registered slowing economic activity.
  • Boston, Cleveland, Richmond, Chicago, St. Louis, and Kansas City reported flat activity.
  • San Francisco, Dallas, and Minneapolis reported slight growth.

The bottom line is that inflation seems to be rising at a slower pace and that the US economy is slowing, as eight of eleven Fed districts reported slowing or flat economic activity. The three that reported growth described it as slight to moderate.

Bond Yields Test Resistance. Mortgages Follow. Homebuilders Perk Up.

The most predictable relationship in the stock market currently is the one that connects bond yields, mortgage rates, and homebuilder stocks. When bond yields fall, mortgage rates follow. Increases in home sales register and homebuilder stocks rally.

The crucial point on the 10-Year US Treasury Yield ($TNX) is 3.85%. If yields remain below this level, the environment should remain stable.

Moreover, if I’m right and the economy continues to slow, bond yields will roll over, and mortgage rates will drop as demand for new homes again picks up.

As things stood last week, the S&P 500 Homebuilding Subindustry Index ($SPHB) seems to have made a short-term bottom as traders begin to factor in the scenario above. 

If $TNX remains below 3.7%, it’s a sign that bond traders are less worried about inflation. This should be bullish for homebuilder stocks.

For an in-depth comprehensive outlook on the homebuilder sector, click here.

NYAD Rallies; SPX Joins NDX’s Breakout; Liquidity is Stable; VIX Hits New Low.

It was quite the week for the market’s technical picture.

The New York Stock Exchange Advance Decline line ($NYAD) rallied back above its 50-day moving average, signaling stocks are back in an uptrend.

The Nasdaq 100 Index ($NDX) extended its recent breakout, closing the week well above 14,500. The current move is unsustainable, so some pullback and consolidation are likely over the next few days to weeks. On the other hand, it could take some time for a consolidation or pullback to develop, as both accumulation distribution line and On Balance Volume (OBV) are in solid uptrends, signaling lots of upward momentum.

The S&P 500 index ($SPX) finally broke out above the 4100–4200 trading range, decisively confirming the trend in $NDX. OBV continues to improve, while the Accumulation Distribution line remained in an upward trend.

VIX Breaks to New Lows

The Cboe Volatility Index ($VIX) broke to a new low as call option buyers overwhelmed the market. This is probably a little too much bullishness all at once, so we’ll see how long it lasts.

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 Still Limited

The market’s liquidity may have bottomed out, but it’s not particularly bullish. The Eurodollar Index ($XED) failed to rally above 94.50, a bearish development. For now, it’s good enough to keep the rally from imploding. A move below 94 would be very bearish.

A move above 95 will be a bullish development. Usually, a stable or rising XED is very bullish for stocks.

To get the latest up-to-date 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.
Learn More

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#Momentum #Breadth #Rallies #Truth #Time #OPEC #Crude #Oil

Trade What You See; Profits are Waiting Beyond the Daily Grind

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As the mainstream focuses on negative developments, such as the Fed’s latest utterings and the implosion of subsets of the commercial real estate (CRE) sector, there seems to be a stealthy migration of money into other select areas of the market. This is a great example of why focusing on the markets instead of the external noise is the best way to trade.

Trade What You See

There’s an old saying among wise veteran traders: “trade what you see.” And the current market is a perfect place in which this adage holds up.

As investors await the Fed’s nearly certain rate increase on May 3rd, the daily options market-related gyrations in stocks continue to develop. Meanwhile, the four-prong post-COVID pandemic megatrend continues to evolve, as I discuss in detail in my latest Your Daily Five video. Said megatrend is composed of:

  • The Great Migration – population shifts to suburbs, rural areas, and the sunbelt; 
  • The CRE Implosion from an oversupply of office space;
  • Bullish Supply Dynamics for Homebuilders; and
  • The Evolving End of Globalization.

As a result, the only solution is to be contrarian, to trade what you see, and to focus on investments from a longer-term viewpoint. Stated plainly, if a stock is not crashing and the underlying business is performing reasonably well, then it’s a keeper until proven otherwise.

