Prudent investors should remain cautious: trade small, keep lots of cash in the wings, and take profits in the short term. Wall Street votes with money. Therefore, focus on whether Wall Street gives stocks like Facebook, Tesla, and Amazon a pass, asserts Joe Duarte, MD.
Somewhere along the way of every bull market we hear the phrase – this time is different along with exultations of a “new paradigm.” Unfortunately for many, even though it seems as if these new paradigms are here to stay, they often only hold up for a few months to a few years before life reverts to the mean and things change, often rapidly and dramatically.
Double barrel collision - when markets and societal trends merge
The last time a new paradigm crashed was in 2007. For the five or so years prior to that implosion the mantra on Wall Street, and Main Street was that anyone could afford a house because of creative financing. Therefore, it followed; investors would always make money on collateralized mortgage backed debt securities because no one would ever miss a house payment.
Of course, that paradigm blew up and the housing market had a generational change which is now evident via the scarcity of homes for sale, higher existing home values, lower mobility and fewer families being willing or able to afford a home.
It turns out that many people who bought expensive homes with no down payments because they didn’t have enough money to make the payment never had enough money to make the mortgage payments after all. So, they left the houses on their bank’s balance sheets and the rest is history. Paradigm Lost.
Fast forwarding to today, we see social media as the center of the lives of millions, perhaps billions across the world. And the centerpiece of this new dynamic has been Facebook (FB), the hub of the new paradigm of “eternal connectivity and privacy is a thing of the past.”
Yet over the last few weeks, this once highly heralded market darling and icon of the digital future is suddenly up against the wall and we may be near one of those potentially violent periods of social trend reversals. More to the point: Facebook shares fell off as much as 21% from its February highs before bouncing back on March 29 after reports questioning its privacy policy and internal management style appeared.
Indeed, Facebook is a most salient example of how quickly the market can turn on a company as questions arise about its business model, its ethical practices regarding the safekeeping of user’s personal data, and the company’s management decisions along the way to the brave new world.
Furthermore, even if the stock stabilizes in the short term, I suspect bigger questions are being raised about the meaning of the stock’s decline and its connection to the world outside the market. Does anyone remember My Space?
Major indexes find support at crucial levels
Things could change at the drop of a hat, but for now, the market is still walking a tightrope and the bears are not in total control yet. Although there are some clear and significant pockets of weakness, such as the big tech stocks, the bears are still in raiding rather than taking over the entire market mode.
Specifically, the New York Stock Exchange Advance Decline line, the most accurate indicator after the 2016 election, last week arrested what seemed to be the start of a down trend, and may be starting a sideways channel, a sign of consolidation. If this continues, the market will more likely be in a sector rotation mode instead of an all-out bear trend.
This chart pattern is also evident, although to a lesser degree in the Nasdaq 100 (NDX) and Standard and Poor’s 500 (SPX) indexes. Both NDX and SPX found support last week, albeit with valid questions about low trading volume and with both the Accumulation Distribution (ADI) and On Balance Volume (OBV) showing signs that there are still more sellers than buyers in the market.
Interestingly, of the two major indexes, NDX is faring better both in price action as well as in the volume department. History shows that robust volume is better than weak volume as it is a measure of investor engagement. So, while healthy volume is the hallmark of bull markets, even in bearish trends, high volume suggests that a faster resolution is more likely and that the bear phase will last a shorter period of time.
Making the bull vs. bear market decision harder, there are three important and specific findings on the SPX chart.
First, the index found support at the 200-day moving average. This is encouraging.
Second, and less encouraging, volume remains very low, suggesting volatility is not going away anytime soon.
And third, the index has yet to break out of the short-term pattern of the last few weeks of making lower lows and lower highs.
Stay patient: no clear path is evident at the moment
The next stock market trend remains murky. If the large technology names remain under pressure and no clear new leadership group emerges, I expect more of the same volatile price grind we’ve seen for the past few weeks. Thus, prudent investors should remain cautious: trade small, keep lots of cash in the wings, and take profits in the short term when you have them. If we are in a rotation instead of the early stages of a bear market, we should know which groups are going to be more attractive than others in the not too distant future.
Don’t forget: Wall Street votes with money. Therefore, it makes sense to focus on whether Wall Street gives stocks like Facebook, Tesla (TSLA), and Amazon (AMZN) a pass.
Bloomberg: Tesla Model 3 deliveries come up short, stock drops.
Indeed, if investors are truly shaken by the events of the moment and believe that secular, outside the market trends are now changing and that especially FB is no longer a top of the food chain company, large amounts of money will continue to move away from it and others in the same general group.
Paradoxically, money coming out of that complex has to go somewhere. Once a pattern of money flows becomes more discernible we can all make better trading decisions. Accordingly, patience is indeed a virtue as this may evolve into a stock picker’s market over the next few weeks.
Joe Duarte is author of Trading Options for Dummies, now in its third edition. He writes about options and stocks at www.joeduarteinthemoneyoptions.com.
