While there are signs of broad market weakness, Joe Duarte says it is too early to get out, and the tech sector remains strong.
The stock market took a breather during the first real week of earnings reports, with the banking stocks generally beating expectations and rallying while tech stocks delivered a mixed bag. The worst hit sector was healthcare. Indeed, from a technical standpoint, we may be seeing the early stages of some sort of decline in upside momentum for some sectors of the market, but not necessarily in the technology area.
On the down side of the earnings parade were the reports from IBM and Netflix (NFLX), while JPMorgan (JPM) delivered a better than expected report. Meanwhile we had unexpectedly good news from Qualcomm (QCOM), which reports its earnings on May 1. The stock moved decidedly higher after settling a court battle with Apple, leading shares to soar. Happily, we bought QCOM in early March 2019, and the stock has so far delivered a 40% + profit. My point is that if this market starts to struggle, and there are some peripheral signs that it may do so, stock picking and asset allocation will be the most useful tools for traders. As a result, I want to review the Qualcomm trade in some detail.
Shares of QCOM, a leading telephone chipmaker, bottomed out in January 2019 after being routed in the late 2018 bear raid. Most interestingly, On Balance Volume (OBV) started rising along with the shares, even though volume was fairly tame early in the year. This was a sign that even though trading was light, the money that was coming in was decidedly overwhelming any money that was leaving. This is a sign that value players are building long term positions.
An even more bullish sign was that there were no real news items to boost the stock. By March, the steady money flow was not slowing, which suggested that bigger money was moving into the stock and that there might be something in the works. Meanwhile the stock started to make bigger gains, a sign that momentum was increasing.
It is well known that computer trading algorithms, because of their proximity to the exchanges’ computer systems are able to see trades before they come into the virtual trading floor. As a result, they execute their trades at a better price and capture the difference as a profit when they sell to the slow traders like the rest of us. In this case, the robots were alerting us that something might be up.
And while the whole algo thing seems fishy, it’s perfectly legal. Furthermore, here is some good news. Because the algos often know which way money is flowing on every single stock at any moment, they are usually on the right side of the trade. That means that the general trend of a stock’s price is usually reliable. By using that knowledge, it was clear that something was up in the case of QCOM, which allowed us to build a position in the stock long before it popped.
Bullet Train
- Calendar: U.S. GDP is released on Friday, while Durable Goods and Consumer Sentiment data is also out. Big earnings week featuring Facebook (FB), Microsoft (MSFT), Amazon (AMZN), Caterpillar (CAT) and others.
- Big Picture: The third year of the Presidential Cycle (2019) is traditionally bullish for stocks. The U.S. economy is showing signs of slowing growth, but this may be fleeting. There may be a shift in the political winds heading this way.
- Risk: Watch earnings, and the algo response to the rising political situation in Washington. Keep a very close eye on U.S.-China trade talks and the ongoing reserve ratio manipulations in China and how the market responds to good or bad news on any front.
- Market Behavior: The trend remains up, but a short term pause may be in the works. But don’t blink, because you may miss it as dip buyers are lurking.
- What to do: Stay patient and don’t chase stocks at this stage. Expect intraday volatility. Continue to use options for high priced stocks but remain selective
A-D Line Takes Breather
The New York Stock Exchange Advance-Decline line (NYAD) has uncannily predicted the general trend of the stock market since the 2016 presidential election, which is why I feature it in this space weekly. The line has been making new highs of late, and the market has been in a generally bullish trend.
However, this indicator took a breather last week, and did not make a new high. Of course, it remains within striking distance of a new high, which is bullish. However, if as earnings season develops the NYAD starts to show signs of weakness, it could be a signal that the market may be ready to roll over.
Meanwhile, the S&P 500 (SPX) index is within striking distance of its all-time highs while the Nasdaq 100 (NDX) delivered a new all-time high on April 17. SPX is lagging because of the weakness in the Health Care Sector (XLV). But Technology (XLK), Banking (BKX) and Energy (XOI) made up the difference.
The new high in NDX came on strength from QCOM and Intel Corp. (INTC), although the index was not able to extend its lead for two days running, yet another sign that some sort of pause may be in the works, barring the breakout of some unexpectedly good news which trips the headline driven algos to buy stocks. Still, Accumulation Distribution (ADI) and On Balance Volume (OBV) remains positive, which suggests that trading in tech stocks may now be more attractive than trading in the broad market.
Stay Patient & Selective
It’s getting harder to find stocks to buy in the broader market, which could be a sign of a slowing in the market’s rise or even a real correction. However, it is also possible that money flows into technology stocks may not suffer as much as other areas in the broad market.
In this type of market there is no need to be in a hurry. If prices do pull back, then we can use support levels such at the 20- and 50-day moving averages; when they hold, as places to re-enter stocks at lower prices.
Otherwise, we stick with what’s working and see how things develop. And of course, earnings season is just getting started, which means that the market’s daily trading pattern will be highly influenced by both earnings’ news and individual company guidance.
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