Tag: xhb

With the Fed on Hold, Santa Just Revved Up the Sled; Think Value

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The Santa Claus rally has left the station and is barreling down the tracks, as the Federal Reserve is on hold. 

Before I took a week off from writing this column for the Thanksgiving holiday, I wrote: “Regular readers of this column were not surprised by the rally, given the multiple alerts I posted noting the likelihood of a meaningful market bottom emerging due to the extraordinary technical picture which had developed in the bond market, and the ensuing gloom and doom in stocks as early as September 2023. And although there are no guarantees, the ongoing rally in both stocks and bonds has a great chance of continuing, due to the bullish seasonality which kicks into high gear with the traditional Thanksgiving rally.”

Here’s why we’re rallying. At least three voting members of the FOMC, including Chairman Powell, have made the following clear:

  • No easing in in the cards for now;
  • The Fed is prepared to tighten further if needed; but
  • Unless inflation data worsens, the interest rate hiking cycle is likely over.

All of which adds up to stocks moving higher in the short term, unless something bad happens that derails the bullish sentiment; think CPI, PPI, and the FOMC meeting, which are all approaching. Moreover, there is some evidence that overbought sectors of the market, such as technology, are starting to struggle, which means that some sort of sector rotation is well overdue.

So far, so good; but what’s next?

Bond Yields and Mortgages Continue Bullish Decline

The first part of the answer to the above question lies in the bond market, where rates continue to fall and seem headed lower at a rapid clip. The U.S. Ten Year Note yield (TNX) is now well below 4.5% and its 50-day moving average. Moreover, it just broke below the 4.3%-4.4% support area, and looks headed for 4%.

Even more impressive is the move down in mortgage rates (MORTGAGE), which looks set to test the 7% area and may move as low as 6.8%, the 50-day moving average for this series.

As expected, amongst the major beneficiaries of the lower interest rates have been the homebuilders, as reflected in the recent price action for the SPDR S&P Homebuilders ETF (XHB), which broke out to a new high on the latest decline in TNX.

In addition, the long-term fundamentals of supply and demand in the housing market remain in favor of the homebuilders and related sectors. These include real estate investment trusts (REITs), which specialize in home rentals and related businesses.

You can see the bullish influence of lower interest rates on Nuveen Short Term REIT ETF (NURE) which is now testing its 200-day moving average. This ETF specializes in rental properties. A move above $30 in REZ is likely to deliver higher prices.

Sector Rotation is Likely

The REIT sector is certainly a place where value investors can find excellent ways to put money to work. But it’s not the only area that has been overlooked by the market lately, and which should benefit from a sector rotation.

Over the last few weeks in this space, I’ve been focusing on value investing, a topic in which I recently expanded in my latest Your Daily Five video, which you can catch here. That’s because growth stocks have become overbought and are due for a pause, while there are still plenty of investors and money managers who missed the October bottom and are being forced to play catchup before the year ends.

You can see this dynamic playing out by comparing the action in the S&P 500 Citigroup Pure Growth Index (SPXPG) to the trend in the S&P 500 Citigroup Pure Growth Index (SPXPV) index.

The growth index has been trading ahead of the value index for the past several weeks, but is now struggling near the 15800 chart point. Meanwhile, the value index has extended its move with greater momentum. You can appreciate the differences in the strengths of the move via the Pure Price Momentum indicators (PMO) for both where the PMO for SPXPV is much stronger.

All of this suggests that the next leg up in the market, barring something bad happening, will likely be led by value stocks.

For more on homebuilder stocks, click here.

The Unloved Energy Sector

After the amazing summer rally in the oil markets, things have cooled off dramatically. At the center of the decline in crude and the fossil fuel sector has been an oversupply of product. On the one hand, higher well efficiency in the U.S. shale sector has increased supply. On the other hand, as usual, OPEC + has not fully stuck to its highly publicized production cuts.

Yet the recent collapse in the clean energy stocks puts a different emphasis on the traditional energy sector, which is why it’s worth looking at the action in the Energy Select Sector SPDR Fund (XLE), where big oil and gas companies are aggregated.

What stands out the most is that even as crude oil prices (WTIC) have come well off their recent top, XLE’s decline has been a lot gentler. In fact, XLE is still trading above its 200-day moving average, which puts it technically in a bullish trend. In addition, the ETF is starting to show signs of moving away (to the upside) from a large VBP bar near $85. Above, there is more resistance from the 50-day moving average and a cluster of VBP bars all the way to $89.