Even better, as I detail below, detecting trend changes early is very helpful.

The Evolution of the Commercial Real Estate Crash

There is more nuance than what meets the mainstream eye going on in the beleaguered CRE market. 

For example, the big news of the week was Vornado’s (NYSE: VNO) dividend cut, which sent the shares lower as investors braced for worse news, such as the possibility of loan defaults. If that happens, few would be surprised.

The price chart’s Accumulation Distribution (ADI) shows that short sellers have had a field day with the shares over the past twelve months, especially during the last quarter. On Balance Volume (OBV) also indicates more sellers than buyers have been the norm of late.

But things may be changing in other areas of the real estate business. And a closer look at VNO’s shares shows that the one day mini-crash in the stock on 4/27/23 was followed by a bounce which, of course, was short-covering.

As I described in my recent Your Daily Five video, the evolution of the post-pandemic megatrend is evolving into a new and quite investable phase. That’s because the market is slowly adapting to its circumstances as businesses adjust to the changing landscape. And as one section of the real estate investment trust (REIT) world is suffering, other areas are starting to show signs of life.

To be specific, REITs, which are heavily laden with office building properties that are having trouble paying their bills. Loan defaults are becoming quite common; foreclosures and bankruptcies are likely to rise. On the other hand, those REITs who derive their income from residential properties are faring better. The result is an unexpected improvement in the price chart for the iShares U.S. Real Estate ETF (IYR).

The price chart for IYR shows that the entire sector still has plenty of work to do. But amazingly, REITs may have bottomed out. All of which suggests that the stock market may be starting to quietly price in a pause in the Fed’s interest-raising cycle after the almost-certain rate increase, which is expected on May 3.

IYR’s Accumulation/Distribution indicator (ADI) suggests that short sellers may have lost their enthusiasm for the sector. On the other hand, On Balance Volume (OBV) is still bottoming out, which suggests that buyers have not overwhelmed sellers altogether.

Still, the ETF is trading tightly near the $84 area, where there is a large Volume by Price bar (VBP). If the price can move above this key price point, we are likely to see a challenge of the 200-day moving average. 

A move above that would be bullish. I have just added two long REIT plays to my portfolio. Get the details with a free trial to my service here.

Bond Yields Turn Lower at 3.5%. Home Buyers Play Cat and Mouse with Mortgage Rates.

The bond market continues to price in a slowing of the economy, while homebuyers continue to play a nifty game of cat and mouse as they try to time the mortgage market. Homebuilder stocks continue to move higher.

Over the last few weeks, the Fed hinted that another rate increase was coming at its May 2-3 FOMC meeting. Initially, this bearish talk pushed the U.S. Ten Year Note (TNX) despite above the 3.5% yield area. This resulted in a rise of the 30-year mortgage to 6.4%, where it has remained for the last couple of weeks.

This upside reversal delivered a slowing in existing home sales. But the reversal in bond yields on the week ended on 4/28 is likely to lead to yet another reversal in mortgage rates. Moreover, savvy potential homebuyers are likely calling their bankers as I write in order to lock in rates before the official numbers are released next week.

Note the close relationship between TNX, mortgage rates, and the steady uptrend in the homebuilder sector (SPHB). Specifically, take a look at the rally in SPHB, which was spawned when the average mortgage rate topped out in late 2022 above 7%. The subsequent decline in mortgages has been a boon for homebuilders.

For an in-depth comprehensive outlook on the homebuilder sector, click here.

NYAD Seems to Have Nine-Lives. NDX Breaks Out.

The New York Stock Exchange Advance Decline line (NYAD) once again survived a potential breakdown as it continues to hug its 50-day moving average, while remaining well above its long-term dividing line between bull and bear trends, the 200-day moving average. It would be nice to see breadth improve, but the fact that it has not broken down altogether is very encouraging.

