Tag: SPX

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.
Learn More

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#Double #Barrel #Bull #Market #Housing #Rule #Roost

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

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

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

Fibonacci Says Upside to SPX 4300

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Earlier this week, I completed a “clean slate” exercise on the S&P 500 chart.

You see, my charts become pretty busy over time, because I draw lots of trend lines and put notes on the charts as well. Basically, I consider charts to be the way you have a conversation with the markets! And after a while, the conversation gets a little muddy, and you need to reset.

My normal S&P 500 chart looks like this:

Viewers of The Final Bar on StockCharts TV will probably be very familiar with this daily SPX chart, because we review it on pretty much every episode of the show!

Every line drawn on that chart comes from some moment where, in reviewing the chart, I felt that I needed to indicate a particular level or trend or pattern. Over time, the chart can accumulate quite a bit of noise!

Should we “sell in May and go away” in 2023? Join me for a free webcast on Tuesday May 23rd at 1:00pm ET called Sell In May: Trends vs. Cycles. We’ll review the history of this seasonal pattern, compare the current market environment to past cycles, and decide together whether we should indeed “sell in May!” Sign up HERE for this free event!

So I saved a new version of this chart and went with a completely clean slate. Okay, I did add back the moving averages and RSI, but other than that it’s pretty clean!

What jumps out at you as you’re looking and reflecting on the price movements and price patterns? For me, I was immediately drawn to the higher lows from October to December to March. I drew that trendline first (dashed blue line), and it struck me that my first takeaway was the bullish pattern of higher lows over time.

Next, I noticed how we were approaching the February high around 4200, so I drew a dashed pink line to indicate this important resistance level. It turns out Thursday’s close was almost exactly at this level, and then Friday’s drop pulled right back below 4200.

Finally, I noticed the symmetry around the 4100 level. The S&P 500 hit 4100 in early December of last year, and I would argue that February’s run to 4200 was essentially a failed attempt to break above that December high. We spent most of the last six weeks sitting right around 4100, so that trendline was added next.

I sat back and reviewed my trendline analysis, and realized that I was missing one of the most effective ways to identify potential support and resistance levels between two extreme prices: Fibonacci Retracements. When a market has established a significant high (SPX 4800 in January 2022) and then a significant low (SPX 3500 in October 2022), Fibonacci Retracements can help to anticipate where the market may retrace as the price attempts to push higher and regain the previous highs.

When I applied the Fibonacci ratios to the chart, I remembered why I was so focused on the 4000 level in the 4th quarter of last year. This represented a 38.2% retracement of the 2022 range and seemed to be a likely upside target on the initial rally off the October lows.

Sure enough, we hit 4000 in November and spent about four weeks chopping around that price point. When we finally saw a follow-through move above 4000 in January, that opened the way to the 50% level around 4155, which was reached in early February.

Just can’t get enough Dave Keller in your life? My newsletter focuses on behavioral investing, combining the best practices of technical analysis and behavioral finance. Check it out!

For the last six weeks, we’ve been talking about the S&P 500 hitting 4200 and whether it can eclipse the February high. This chart now reminded me that the 50% Fibonacci level was also at play here, and getting above 4155 was an important milestone as well.

So if the SPX does indeed power above the February high next week (still very much an open question in my opinion!), what’s the next upside objective?

A 61.8% retracement of the 2022 selloff would take the SPX to around 4310. That is pretty much exactly at the August 2022 high! Here, we have a “confluence of resistance” where traditional support and resistance analysis aligns with Fibonacci retracements. Based on the narrow leadership in 2023, and the anemic breadth conditions persisting through this week, I would expect a move above 4300 to be highly unlikely.

What if the S&P 500 index fails here and pushes back lower? Well, we have plenty of support levels and Fibonacci levels below the current price, including the 4150 and 4100 price points. I’m immediately drawn to 4000, which represents a “confluence of support” based on Fibonacci analysis, the 200-day moving average, and the trendline we mentioned at the beginning of this article.

There is plenty to be bullish about, with strong uptrends in many equities and our Market Trend Model remaining bullish on all three time frames. But, when markets are facing significant overhead resistance, I have to question the risk vs. reward at current levels.

Want to learn more about Fibonacci in a handy video format? Head over to my YouTube channel!

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

Subscribe to The Mindful Investor to be notified whenever a new post is added to this blog!

