No trade deal is imminent, but traders need to be prepared for unlikely scenarios at yearend, reports Joe Duarte.

Given the current situation in Washington and the world, it could go either way. Therefore, investors should prepare for an eventful end to 2019.

The strong seasonal trend toward higher prices in December, aka the traditional Santa Claus rally may be knocking on the door, but uncertainty remains. There are no guarantees, especially when news related to unexpected geopolitical developments, the upcoming release of the Horowitz report, the impeachment drama and a host of other hot button issues of the moment could derail just about anything including the traditional year-end ramp up in the stock market.

Nothing would surprise me at this point, even a U.S.-China trade deal being announced at some point before the open of U.S. trading on Dec. 16 – maybe late Friday afternoon or early Sunday night - just in time to juice stocks higher before the end of the year.

I have no inside information on a trade deal, and I wouldn’t bet on it, but given the way the White House works, I can’t help but suspect that something dramatic is brewing. Furthermore, given the way that algos are behaving, a trade deal announcement, could lead to a sizable blow off in stocks that could carry the market beyond insanity in the short-term. (Of course, if an announcement is made, the details could disappoint.)

Just look at what happened last week. First, the stock market floundered when President Trump, at the NATO Summit in London, noted that he could wait for a trade deal until after the 2020 election. That one item took some 800 from the Dow Industrials in two days. But by midweek, the jawboning on the trade deal was back and by Friday news of “intense negotiations” between the two countries hit along with a strong employment data and improving consumer confidence numbers and the stock market, right on schedule took off to end the week on a high note.

My point is that events seem to be heating up at the Edge of Chaos, where the intricacies of the ruling forces of the Universe, Complexity, do their work. Therefore, this could be a pivotal week for all kinds of things that have been brewing to reach critical mass and that the potential for something big to emerge is starting to rise.
One of those high potential areas of the market is Big Pharma, where companies such as Abbott Labs (ABT), Merck (MRK), Eli Lilly (LLY) and Pfizer (PFE) are finally adapting to the health insurance marketplace and are sitting on potential blockbuster drugs.

Look for my detailed report on these healthcare stocks tomorrow in this space

Bullish Trend Pattern Remains Intact

Despite the daily volatility the New York Stock Exchange Advance Decline line (NYAD) continues to ride a bullish trend with two major characteristics, see directly below, remaining intact. So as long as the NYAD continues to make at least one new high per week and remains above its 50-day moving average, it will be very difficult no matter how absurd or out of place or incompatible with economic fundamentals it seems, to fight the notion that the bull trend remains in place. Of course, if the fundamentals don’t catch up soon enough, NYAD can’t keep this up forever. But for now, momentum remains intact.

nyad

Simultaneously, a slight divergence is taking place between the S&P 500 (SPX) and the Nasdaq 100 (NDX) indexes, which may be foreshadowing some sort of meaningful pullback along the way.

spx

Specifically, NDX is starting to lag SPX as the technology stocks are struggling to move higher despite the frequent jawboning on the U.S.-China trade situation. SPX’s outperformance, at this point, is largely due to the steady rise in pharmaceutical and healthcare stocks found in SPX and the late week bounce in energy.

ndx

Of course, the bond market continues to be of major interest. And last week’s action was worth watching for sure as the U.S. 10-year Note (TNX) fluctuated in a narrow range between 1.65% and 1.9%. The key for the bond market is what happens to stocks if and when TNX moves above 1.9%.

tnx

Accordingly, if TNX breaks out above this key resistance level, it is likely that we would see significant selling pressure in the housing stocks, which even though they have not fully recovered from their late October decline, are still showing some resilience.

Odds Still Favor Santa Claus Rally

The U.S.-China trade war, the release of the Horowitz report, and the likely impeachment of President Trump by the U.S. House of Representatives remain potential roadblocks to higher prices in U.S. stocks. Still, despite the ongoing volatility and geopolitical uncertainty, stocks continue to move higher as they climb one of the largest walls of worry in history. As a result, it’s difficult to argue the bear side, other than fully accepting the fact that nothing goes up forever and that any day could be the day that stocks top for the long term.

Nevertheless, at the moment as long as we trade what’s working, we continue to make money. As a result, little has changed from a strategic point of view, which means we own stocks that work, we keep an eye on sell stops and we look to hedge if and when it’s called for.

Finally, it seems the odds are still favoring an end of the year Santa Claus rally, barring an unpleasant surprise from geopolitical issues or the Federal Reserve which has its last meeting of the year this week.

I own ABT, LLY, MRK and PFE 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.