The S&P 500 (SPX) continues to hold between 4100 – 4200, but is getting closer to what could be a major breakout if it can get above the 4200 area. On Balance Volume (OBV) and Accumulation Distribution (ADI) remain very constructive for SPX.

For its part, the Nasdaq 100 Index (NDX) closed above 13,200 on 4/29/23, scoring a nifty breakout with OBV starting to turn up a bit more decisively. If NDX can stay above 13,200, the odds of a significant move higher are well above-average.

These are bullish developments, which suggests money is moving into technology stocks. When tech stocks rally, they often give the whole market a boost.

VIX Makes New Lows

The CBOE Volatility Index (VIX) again broke to a new low and is now well below 20, a sign that the bears are throwing in the towel. This remains bullish despite the intraday volatility in the options market.

When VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures in order 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 Stable. Upcoming Rate Hike Could Crimp.

The market’s liquidity retreated as the Eurodollar Index (XED) remains a question mark, even though, for now, it remains stable, yet below 94.75 on Fed hike expectations. A move above 95 will be a bullish development. Usually, a stable or rising XED is very bullish for stocks. On the other hand, in the current environment, it’s more of a sign that fear is rising and investors are raising cash.

To get the latest up-to-date 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.
Learn More

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#Trade #Profits #Waiting #Daily #Grind

Introducing the Four Horsemen of MELA; Homebuilders Thrive as Commercial Real Estate Implodes

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The next liquidity crisis will likely be spurred by the woes in commercial real estate (CRE); ironically, a four-headed megatrend which has been accelerated by the Fed’s rate hike cycle. 

Introducing the Four Horsemen of MELA: 

  • The Great Migration – population shifts to suburbs, rural areas, and the sunbelt; 
  • The CRE implosion from an oversupply of office space;
  • Bullish Supply Dynamics for Homebuilders; and
  • The Evolving End of Globalization.

This once-in-a-generation confluence of events has created both opportunities for mega-profits.

The MELA Connection

Bull markets (M) increase the value of 401 (k) plans, IRAs, and trading accounts, creating a positive wealth effect which leads to increased consumer spending, and rallies the economy (E) as bullish consumers make important life decisions–buying homes and cars (L). Wealthy consumers induce bankers to make loans, expanding the virtuous cycle.

Banking decisions are influenced by artificial intelligence fueled formulas which factor in a potential borrower’s credit worthiness partially based on the value of stock-based accounts. News travels fast via social media and the news cycle, which are also controlled by algorithms (A). Thus, system-wide moves happen quickly.

Nowhere is this dynamic more evident that in the interplay between CRE and the homebuilder sector. Here is the background:

  • The 2008 subprime mortgage crisis made homebuilders wary of overbuilding creating secular supply crunch in residential housing;
  • The COVID pandemic spawned the work-from-home megatrend, resulting in glut of commercial office space;
  • The lockdowns prompted a population migration to suburbs, rural areas, and other states;
  • This ongoing migration has made both the office glut in major cities, as well as the home supply crunch in suburbs, rural areas, and states like Texas, Florida, the Carolinas, and others in the sunbelt, practically permanent;
  • Geopolitical changes, spurred by the pandemic and the war in Ukraine have ended the globalization trend, creating an unpredictable future for businesses; and
  • The Federal Reserve has been raising interest rates to combat inflation, which is due to structural problems in the U.S. economy caused by globalization and its death pangs.

As the system adjusts, the Great Migration is compounding CRE’s problems and resulting in rising joblessness, and a continued limited supply of residential housing. As globalization sputters, this four-headed megatrend and its accompanying structural inflation shows no sign of ending anytime soon.

That means the Fed is odds on to raise rates after its May 2-3 FOMC meeting.

Empty Buildings Don’t Produce Rental Income

The bellwether for CRE’s woes is the ongoing implosion of co-working company WeWork (WE). Built on the principle that wide open work spaces catering to free-lancers and part-time workers would flourish as the gig economy expanded, the company flourished in its early days.