Nevertheless, with components such as BP Plc (BP) trading at seven times earnings while yielding 4.81%, you have to wonder how long before value investors come a-knocking at the door of this sector.

Aside from recommending multiple big winners in the homebuilder and technology sectors, I recently recommended an energy stock which likely to move decidedly higher regardless of what the price of oil does. Join the smart money at Joe Duarte in the Money Options.com, where you can have access to this ETF and a wide variety of bullish stock picks FREE with a two week trial subscription. 

Market Breadth is Now Bullish

The NYSE Advance Decline line (NYAD) is back in bullish territory, coursing above its 50- and 200-day moving averages. So, while there is improvement, we don’t have a definitively bullish long-term signal for the market’s trend, yet. If there is a downside, it’s that the RSI indicator is nearing an overbought situation. However, at this stage of the rally, NYAD’s rate of climb may slow, but does not look as if it will fully reverse in the short term.

The Nasdaq 100 Index (NDX) looks a bit tired and needs a rest. The index has struggled to move above 16,000. Both ADI and OBV are flattening out as profit-taking increases.

The S&P 500 (SPX) remained above 4500 and could well move above 4600. This is not surprising, as many value stocks are now pushing SPX higher.

VIX is Back Below 20

The CBOE Volatility Index (VIX) continues to fall, closing below 15 last week. This is bullish.

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

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

#1 New Release on Options Trading!

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

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

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

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

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#Fed #Hold #Santa #Revved #Sled

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bonds Retain Bullish Tone Ahead of Inflation Numbers

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

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

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

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

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

Market Breadth Lags Rally as Indexes Outperform

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

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

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

VIX is Back Below 20

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

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

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

#1 New Release on Options Trading!

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

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

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

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

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

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

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

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

Buckle up! Santa may be warming up his sled.

The Signs Were There

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

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

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

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

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

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

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

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

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

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

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

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

Huge Potential Gains Lurk in Homebuilders

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

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

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

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

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

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

Market Breadth Reverses Bearish Trend

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

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

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

VIX is Back Below 20

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

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

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

#1 New Release on Options Trading!

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

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

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

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

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#Santa #Warming #Sled #Whats #Watch #Fed #Bond #Market

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

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

Fear is Reaching Extreme Levels

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

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

Here’s the laundry list of worries:

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

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

Smart Money Sneaks into Tech Stocks

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

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

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

Bond Yields Are Now Totally Crazy

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

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

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

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

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

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

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

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

The Market’s Breadth Shows Signs of Stabilizing

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

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

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

VIX Remains Below 20

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

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity Continues to Tighten

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

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

#1 New Release on Options Trading!

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

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

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

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

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Bonds Toy with Secular Bear Market — Was That the Top in Housing Stocks? Maybe Yes, Maybe No.

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The market’s worsening breadth and the lack of a robust bounce on 8/18/23, even as bond yields reversed course after their runaway freight train climb during the week, is worrisome.

On the other hand, the market’s sentiment is souring rapidly, and oversold gauges are closing in on traditional bounce territory. Consider this:

  • CBOE Put/Call Ratio hit 1.25 on 8/16 – the highest reading in eight months;
  • The CNN Greed Fear Index hit 46 (neutral) on 8/18/23 – a month ago it was at 83 (extreme greed). Readings below 40 signal excessive greed in the market;
  • RSI for the S&P 500 (SPX) is at 34, just shy of the critical 30 oversold reading; and 
  • The New York Stock Exchange Advance Decline line (NYAD, see below) closed outside its lower Bollinger Band for the fourth straight day – this is as oversold as it gets.

Thus, with rising pessimism and with the market nearing an oversold level, the key to what happens next depends on what type of bounce we see in the next few days. If there is no real strength in the bounce, we may see a renewal of the downtrend.

Bonds Test Secular Bear Market Boundaries

The U.S. Ten Year Note yield (TNX) recently tested the 4.30% yield area, its highest point since late 2022, before turning lower. If TNX breaches this key chart point, bonds may have entered a secular bear market. That won’t be good for stocks.

The long-term chart for TNX shows that yields crossed a meaningful high point (3.25%) area in 2019 before re-entering a bullish phase, due to the pandemic raising the specter of a global depression.

Of course, history has shown that no such thing happened as global central banks hit the digital printing presses.

The U.S. recovered. The jury is still out for Europe. China remained closed too long. Foreign companies moved. Since China’s economy depends on foreign capital to fuel its manufacturing base, the exit of foreign companies resulted in a capital vacuum which is now affecting the Chinese property sector, as seen in the recent bankruptcy of the Evergrande Real Estate conglomerate, China’s largest developer.

