While fear of the end of this long bull move is rising, there are many reason for optimism going forward, writes Joe Duarte.
As each day passes, it becomes clear that we are at the Edge of Chaos, a place from where things emerge and complex adaptive systems, such as the Markets-Economy-Life (MEL) ecosystem move on to their next level of complexity, which is often a surprisingly positive development. Thus, as we head into a new decade, it makes sense to analyze the big picture, as we peek into The Edge of Chaos, the topic of my presentation at the February 2020 Money Show in Orlando.
After a volatile and politically contentious 2019, the new decade ahead will likely bring equally dramatic highs and lows. But regardless of the daily grind, and barring a major negative event, the potential for selective stock investors to deliver profits remains high. Moreover, even in a cautiously optimistic analysis it is important to keep an eye on where unexpected negative events that derail markets may come from. And while there are numerous members of a potential calamity list, here is a small sampling of plausible Black Swans whose occurrence would have well above average impact on MEL:
- If he U.S.-China trade deal sours/does not happen
- If there are central bank policy errors
- If a major liquidity crisis and/or bond market meltdown emerges
- If events related to the U.S. election and the political situation in Washington reach a critical point which threatens the social order
- A calamitous natural disaster of biblical proportions
Certainly, as the list above suggests, even as we look forward to what may be another profitable year, there is nothing wrong with keeping an eye out for potential problems and to act accordingly.
Why I’m Cautiously Optimistic
As 2019 wound down, I kept looking for reasons to sell stocks, but the act of selling wasn’t as easy as I thought it would be. Certainly, as I listed above, there is still plenty to worry about in the world, and any market analyst worth their salt will tell you that any day could be the start of a new bear market. But the wall of worry aside, as I wade through my equity charts on a daily basis, I am still finding a well above average number of stocks which seem to be at the point of nearing breakouts. All of which suggests that at this point, and until things change, it’s more about individual sectors and their components than about the worry.
Is 2020 the Year of Meaningful Scientific Advances?
Perhaps the most interesting result of my recent analysis is how many companies in the midst of a corporate turnaround are starting to see positive results. One of them is Hewlett Packard (HPQ), a stodgy and long troubled PC and printer maker currently involved in a merger dispute with Xerox (XRX) whose endpoint is uncertain.
Interestingly, and well aside from the Xerox situation, HP shares seem to have bottomed and, may be knocking on the door of a potential breakout. And, if there is a breakout, it will likely come for good reasons, as margins are improving and revenues and earnings have started to climb as the company cuts costs and adapts to the current marketplace and re-invents their business via restructuring its operations through cutting management levels.
Indeed, the successful turnaround seems to be a trend that is gathering steam as companies look to increase efficiencies, reduce bureaucracy and speed the delivery of products from research to market and improve their competitiveness in an increasingly difficult environment. More specifically, HP is expanding its industrial and manufacturing presence via improved graphics platforms via its 3D and digital manufacturing. Areas such as automotive, through its 3D parts manufacturing contract with Volkswagen, is helping to expand its product line to a more industrial base, while maintaining its still dominant PC and mainstream printer market share.
Indeed, from an investing standpoint, it seems we may actually be in the early stages of a new golden age of science. This is also true in advancements in the Pharmaceutical sector, which we will discuss in depth on Thursday. All things considered, that would not be a bad thing to see in the midst of all the ongoing uncertainty in this world.
New Highs all around
The New York Stock Exchange Advance Decline line (NYAD) continues to make new highs on a regular basis. And although the indicator is likely to pause at some point and investors should be prepared for a short term reversal, NYAD remains the most accurate indicator of the stock market’s trend, as it has been since the 2016 presidential election (see chart).
Interestingly, the bond market once again failed to reverse its recent downtrend fully, with the U.S. 10-year Treasury note yield ending last week below 1.9% after threatening to move closer to 2% in the prior week (see chart). This remains a positive for the overall trend in the market, as a move above 2% on TNX would be unpredictable for the markets.
Meanwhile, the new highs on NYAD have been confirmed by new highs on the Nasdaq 100 (NDX) and the S&P 500 (SPX) indexes, suggesting that the trend for stocks remains up.
As a result, taking some profits before the end of the year is not a bad idea.
Rotate Portfolios in the New Year
I am having no trouble finding stocks with positive money flows whose prices seem ready to break out. In fact, there are quite a number of companies whose recent restructurings may be ready to bear fruit.
Thus, as we head into the 2020 and the start of new decade, it makes sense to rearrange portfolios in order to accommodate new picks. Moreover, investors who fight greed and take some profits while simultaneously deploying them into stocks that have not had big runs of late, but seem poised to do so are likely to do better as 2020 progresses.
Happy New Year
I own PFE, LLY, and HPQ as of this writing.
Joe Duarte 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.