As the dynamic boomed, WE leased large spaces in prominent buildings in large cities, financing its ambitious plans with adjustable debt. When the pandemic struck, everything fell apart, as work-from-home made co-working spaces obsolete. The company is now reeling and may be on the verge of bankruptcy.

As I described here, the amount of cash on WEs, would only cover 14.5% of its debt load. In addition, the New York Stock Exchange has notified the company that its stock will be delisted within six months due to its low price. WE is walking away from leases and facing law suits from land lords.

Refinancing of adjustable debt at higher interest rates, combined with fewer tenants, reduced revenues forcing the company to default on its rent obligations. The price chart needs no explanation.

WE is not alone. For example, even CRE giant Blackstone Group (BX) is having problems, as a Korean investor, Inmark Asset Management, looks to unload $50 million worth of Blackstone’s mortgage debt in fears of a potential default by Blackstone on the debt. See details on this developing story here.

Blackstone, because of its much deeper pockets, is faring better than WeWork. But even though it met its most recent earnings expectations, the shares seem to have run into a brick wall as they reached the $95 area. You can see that’s where a large Volume by Price bar (VBP) is offering what looks to be stout price resistance. If BX shares break below their 200-day moving average, they could move back toward their recent lows.

There is an easy way to protect your portfolio against what may be very nasty breakdown in CRE. You can access this simple tool with a FREE trial to my service. Click here for more information.

Horton Blows Out Earnings Expectations

Shares of homebuilder D.R. Horton (DHI) broke out on 4/20/23 after an earnings beat, even as results were lower than the previous year’s results.

Nevertheless, due to supply being in its favor, DHI is selling houses at higher prices while smartly not overbuilding and focusing on areas of the country with growing populations. Here are some details:

Connecting the dots: The Great Migration to the sunbelt and tight home supplies are keeping DHI in the money. Sales and revenues have slowed thanks due to higher interest rates. Moreover, the lack of apartment sales suggests that the CRE situation is getting worse, as real estate investment trusts have no money to spend and are not investing in new properties. This will most likely result in a continuation of the current state of supply and demand in affordable housing.

To view my homebuilder picks and how I’m trading the commercial real estate market, click here. I own shares in DHI.

Bonds and Mortgages Rise Slightly. Expect Panic Buyers to Materialize

D.R. Horton’s Q2 earnings illustrate two simple principles: 1) Low housing supply is bullish for homebuilders, and 2) When mortgage rates fall, potential buyers come into the market. Moreover, when rates dip for a short period and then start to rise, on-the-fence buyers jump in as they fear missing out. We’re about to see more of that.

The Fed’s warnings about another rate hike in May have pushed the U.S. Ten Year Note (TNX) above the 3.5% yield area. This resulted in a rise of the 30-year mortgage to 6.4%.

The long-term connection between TNX, mortgage rates and the homebuilder sector (SPHB) is well established. For an in-depth comprehensive outlook on the homebuilder sector, click here.

Breadth Rolls Over. Nasdaq 100 Barely Holds 13,000

The trading range in the major indexes continues, but the market’s breadth had a bad week as the New York Stock Exchange Advance Decline line (NYAD) rolled over. NYAD still closed above its 20- and 50-day moving averages, but it did show some weakness.

The S&P 500 (SPX) remained above 4100. 4200 is still an a key resistance level. On Balance Volume (OBV) and Accumulation Distribution (ADI) remained constructive.

The Nasdaq 100 Index (NDX) barely held above 13,000, which has becomes fairly reliable support. This remains bullish, as it suggests money is now pouring into technology stocks. When tech stocks rally, the give the whole market a boost. Accumulation Distribution (ADI) and On Balance Volume (OBV) are very bullish for NDX.

The CBOE Volatility Index (VIX) broke to a new low and is now well below 20, a sign that the bears are throwing in the towel. This is also bullish.

When VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures in order 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.