Normally, this would be bullish news for U.S. Treasuries. Is this time different?

So Why are Bond Yields Rising?

The pandemic reversed globalization, as lockdowns had unintended consequences. Consider the following:

  • Companies moved out of China, taking capital out of the Chinese economy;
  • Construction of manufacturing plants and warehouses in the U.S. has increased; while
  • Supply chains have not fully adjusted.

New factories built in the U.S. are technology-focused: semiconductors, solar power technology, and electric car parts and batteries. A few factories make building materials, household appliances, furniture, cell phones, or internal combustion engine automobiles.

Ignored are food processing, medical product manufacturing, and other important areas. Normally, these items come from China. But China’s economy is slowing, and capital flight is making operations there difficult for both domestic and foreign companies, creating shortages of everyday products and raising prices. 

In the U.S., the skilled labor pool has shrunk. There aren’t enough people farming, making furniture, or processing meat. Those with those skills cost more. Meanwhile, companies looking to build factories in the U.S. are having trouble finding enough skilled construction workers, adding to rising costs and fueling inflation.

The U.S. government continues to pump money into the clean energy economy, flooding the economy with money just as the Fed is trying to tighten conditions. Too many dollars chasing too few goods – the most basic definition of inflation. Capital allocation is unbalanced and inefficient, compounding the problem. Thus, bond traders fear a squeeze in raw materials and skilled labor costs, and the related decreased production of necessary household goods.

In other words, the post-pandemic period is turning into one where inflation is becoming structural. If TNX moves above 4.3%, this notion will be all but confirmed.

Smart Money Update: Was that the Top in Housing Stocks?

We may have seen the top in the housing stocks, although the jury is still out on this. I’ve been bullish on homebuilders for quite a long time, but, unless something improves quickly, the best days for this group may be behind us.

The SPDR S&P Homebuilder crashed and burned on 8/17/23, slicing through its 50-day moving average like butter. Moreover, there was no real bounce to speak of on the next day, which is what’s usually happened in the past twelve months after heavy bouts of selling. Accumulation/Distribution (ADI) and On Balance Volume (OBV) both rolled over aggressively, both negative signs suggesting money is moving out in a hurry.

The key is if and how the sector bounces back. Still, the supply shortages in the housing market will resurface as the kindling required to reignite a rally in XHB. Meanwhile, money is decidedly finding a home in the energy sector, specifically in oil and oil service stocks (OIH).

Patient investors may eventually benefit from the uranium market, as nuclear power continues to slowly become a viable alternative in the search for clean energy sources in the face of the cuts in oil and natural gas production, as displayed in the accelerating downward path of the weekly oil rig count. There are now 136 fewer active rigs in the U.S. compared to the same period in 2022.

A sector, which is bullishly being ignored by many traders, is uranium. But the shares of the Global X Uranium ETF (URA) are under steady accumulation. I recently discussed how to spot the smart money’s footprints and how to turn them into profits. URA, in which I own shares, is featured in the video. You can get the full details here.

Do you own homebuilder stocks? What should you do with your energy holdings? Get answers at Joe Duarte in the Money Options.com. You can have a look at my latest recommendations FREE with a two-week trial subscription. And for an in-depth review of the current situation in the oil market, homebuilders and REITS, click here.

Will NYAD Finally Bounce? NDX and SPX Approach Oversold Levels

Given the drubbing stocks took last week and the oversold reading on RSI for the New York Stock Exchange Advance Decline line, you’d think we’d get a bigger bounce when bond yields turned lower on Friday. No such thing happened. That’s worrisome.

The long term trend for stocks remains up, but the short- and intermediate-term trends are in question, as NYAD remained below its 20-day and 50-day moving averages and may still be headed for a test of its 50-day, and perhaps the 200-day, moving average.

The Nasdaq 100 Index (NDX) is very oversold after breaking below its 50-day moving average the 15,000 level. Accumulation/Distribution (ADI) and On Balance Volume (OBV), remain weak, as short sellers are active and sellers are overtaking buyers. Let’s see what type of bounce we get.

The S&P 500 (SPX) looks just as bad, remaining below 4500, its 20-day and its 50-day moving averages. Both ADI and OBV are negative. Support is now around the 4300 area.

VIX Remains Below 20

VIX rolled over at the end of last week without taking out the 20 level. This is good news. A move above 20 would be very negative as it would signal that the big money is finally throwing in the towel on the uptrend. 

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity Remains Stable

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

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

#1 New Release on Options Trading!

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

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

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

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

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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.
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