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#Fibonacci #Upside #SPX

Ending The Sloppy Choppy Phase

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In the last two weeks, I’ve heard this market described as “frustratingly neutral”, “decidedly sideways”, “stuck”, and my personal favorite, the “sloppy choppy” phase. So how does the market breakout of this sideways period and move into a new bullish or bearish phase?

It starts with the S&P 500 and Nasdaq Composite and what I call the New Dow Theory.

What a Breakout Could Look Like

Now, there are more sophisticated methods for gauging Dow Theory signals, but I tend to keep things super simple. When both the S&P 500 and Nasdaq Composite are making a new swing high, that is a confirmed bullish signal. When either index makes a new swing high, and the other index does not confirm that new swing high, that is a bearish non-confirmation. When both the S&P 500 and Nasdaq Composite are making a new swing low, there’s a confirmed bearish signal. When either index makes a new swing low, and the other index does not confirm that new swing high, that is a bullish non-confirmation.

We can see that this week the Nasdaq Composite did indeed make a high for 2023, finally pushing above its February peak. The S&P 500, even with a fierce rally into Friday’s close, still has not broken out to a new swing high.

If the S&P 500 would close above 4200 at some point next week, that would create what we listed above as a confirmed bullish signal. What if the SPX does not close above 4200? Then we would have a bearish non-confirmation and a likely retest of the March low.

Further Confirmation From Market Breadth

Now the issue with our growth-oriented, cap-weighted benchmarks is that they are very skewed to a relatively small number of mega cap stocks in sectors like technology and communication services.

We’ve been talking narrow leadership and questionable breadth conditions for a while now, and John Murphy included it as a key bullet point in his recent market note.

If we check out the advance-decline lines by cap tiers, you’ll notice a huge difference between conditions for the largest vs. the smallest names in the equity space.

Below the S&P 500 price trend, you’ll see three data series which represent the cumulative advance-decline lines for large caps, mid caps, and small caps. Note how the large cap A-D line is testing its February high, similar to the S&P 500 itself. The mid cap A-D line is well off its February high, and just broke below its 50-day moving average this week. At the bottom, you’ll see that the small cap advance-decline line is testing its March low.

Talk about three very different takes on market breadth!

While our mega-cap dominated benchmarks can and do move higher based on the strength of the mega cap trade, the weakness in the smaller stocks out there suggests less of a “risk-on” environment, and more of a “getting large and defensive” feel.

The bear case from here would start with the small cap A-D line making a new low for 2023, as well as the large cap breadth line not pushing above its February high.

Investor Sentiment and Economic Growth

Our final chart today addresses the relationship between the equity markets and other asset classes. Here we see the S&P 500 at the top, followed by three key ratios that provide fascinating insights into market sentiment and economic outlooks.

The first ratio is stocks vs. bonds, using the SPY and TLT ETFs. Note how this ratio was in a clear uptrend for about three years, starting just after the 2020 market low. It definitely paid to own stocks over bonds from 2020 through 2022.

Now look at the last six months, and you’ll see how stocks and bonds have been pretty much a wash since October of last year. That’s right, owning stocks or bonds would given you pretty similar returns, even with equities rallying strongly off their October lows.

The next panel down shows stocks vs. gold, or what I think of as “paper vs. rocks”. Now in the rocks-scissors-paper challenge I often find myself in with my seven-year-old son, paper covers rocks. But in the financial markets in 2023, rocks have done much better due to the strength in gold and precious metals. So you’ve been much better off owning gold over stocks or bonds since the end of 2021.

At the bottom, we have two ETFs of which you may be a bit less familiar. Here, we’re comparing base metals (DBB) vs. precious metals (DBP). When economies are growing, you need lots of copper and aluminum and other practical materials to build cities and other things. When the economy is weaker, precious metals tend to thrive, as they are considered a good store of value and tend to be as recession-proof as anything can be. And, of course, weaker economies mean less demand for base metals.

So what does it mean that this ratio has been trending lower over the last 12 months? It certainly does not mean that the economy is doing well, and arguably it indicates that the actions taken by the Fed to raise rates and slow the economy has had its intended effect.

Can stocks move higher while this ratio goes lower? Of course. But just as we’ve discussed regarding small-cap stock performance and offensive vs. defensive sectors, I’d feel much better about upside potential if ratios like this were trending higher rather than lower!

Want to digest that last chart in video format? Just head over to my YouTube channel!

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

Subscribe to The Mindful Investor to be notified whenever a new post is added to this blog!

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#Sloppy #Choppy #Phase

Is This Market Resilient or What?