The market’s liquidity retreated as the Eurodollar Index (XED) closed slightly below 94.75 on Fed hike expectations. A move above 95 will be a bullish development for sure. Usually, a stable or rising XED is very bullish for stocks. On the other hand, in the current environment, it’s more of a sign that fear is rising and investors are raising cash.

To get the latest up-to-date 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.
Learn More

Subscribe to Top Advisors Corner to be notified whenever a new post is added to this blog!

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#Introducing #Horsemen #MELA #Homebuilders #Thrive #Commercial #Real #Estate #Implodes

As Fed Plays with Fire, Focus on Strength, Ignore Intraday Volatility, and Expect the Unexpected

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There is only one way to survive this market. Focus on strength. Ignore the intraday volatility. And always expect the unexpected.

The stock market remains in a stubborn trading pattern, with nearly equal measures of strength and relative weakness. On the one hand, many hedge funds remain short stocks. Their short-term options related plays create intraday volatility and perpetuate a general feeling of uncertainty.

On the other hand, value players are moving into certain sectors, especially after short-term bear raids knock them down. Their steady buying counters the hedge funds’ short-term trades, often creating intraday rallies. In between are bond traders betting on recession.

Combined, these influences are creating a frustrating narrow trading range with unpredictable intraday swings. Yet, as the Fed continues to talk tough on inflation and rate hike odds rose late in the week, in the real world, the economy is already showing signs of slowing. CPI is flattening, PPI may be rolling over, retail sales are slowing, commercial real estate is in trouble, and layoffs and joblessness claims are rising.

The Fed is Playing with Fire

The Fed is playing with fire as it plans for an almost certain 25-basis-point rate increase in the Fed Funds rate at its May 2-3 FOMC meeting.

Last week, in this space, I expressed concern about the unexpected decrease in jobs created by the private sector in the Southern region of the U.S. Here is a reprise of the regional ADP new-jobs-created numbers:

  • Northeast: 141,000
  • Midwest: 132,000
  • West: 95,000
  • South: (-) 228,000

As I noted then, these numbers reflect a slowing in new job creations, with the reduction in the South sounding the alarm. 

I also noted that the Challenger Jobs Cut report and weekly jobs claim data from the Bureau of Labor Statistics (weekly jobless claims) were starting to suggest more weakness may lie ahead. Specifically, I noted that Challenger had reported 89,000+ job cuts for March, 270,000+ for the year. The West Coast was the biggest contributor. Here is the breakdown of Challenger’s numbers:

  • East: 13,638
  • Midwest: 21,764
  • West: 48,123
  • South: 6,178

In conclusion:

  • New job listings are falling;
  • New job creation is stalling;
  • Layoffs are increasing; and
  • The number of people requesting unemployment insurance is on the rise.

What could possibly go wrong when the Fed raises rates in May?

Mortgage Activity Picks Up as Rates Fall; Watch Support Area for Homebuilders

The recent decline in bond yields, notwithstanding the reversal on 4/15/23 in response to hawkish Fed talk, has turned the housing market into a haven for interest rate stalkers. Every time bond yields fall, potential home buyers who are on the fence pounce on the lower rates. Over time, this will continue to fuel the bullish trend for homebuilders, especially in the Southern U.S. In the present, however, the bond market continues to bet on a recession as yields test the 3.5% area.

If the bond market is correct, the U.S. economy is heading for recession and the Federal Reserve will be pressed to lower interest rates. The Fed meets on May 2-3 and is now expected to raise rates 25 basis points. That is likely to increase volatility in bond yields.

Mortgage rates fell for the fifth straight week, following historical norms as the multi-year view of the relationship between bond yields (TNX) and mortgage rates (MORTGAGE) shows. Normally, this bullish scenario is also a positive for the price action in the Homebuilders Subsector Index (SPHB).

For now, however, the homebuilder sector remains in a consolidation pattern as traders await more definitive direction from the Fed on interest rates. Another Fed rate hike, which is possible at its May 2-3 FOMC meeting, would once again put a damper on mortgage rates and the stock market, including the homebuilders.

