Joe Duarte’s Smart Money Trading Strategy Weekly

The Eclipse, Volcanic Eruptions, the Fed, and the Market’s Roller Coaster - What in the World is Next?

April 21, 2024

The Federal Reserve, ahead of next week’s important PCE deflator and GDP reports made it clear last week that the odds of a rate cut until late in 2024 are almost zero now.   That the Fed turned hawkish ahead of two important inflation related economic reports, next week, suggests that perhaps the data won’t be market friendly.  If there is a bright side, it is that market sentiment is souring quickly and that stocks are already oversold. 

Yin and Yang - Eclipses, Volcanic Eruptions, and a Generally Unpleasant Market

Talk about the Butterfly Effect (eclipse version) - on steroids.  Storms are raging across the U.S. while the Ruang volcano in Indonesia impressively erupted just one week after Sicily’s Mount Etna delivered its own eruption.  Meanwhile, a small eruption may be forecasting more action in the Philippines.

Closer to home, the solar eclipse also affected Wall Street’s Yin and Yang as they struggle to balance the risks stemming from the volatility in the Middle East and a suddenly hostile Federal Reserve.

It's clear that the world and the markets are unsettled, and the result is a nail biting roller coaster ride, requiring a nearly constant reassessment of conditions and expectations.  Trading stocks has become a tiresome grind as rallies are met with a slow and painful selling sprees as CTA-algo driven programs react to failing support levels.

Watch this:

• Sentiment continues to plummet.  The CNN Greed/Fear Index clocked in at 31 finally hitting Extreme Greed status. This is a positive;
• The New York Stock Exchange Advance Decline Line (NYAD) is oversold and showing signs of a potential reversal. This is encouraging;
• The CBOE Volatility Index (VIX) is testing the resistance of the 20 area, but has not risen above it. This is a queasy positive;
• The Put/Call Ratio is hinting at a potential climactic event ahead.  This is worth watching;
• The S&P 500 (SPX) closed below 5000 with little support until the 200-day moving average. This is not good, unless it is short lived;
• The Nasdaq 100 Index (NDX) is in freefall as the AI stocks get crushed; This is a big concern; and
• The U.S. Ten Year Note yield (TNX) is holding below the key 4.7% resistance level.

To summarize:  The Fed is turning hawkish.  Both SPX and NDX have broken down.  Thus, a decisive bearish break below key support levels for NYAD coupled with a move above 4.7% for TNX, and a break above 20 for VIX would signal that an acceleration of the downside for stocks and upside for bond yields are likely. 

Never fear. Be prepared for what’s next with a FREE Two-Week Trial to Joe Duarte in the Money Options.com.

When Markets Fall, the Economy Often Follows. Three Field Anecdotes to Ponder.

I recently described the relationship between the stock market and the economy. Specifically, the action in the stock market positively influences the economy as the wealth effect created by rising stock prices fuels higher consumer spending. 

Things may be changing.

During my weekly pilgrimage to Costco (COST), I spotted a fellow who was visibly unhappy with the prices posted in the steak bins.  I didn’t blame him as the same steaks I had purchased a week earlier were priced $10 higher – no kidding.

As I reached for the least priced package I could find, I told the fellow that the prices seemed to be lower at my bin.  He looked at me with a worried expression and after he thanked me, he just moved on.  I took the steaks but crossed some other items from my shopping list so I could stay within my budget.

An hour earlier, I talked with a friend who owns a small business and does not live beyond her means.  She noted that her business is steady, but it’s not growing and not producing enough income to cover all her expenses. So, she started a house cleaning business, which she operates on weekends. 

She’s also worried because her apartment lease is coming up for renewal and she expects the landlord to raise her rent, while noting that one of the reasons her business is flat is that a significant number of her older clients are now dying and no new clients are making their way to her establishment.

A day earlier, another friend told me that his long time physician, a specialist, was closing his practice after 30 plus years, effective immediately because he is no longer able to pay for his expenses.

These three anecdotes suggest that what the Fed’s most recent Beige Book reported, things are not as rosy as the data suggests.

Therefore, I stand by what I said last week:  “a meaningful pullback in stocks over the next few weeks to months, may indeed push the U.S. economy into contraction as the wealth effect shrinks and the M.E.L.A System resets. What’s more important, is whether a slowing economy will eventually reverse the current inflationary trends.”

This is a tough market, but it will eventually bottom out.  And when it does, the rally will start with a short squeeze.  In this video, I show you how to spot the price chart set up and how to trade it.

Bonds Remain Range Bound. Mortgages Cross Negative Threshold.

The U.S. Ten Year Note yield (TNX) is in a holding pattern, trading narrowly between 4.5 and 4.7%. Any move above 4.7% would be very negative for stocks, and for mortgage rates, which I discuss below.

Bond yields are still recovering from the hotter than expected CPI and PPI numbers as well as soft data such as in PMI, ISM, and Fed regional bank surveys which continue to point to stubbornly high prices along the supply and labor chain.  As I noted above, consumers and small business owners are also being affected.

One of the most tangible effects of inflation and higher bond yields is in the mortgage market, where the average 30-year mortgage finally crossed above 7%.  This is likely to reduce mortgage demand in the short term.

Keep these simple principles handy:

• Expect continued Volatility;
• Stick with what’s working; if a position is holding up – keep it;
• Take profits in overextended sectors;
• Consider some short term hedges;
• Look for value in out of favor areas of the market;
• Protect your gains with sell stops. Raise them as prices of your holdings rise;
• Trade one day at a time; and

No matter what, I have a solution for inflation and your wallet.  Grab a paycheck via actively trading stocks, via my active trader focused Substack page here.  New trades are posted on Mondays.

ETFs make sense in this market as they let you trade sectors which can withstand inflation and volatility. My new service, Joe Duarte’s Sector Selector is all about ETFs and tactical trading.  It’s FREE with your monthly membership to Buy Me a Coffee.  Sign up here.

NYAD SPX and NDX Fall Through Support.  RSI Registers Oversold Readings on All Three.

The NYSE Advance Decline line (NYAD) and the major indexes are oversold with the RSI indicator hitting 30. NYAD is trying to bottom out after reversing its recent uptrend, breaking below its 20-day and its 50-day moving averages. 

The Nasdaq 100 Index (NDX) is in full mini-crash mode with a test of 17,000 lurking. A break below that could lead to a test of the 200-day line. The ADI and OBV lines are now in full retreat.

The S&P 500 (SPX) sliced through its 50-day moving average, and the 5000 area.  Both ADI and OBV rolled over as buyers gave up (OBV) and short sellers hit the overdrive button (ADI).  Support is scarce until the 200-day moving average.

VIX Tests 20. Put/Call Ratio Tests Upper Range.

The CBOE Volatility Index (VIX), remained below 20. If VIX rises above 20, expect more volatility in stocks.  A sustained move in VIX below 15 would be bullish.

On the other hand, the Put/Call ratio is gyrating near 1.0 signaling a mix of fear and indecision.  When the put/call ratio and VIX rise together, it usually means that volatility is on the rise.

VIX rises when traders buy large volumes of put options.  Rising put option volume leads market makers to sell stock index futures to hedge their risk and leads markets lower.  A fall in VIX is bullish signaling lower put option volume, eventually leads to call buying which is bullish as it causes market makers to buy stock index futures raising the odds of higher stock prices.

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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 - now in its third edition, The Everything Investing in your 20s and 30s and six other trading books.

Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The Everything Investing in your 20s & 30s at Amazon and The Everything Investing in your 20s & 30s at Barnes and Noble.

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