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Have you ever stood at the edge of the Grand Canyon and wondered about all the history of each cave or ridge? What about the multiple valleys that ultimately drain to the Colorado River? It is a daunting site to behold, but, as the winds blow past you and the hawks soar overhead, you can quickly see that just one viewpoint doesn’t do it justice.

Photo: Greg Schnell

This week’s price action in the stock market reminds me that there are multiple perspectives of where we are in the stock market journey. Everyone’s viewpoint is different, and that’s what makes a market. Technology investors see one perspective. Commodity investors see another. Bank dividend investors are seeing a new view as well.

I went to look and see what were the top-performing industries over the last week while the banks were imploding, and it was travel and leisure, hotels, and gaming. I had no idea that the resilience of those groups could hold up a market.

Financials:

Financials are breaking down, both big and small. Financials used to be important, but apparently they do not matter, as the $SPX touched a fresh 2023 high last week.The charts of C, WFC, and BAC don’t look nearly as healthy as JPM. The regionals are bombing out, and a few might get merged this weekend. I think we have all seen the KBE and KRE ETF charts. The main point of the picture below is that JPM is holding up; the others are not.

Here is the banking index. That 2010-2023 trend looks broken. Even by just ignoring the COVID situation, this looks broke, and a test of $60 wouldn’t be hard to imagine. The bottom panel shows 15-year relative strength lows.

The broker dealers, usually considered as one of the leading industries, looks better than the banks. Does the trend line hold? The PPO is going below zero again. This is a chart that suggests, to me, that this problem will get bigger.

Industrial Metals

The industrial metals commodity index by Goldman Sachs is making lower lows and lower highs since January. Is this just China managing commodity demand to load up on cheap commodities before the next run starts? That would be no different that the US government managing oil pricing by releasing the strategic petroleum reserve. So this isn’t taboo, but other nations do it on a lot more commodities than just oil.

Crude Oil

Crude oil continues to struggle. That rally last Friday was just that. It was so-o-o last week, as crude slid below $65 this week. Before market open on May 5, this chart shows crude down 10% on the week, and that isn’t even the bottom of the candle.

$SPX Price Earning Ratio

The price/earnings ratio for the stock market, sitting up near some of the most stretched extremes in history, was barely discussed at the CMT Association meeting. Purple is current, and the other three lines are where it would be based on lower P/E ratios. We have lived in a stretched world since 2014, so why would that view matter now? I show this chart to demonstrate that, if we reverted to 20, we would be below 3500, and if we reverted to a P/E of 15, 2600 is in play. It is not uncommon for recessions to cause a valuation reset of the market broadly.

Bonds and the Yield Curve

At the CMT Association meeting, the yield curve or the history of the yield curve was never mentioned in any of the conversations and presentations I sat in on. It didn’t fit with the bullish narrative of the $SPX and $NDX at 2023 highs. By the way, most portfolio managers think we are going much higher (but don’t mention the yield curve).

Actually, I was amazed that no one even mentioned it, even though the whole bank valuation issue right now is hold to maturity (HTM) bonds. Bonds are the problem, not the equity market.

The real deal is bonds add another perspective, much like the Grand Canyon viewpoints. Change any one viewpoint and it looks totally different. We find an entirely different view over in the yield curve. Bonds are one of the four major asset classes, but only Louise Yamada ventured there, showing a 40-year break of the interest rate trend line for long bonds.

The current yield curve did not seem to matter, nor did the history of the yield curve. So let me add a few yield curve charts here. The vertical line on the right side at year 2000 is the top yield curve line on the left. The vertical line at 2007 is the bottom yield curve line on the left.

So what does the yield curve line look like right now? It is the bottom line on this chart below, comparing with the 2000 top. They look similar to me.

Why does that matter? Let me use another chart to explain what is happening. The 30-year yield is now higher than the middle or the belly of the curve. This is changing rapidly as the yield curve starts to realign. If you look on the right side in the zoom panel, the 30-year yields are starting to hold above the middle of the curve yields. The 30-year yield may cross above the 2-year soon. But look at the congestion zones when the yields get tight. The equity market response is shown as this starts to broaden out. $SPX is on the lower panel.

Fed Rate

Now that a large portion of money managers assume the Fed is done raising rates, where does this leave us? The chart that makes a big impression on me is the rate of change of the Fed funds rate, shown in green in the lower panel. This isn’t the rate of change of something like lumber. This is the rate of change for one of the most tracked interest rates in the world.