On the other hand, given what we’re seeing in relationship to bond yields and mortgage rates, a pause would likely boost homebuilder stocks. For now, the consolidation pattern is SPHB is not necessarily a sign of alarm, although a move below 1800 (the 50-day moving average) would be a very bearish development for the sector.

To view my homebuilder picks and how I’m trading the bond market, click here. For an in-depth comprehensive outlook on the homebuilder sector, click here.

Focusing on Strength

Investors with positions in the right sectors are outperforming the market. Here are two examples of what’s working and what’s not.

Commercial real estate is struggling. This is especially affecting the technology-rich areas of Silicon Valley and Austin, Texas, where vacancy rates are rising. Moreover, a negative divergence is developing between bond yields and real estate investment trusts.

Normally, lower bond yields are bullish for real estate investment trusts (REITs). But because of the office bust in the tech sector, loan defaults are piling up, vacancy rates are rising, and we’re just not seeing any signs of life in the REITs. You can see the action in the iShares U.S. Real Estate ETF (IYR) as it struggles below its 200-day moving average. That’s a sign that investors are bracing for even worse circumstances.

On the other hand, the oil stocks are attracting money. You can see the steady accumulation pattern in the Energy Select Sector SPDR ETF (XLE). Especially bullish is the recent uptick in On Balance Volume (OBV), which signals that buyers are building positions. A move above $90 would likely attract more money into XLE as momentum players begin to crowd in.

I recently recommended two energy options trades, which you can access with a FREE trial to Joe Duarte in the Money Options.com. In addition, I just wrote a comprehensive report on the oil market, which is available FREE of charge to members at my Buy me a Coffee page.

Breadth Holds Steady, Nasdaq Again Holds 13,000

Although prices gyrated wildly in a narrow range last week, the market’s breadth held up. Once again, the New York Stock Exchange Advance Decline line (NYAD) closed above its 50-day moving average and its long-term support line, the 200-day moving average. This is a positive.

The S&P 500 (SPX) also held up, despite short-term volatility closing above 4100. 4100-4200 is still an important resistance band. On Balance Volume (OBV) and Accumulation Distribution (ADI) remained constructive.

For its part, the Nasdaq 100 Index (NDX) also held above the important 13,000 area, which has becomes fairly reliable support. This remains bullish as it suggests money is now pouring into technology stocks. When tech stocks rally, they give the whole market a boost. Accumulation Distribution (ADI) and On Balance Volume (OBV) are very bullish for NDX.

The CBOE Volatility Index (VIX) broke to a new low and is now well below 20, a sign that the bears are throwing in the towel. This is also bullish.

When VIX rises ,stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures in order 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.

The market’s liquidity retreated as the Eurodollar Index (XED) closed slightly below 94.75 on Fed hike expectations. A move above 95 will be a bullish development for sure. Usually, a stable or rising XED is very bullish for stocks. On the other hand, in the current environment, it’s more of a sign that fear is rising and investors are raising cash.

To get the latest up-to-date 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.
Learn More

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Real Problems in Real Estate

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The correction in stock prices may be gathering steam, and the potential for a full-blown liquidity crisis seems to be rising. The reason may be that several big players in commercial real estate have recently defaulted on billions of dollars’ worth of loans.

Last week, in this space I wrote: “Something happened to the markets around Valentine’s Day which could reverse the recent uptrend.” Well, the trend is increasingly wobbly, and we are getting new information which may explain at least part of what’s happening.

Real Trouble in Real Estate

The hotter than expected PCE (Personal Consumption Deflator) data grabbed the headlines. But it seems that its arrival on the scene may be more of a catalyst for an already churning dynamic in the market than the cause for the renewed selling on February 24, 2023.

Think commercial real estate defaults.

Over the last few weeks, in this space, I reported that several major real estate investors have faced increasing difficulties. I also noted that it’s possible that these, along with other commercial property REITs that are having problems with foreclosures, may have been selling U.S. Treasury bonds in order to raise cash to fund operations as their cash flow dries up due to rising vacancies.

