Will reports of a trade deal spike stocks on slow trading week, asks Joe Duarte.

The Federal Reserve’s money pumping operations into the repo market have kept the stock market from embarking on a downtrend, yet the big elephant in the room remains the U.S.-China trade war, which means that aside from the usual potential potholes: Earnings, the Fed and politics in Both domestic and global) the major influence on stock market volatility these days remains the daily trade war news grind.

Indeed, complex adaptive systems such as the Markets-Economy-Life ecosystem (MEL), by nature, are fluid entities whose most dramatic moves begin at a place that physicists call the edge of Chaos. This is where order and disorder collide and the forces of complexity — the ruling force of all systems in the universe — take over and events emerge onto their next behavioral phase. Moreover, that’s precisely where the financial markets stand as we head into the last five weeks of 2019: The edge of Chaos.

Kohl’s Crashes

While the market seemed unstoppable last week’s, action proved unpredictable. For example, retailer Kohl’s (KSS), which I profiled in a positive light here last week, albeit with the caveat: “I do suggest a bit of caution as KSS reports earnings on Nov. 19.

It is apparent that this is a Kohl’s problem as other retailers have looked strong. See our report on the retail sector in tomorrow’s report.

Advance-Decline line is in No Man’s Land

The New York Stock Exchange advance decline line (NYAD) has been the most accurate indicator of the stock market’s trend since the 2016 presidential election. Moreover, in the last few weeks it has been signaling a steady uptrend in prices by making at least one new high every week.

NYAD

Unfortunately, that pattern changed on the week ending Nov. 22. Certainly, NYAD is not signaling a bearish trend at the moment. But what’s troubling is that it seems to have lost a bit of its recent momentum, which means that if we don’t get a new high in the next few days, and the current pattern persists, we may be close to a meaningful pullback in stocks before the year is over. For now, if NYAD can hold above its 50-day moving average the uptrend remains intact.

Individual stocks are still getting wrecked on news, which suggests that if the economy slows, the bad news will spread.

NDX

Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a tight range between 1.75% and 1.98%.

TNX

A move above that 1.98% area could take the yield to a test of 2.1%. If that level is taken out, I would expect some very large amounts of handwringing and outright selling in the stock market.

Good News on U.S.-China Trade Front is Needed

Complexity is a fluid force so we must be ready for anything in the next few days to weeks. At the moment, however, the stock market looks worn out and perhaps it’s just tired of waiting for a U.S.-China trade deal. I’m thinking that at this point any deal would be better than no deal. Moreover, given the mixed earnings in retailing these days and no huge pop in PMI or other economic data, there may be some pockets of the economy that are softer than what even soft data suggests.

As a result, this is a good time to be a bit more cautious, but not all out bearish as too many things could change in a hurry and we may be off to the races again in a heartbeat. As you know, market trends tend to over-extend themselves before the inevitable reversal. Certainly, it’s worth keeping shares that are working, and to continue to have a handy shopping list. But it’s also not a bad time to bring back some hedges and to take some profits on any big gainers left in portfolios.

Finally, the Thanksgiving trading week tends to be quiet, which means that if the United States and China decide to turn on the good news flow this week, it is possible that stock prices could move decidedly higher, albeit on lower than usual volume.

Joe Duarte has been an active trader and widely recognized stock market analyst since 1987. He is author of Trading Options for Dummies, and The Everything Guide to Investing in your 20s & 30s at Amazon. To receive Joe’s exclusive stock, option, and ETF recommendations, in your mailbox every week visit here.

Join Joe at the MoneyShow Orlando Feb. 6-8 where he will be discussing the ins and outs of the Markets-Economy-Life ecosystem (MEL) and how he uses it to pick winning stocks.