The assumption that the entire business world can adapt rapidly to absorb one of the fastest rate changes ever does not seem plausible to me. As this rolls through boardrooms across the world, when will it crack the equity market investors? So far, the equity markets are not blinking.

I am on another viewpoint — wide-eyed, staring over my view, suggesting something is amiss and about to fall sharply. Will it happen in May or June? Or will it take until October? I don’t know, but I don’t see this working out ‘perfectly’ as we try to go to take out the 2021 highs.

To me, it looks like a setup we should be cautious of. When the market continues to struggle to make higher highs here after six weeks, is this just a consolidation? Or is it a final realization that it’s about to get messy?

If you would like more perspectives on this, I’ll be holding a monthly conference call for clients on Sunday. At Osprey Strategic, you can try out our services for just $7 for the first month. I’m a big fan of protecting capital until the time is right to step back in. Day traders need not test the waters. They won’t find anything they like there. This is for investors with large amounts of capital with the wisdom and patience to wait for a better backdrop.

Greg Schnell

About the author:
Greg Schnell, CMT, MFTA is Chief Technical Analyst at Osprey Strategic specializing in intermarket and commodities analysis. He is also the co-author of Stock Charts For Dummies (Wiley, 2018). Based in Calgary, Greg is a board member of the Canadian Society of Technical Analysts (CSTA) and the chairman of the CSTA Calgary chapter. He is an active member of both the CMT Association and the International Federation of Technical Analysts (IFTA).

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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

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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.
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Stocks Retain Uptrend: Focusing on the Right Homebuilder in a Volatile Market

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The release of the March payrolls numbers threw a wrench into the notion that the US economy is slowing. At the same time, given all the negative data which preceded it, the big question is when the market will start to doubt the veracity of the monthly employment numbers.

Just a week ago, the stock market was back in a technology sector-fueled uptrend. But, on April 4, a major trend reversal took hold as JP Morgan (JPM) CEO Jamie Dimon remarked that the banking crisis was nowhere near over and that the repercussions would last for years. His remarks were reinforced by a slew of data showing a rapid slowing of the US economy.

By Thursday, ahead of the Good Friday market closing, the market had found support. But when the employment data was released on April 7, 2023, everything was once again up in the air, although the stock index futures moved slightly higher on the news.

The report delivered lower-than-expected private jobs at 189,000. A higher-than-expected number of government jobs boosted the overall print, which totaled 236,000. Hourly wages rose slightly, but hours worked dropped slightly. The highest number of new jobs was in the waiter/bartender category.

That was seen as a middle-of-the-road number. Yet it doesn’t jibe with the private market data.

Private Market Data Points to Worsening Labor Market

Before Friday’s employment report, Purchasing Managers’ data (ISM, PMI) showed a slowing economy as new orders faltered. Government jobs listings (JOLTS) weakened. The ADP private sector jobs created showed job creation stalling. The recent Challenger Jobs Cut report showed an increase in layoffs.

Inside the ADP data, the numbers from the Southern US, an area of strength, showed net job losses. This is significant, as the South has been the strongest economic area of the country, boosted by the migration of people from the East, West, and Midwest.

Here is the regional breakdown of the ADP new jobs created numbers:

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

These numbers reflect a slowing in new job creation, not necessarily layoffs. Reductions in manufacturing and financial services led the way, suggesting banking sector weakness. Moreover, manufacturers are struggling as export orders fall, a point made in the ISM and PMI data.

The Challenger Jobs Cut report and weekly jobs claim data from the Bureau of Labor Statistics added to the weakening picture. Challenger reported 89,000-plus job cuts for March, 270,000-plus 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

The Technology sector accounted for 102,391 during the first three months of 2023. The bottom line is fourfold:

  • 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.

Bond Yields Collapsed, Mortgage Rates Follow

Before the jobs number, stocks were volatile and bond yields fell. The 10-Year US Treasury Yield index ($TNX) broke decisively below 3.5%, finishing the week below 3.3%, as bond traders bet on a recession. The initial response in muted Friday bond futures trading was a rate uptick to just below 3.4%.

Of note, as I detail below, homebuilder stocks paused. The ADP data, showing job weakness in the South U.S., could be a problem, given that this is where the largest growth area for new homes is currently.

If the bond market is correct, the US economy is heading for recession, and the Federal Reserve will be pressed to lower interest rates. The Fed meets on May 2-3.