I’ve noted that Brookfield’s LA default (highlighted in prior link) has been well reported, while the even bigger Blackstone (BSX) is also having its share of problems along with Starwood (STWD). Brookfield’s (BAM) CEO Bruce Flatt is calling the LA default insignificant, while citing demand for premium space around the world, in places like Dubai, as more than enough to offset the LA issues for the company.

Nevertheless, the Toronto-based asset manager’s stock is rolling over along with the market for sure.

If there’s a worsening of the situation, the default which we may look back on as the one that broke the camel’s back, is that of Pimco’s $1.7 billion worth of mortgage notes tied to buildings owned by Pimco’s Columbia Property Trust in Los Angeles, Boston, New York and Jersey City, New Jersey.

Together, Pimco and Brookfield have defaulted on nearly $2.5 billion. But there seem to be more on the way, as TheRealDeal.com recently reported the Chetrit Group just defaulted on an $85 million loan in the tony New York City Hudson Yards property. If things don’t improve soon, and margin calls escalate, we could see a complete reversal of the recent rally in stocks.

Just in case, I’ve added some new select hedges to my model portfolios. You can check them out here with a free trial to my service.

Bond Yields Test Crucial Resistance Levels: REITs Heading Lower

As I noted above, the commercial real estate market is facing serious headwinds. Moreover, if things don’t improve fairly quickly, the problems could spread to other areas of the market.

Meanwhile, the 10-Year U.S. Treasury yield ($TNX) has stubbornly remained above 3.8% and seems to be mounting an attack on the 4% area. This may be in response to selling by investors, who’re having trouble making payments due to an increasingly restrictive Federal Reserve. A move above 4% would be a major negative for stocks, which could trigger very aggressive selling.

The rise in treasury bond yields has spawned a major reversal in mortgage rates, which is likely to dampen or at least slow the potential bottoming of the residential real estate market.

The homebuilder sector ($SPHB) has been fairly steady in comparison to other areas of the stock market, but a move above 4% on $TNX could send mortgage rates to levels near or above 7%. If that happens, it’s likely to kill the housing market. Already, the homebuilder sector ($SPHB) is threatening to break below its 50-day moving average.

Even more dire is the situation in commercial real estate, where the Dow Jones Real Estate Index ($DJR) has just broken below its 50- and 200-day moving averages and could be headed significantly lower if there’s no improvement in the market’s liquidity. Note the close inverse relationship between $TNX and $DJR and how they both reflect on the S&P 500 index ($SPX).

For a detailed explanation of how to manage your portfolio during a liquidity crisis, watch this Your Daily Five video.

Test of Key Market Support is Unfolding

The New York Stock Exchange Advance Decline line ($NYAD) broke below support at its 20-day moving average last week and is now on its way to a test of its 50-day moving average.

Meanwhile, the S&P 500 easily sliced through the 4000 area and is now actively testing the key support band of 3950 and the 200-day moving average.

The Nasdaq 100 Index ($NDX) broke below the 12,200 and is now testing the support of the 200-day moving average.

For its part, the Cboe Volatility Index ($VIX) is still lagging the current bearish trend due to a larger focus by option traders on contracts which expire in short periods of time, while VIX measures the volatility of longer-term options. Still, VIX is showing signs that it wants to turn up in a hurry.

When VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures in order 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. This causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.

Liquidity tried to stabilize on February 25, 2023, but the Eurodollar Index ($XED) still closed below 95, which had been a reliable support level. Note the market’s most recent rally, off of the October bottom, has corresponded to this flattening out in liquidity. Note how the continuous decline in the Eurodollar index corresponded to the bear trend in 2022 and how the current liquidity reduction has impacted the market negatively.

You can learn more about how to gauge the market’s liquidity in this Your Daily Five video.

To get the latest up-to-date 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.
Learn More

Subscribe to Top Advisors Corner to be notified whenever a new post is added to this blog!

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#Real #Problems #Real #Estate