Mortgage rates continue to fall, which is generally bullish for homebuilders. A multi-year view of the relationship between bond yields ($TNX), the price action in the Homebuilders Subsector Index ($SPHB), and mortgage rates ($$MORTGAGE) document the close relationship between these three indicators.

To view my homebuilder picks click here.

Focusing on the Right Homebuilder is the Right Approach in a Volatile Market

In the short term, the SPDR S&P Homebuilder ETF (XHB) remains in an uptrend, as it is trading above its 50-day moving average. The current trading pattern suggests a likely continuation of a consolidation pattern. Still, in this market, it’s best to consider individual homebuilder stocks.

That’s because, even though XHB is a useful tool, it’s not a pure gauge of the homebuilder stocks. The ETF holds the stock of companies that supply materials to homebuilders, as well as specialty homebuilders such as Cavco Industries (CVCO). Cavco makes manufactured homes, and although its recent earnings and revenues have been excellent, any type of weakness in the economy—such as a precipitous decline in the job market for the Southern U.S. (ADP data above)—would likely affect it more negatively than other homebuilders.

Comparing CVCO to Lennar (LEN), a homebuilder that targets a higher income bracket, you can see the weakening employment situation in the South was not as large a negative on LEN.

As a result, the action in CVCO and other individual companies in XHB can assert negative pressure on the ETF. In other words, this is one of those times when owning individual homebuilder stocks may outperform owning the entire sector.

I discussed the long-term investment potential in homebuilder stocks in my latest Your Daily Five video, focused on investing in Megatrends. And I’ve just put the finishing touches on a Special Report titled: “How to Invest in the Housing Megatrend,” which is you can download my Buy me a Coffee page.

Breadth Pauses. Nasdaq Holds 13,000.

The market’s breadth did not break last week, but did show some weakness, as the New York Stock Exchange Advance Decline line (NYAD) dipped below its 50-day moving average while remaining above its long-term support line, the 200-day moving average.

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

Meanwhile, the Nasdaq 100 Index ($NDX) held above its breakout level 13,000, which now becomes 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 and OBV are very bullish for $NDX.

The Cboe Volatility Index ($VIX) has broken below 20, a sign that the bears are throwing in the towel. The recent low is 17. A break below that would signal a severe decline in bearish sentiment.

When VIX rises, stocks tend to fall, which 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, raising the odds of higher stock prices.

The market’s liquidity remains stable as the Eurodollar Index ($XED) remained above support, near 94.75. 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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#Stocks #Retain #Uptrend #Focusing #Homebuilder #Volatile #Market

Big bank earnings in spotlight following historic failures: ‘Every income statement line item is in flux’.

Post By Stock , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

JPMorgan Chase & Co.
JPM,
-0.11%,
Citigroup Inc.
C,
+0.20%
and Wells Fargo & Co.
WFC,
+2.74%
— along with PNC Financial Services Group Inc.
PNC,
+0.37%
and BlackRock Inc.
BLK,
+0.05%
— report earnings Friday as Wall Street’s fixation on a recession continues to run deep. And following the implosion of Silicon Valley Bank
SIVBQ,
-12.21%,
Signature Bank
SBNY,
+3.97%
and Silvergate Bank
SI,
-2.72%,
along with efforts to seal up cracks in First Republic Bank
FRC,
+4.39%
and Credit Suisse Group AG
CS,
+1.27%,
Wall Street is likely to review quarterly numbers from the industry with a magnifying glass.

“Every income statement line item is in flux and the degree of confidence in our forecast is lower as the probability of a sharper slowdown increases,” Morgan Stanley analyst Betsy Graseck said in a note on Wednesday.

For more: Banks on the line for deposit flows and margin pressure as they reel from banking crisis

She said that the collapse of Silicon Valley Bank and Signature Bank last month would trigger an “accelerated bid” for customers’ money, potentially weighing on net interest margins, a profitability gauge measuring what banks make on interest from loans and what they pay out to depositors. Tighter lending standards, she said, would drive up net charge-offs — a measure of debt unlikely to be repaid — as borrowers run into more trouble obtaining or refinancing loans.

Phil Orlando, chief investment strategist at Federated Hermes, said in an interview that tighter lending standards could constrain lending volume. He also said that banks were likely to set aside more money to cover loans that go bad, as managers grow more conservative and try to gauge what exposure they have to different types of borrowers.

“To a significant degree, they have to say, what percentage of our companies are tech companies? What percentage are financial companies? Do we think that this starts to dribble into the auto industry?” he said. “Every bank is going to be different in terms of what their portfolio of business looks like.”

He also said that last month’s bank failures could spur more customers to open up multiple accounts at different banks, following bigger concerns about what would happen to the money in a bank account that exceeded the $250,000 limit covered by the FDIC. But as the recent banking disturbances trigger Lehman flashbacks, he said that the recent banking failures were the result of poor management and insufficient risk controls specific to those financial firms.

“COVID was something that affected everyone, universally, not just the banking companies but the entire economy, the entire stock market,” he said. “You go back to the global financial crisis in the ’07-’09 period, that’s something that really affected all of the financial service companies. I don’t think that’s what we’re dealing with here.”

Also read: Banking sector’s growing political might could blunt reform in wake of SVB failure, experts warn

JPMorgan
JPM,
-0.11%
Chief Executive Jamie Dimon has said that Trump-era banking deregulation didn’t cause those bank failures. But in his annual letter to shareholders last week, he also said that the current turmoil in the bank system is not over. However, he also said that the collapse or near-collapse of Silicon Valley Bank and its peers “are nothing like what occurred during the 2008 global financial crisis.”

“Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight,” Dimon said. “Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known — both to regulators and the marketplace.”

“The unknown risk was that SVB’s over 35,000 corporate clients – and activity within them – were controlled by a small number of venture capital companies and moved their deposits in lockstep,” Dimon continued. “It is unlikely that any recent change in regulatory requirements would have made a difference in what followed.”

The Federal Reserve’s decision to raise interest rates, along with a broader pullback in digital demand following the first two years of the pandemic, stanched the flow of tech-industry funding into Silicon Valley bank and caused the value of its bond investments to fall.

Don’t miss: An earnings recession seems inevitable, but it might not last long

But the impact of those higher interest rates — an effort to slow the economy and, by extension, bring inflation down — will be felt elsewhere. First-quarter earnings are expected to decline 6.8% for S&P 500 index components overall, according to FactSet. That would be the first decline since the second quarter of 2020, when the pandemic had just begun to send the economy into a tailspin.

“In a word, earnings for the first quarter are going to be poor,” Orlando said.

This week in earnings

For the week ahead, 11 S&P 500
SPX,
+0.36%
components, and two from the Dow Jones Industrial Average
DJIA,
+0.01%,
will report first-quarter results. Outside of the banks, health-insurance giant UnitedHealth Group
UNH,
+0.70%
reports during the week. Online fashion marketplace Rent the Runway Inc.
RENT,
+3.75%
will also report.

The call to put on your calendar

Delta Air Lines Inc.: Delta
DAL,
+0.69%
reports first-quarter results on Thursday, amid bigger questions about when, if ever, higher prices — including for airfares — might turn off travelers. The carrier last month stuck with its outlook for big first-quarter sales gains when compared with prepandemic levels. “If anyone’s looking for weakness, don’t look at Delta”, Chief Executive Ed Bastian said at a conference last month.

But rival United Airlines Holdings Inc.
UAL,
+1.50%
has told investors to prepare for a surprise loss, even though it also reported a 15% jump in international bookings in March. And after Southwest Airlines Co.’s
LUV,
+0.03%
flight-cancellation mayhem last year brought more attention to technology issues and airline understaffing, concerns have grown over whether the industry has enough air-traffic controllers, prompting a reduction in some flights.

For more: Air-traffic controller shortages could result in fewer flights this summer

But limitations within those airlines’ flight networks to handle consumer demand can push fares higher. And Morgan Stanley said that strong balance sheets, passengers’ willingness to still pay up — albeit in a concentrated industry with a handful of options — and “muscle memory” from being gutted by the pandemic, could make airlines “defensive safe-havens,” to some degree, for investors.

“It is hard to argue against the airlines soaring above the macro storm underneath them (at least in the short term),” the analysts wrote in a research note last week.

The numbers to watch

Grocery-store margins: Albertsons Cos.
ACI,
+0.53%.
— the grocery chain whose merger deal with Kroger Inc.
KR,
+0.96%
has raised concerns about food prices and accessibility — reports results on Tuesday. Higher food prices have helped fatten grocery stores’ profits, even as consumers struggle to keep up. But Costco Wholesale Corp.
COST,
-2.24%,
in reporting March same-store sales results, noted that “year-over-year inflation for food and sundries and fresh foods were both down from February.” The results from Albertsons could offer clues on whether shoppers might be getting a break from steep price increases.

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