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Hopeful, Ready, Willing, and Able to Buy Stocks?

03/24/2020 10:08 am EST

Focus: STOCKS

Joe Duarte

Editor, Joe Duarte In the Money Options

While there are some signs stocks are nearing a capitulation stage, it has not given the all clear to get back in yet, reports Joe Duarte.

I am hopeful. I am also ready, willing and able to buy stocks as soon as the all clear signal is given by the markets.

It is, indeed, very possible that we are now in the capitulation stage of this rapid fire bear market, fueled by forced liquidation of assets due to margin calls, and that a meaningful bottom may be approaching. More specifically, with the liquidation of CME clearinghouse Ronin Capital and weekend reports about the Federal Reserve bailing out hedge funds, the selling could accelerate to a huge climactic point, which could precede a serious buying opportunity. Thus, being ready for any scenario is the best option.

Yet, as I write on March 22, it is clear that as the number of Covid-19 virus cases and deaths rise dramatically, the markets may again open limit down by Monday morning as the negative feedback loop of bad news begets more selling intensifies. Therefore, all we can do is wait, hold on to our cash, and see how things develop.

Near the Breaking Point and Looking for Good News

Last week I noted: “it makes sense to deploy some cash if the market follows through on the March 13 action but not to be too aggressive until the all clear signal is given. It’s also a good idea for those who venture into the market to keep positions small, to use prudent sell stops and to plan for the worst, just in case.” Moreover, at this point, I see no reason to change my conclusions since the all clear signal was not given by the markets.

Still, this is no time to panic. Instead, it’s a good time to take a step back, consider the possible scenarios and plan accordingly.

Clearly the market is near its make or break point. But more important, people are ripe for a pleasant surprise, which means that if something good happens; the odds of a huge upside reversal are excellent given the outrageous amounts of central bank and fiscal stimulus that is in the pipeline.

Thus it’s important to gauge how the entire Markets-Economy-Life (MEL) complex adaptive system is faring, especially regarding the most crucial aspect of economic life in the present, the ability to borrow money during difficult periods such as via Home Equity Lines of Credit (HELOC), mortgage refinancing and the 401 (K) plan. Thus, as big companies and entities drain their credit lines it will be important to keep track of weekly mortgage numbers and other indicators of banking liquidity at the retail level.

If lending freezes at the retail and commercial levels, especially for small businesses, in the wake of the beating delivered to the 401 (k) plan universe via the current action in the financial markets, the repercussions for MEL will have far reaching consequences and any bounce in stocks could be short lived.

Can Strong Coffee Build a Trading Bottom?

Shares of coffee shop giant Starbucks (SBUX) fell nearly 47% from their January 2020 highs as of the recent low on March 17. And although it may be premature, it’s not a bad idea to have a look at the shares. We certainly had a successful short term trade featuring SBUX at Joe Duarte in the Money Options.com last week. We will go into more detail on Starbucks tomorrow.

Technicals Leave Door Open to More Selling

The market was unable to hold its gains on March 20, but despite the roller coaster ride there were no new lows in the New York Stock Exchange Advance Decline line (NYAD), which is a positive and if not reversed may signal that a credible bottom is forming or already in place. But that’s just one positive. Unfortunately, beyond NYAD, the technical picture at the moment does not give the market the all clear we’ve been looking for (see chart).

nyad

Both the S&P 500 (SPX) and the Nasdaq 100 (NDX) indexes made new closing lows but did not fall below their intraday lows, leaving some doors open for more selling, but also creating some dim hope that maybe we’ve seen the worst of it (see charts below). What was encouraging is that even though there were new closing lows, the relative strength index (RSI) did not make a new low for either index to confirm the new price lows. This is a potentially bullish divergence but was unfortunately not universally confirmed by other indicators (never trust RSI on its own, things can stay overbought/oversold for long periods of time).

spx

Specifically, what is worrisome is the new low in the rate of change (ROC) indicator for both indexes, which measures momentum. Also worrisome was the reversal in Accumulation Distribution (ADI) and the lack of a convincing rise for On Balance Volume (OBV) indicators, a fact that suggests that the midweek bounce was mostly short covering.

Since not much real buying took place, we could still see more selling as the new week arrives, especially if there is more bad news about the Coronavirus over the weekend as we’ve seen on a regular basis. Certainly, the moving in of the military into New York City as well as the rising number of new cases will likely affect the headline reading algorithms and possibly exacerbate the selling.

ndx

The bottom line is that very little was settled last week and that the market remains vulnerable to more selling unless a very positive news item hits before Monday’s open.

Wait for All Clear Signal

Although there were some opportunities for short term gains last week, and there may be more in the next few days, the market has not given the all clear signal. That means that the best use of time for investors will be by counting their cash and building a shopping list to deploy once the all clear signal appears.

Specifically, the all clear signal will be evident when we see at least three to four days of the market trading with less volatility and actually being able to put together some back to back gains with good breadth and accompanying volume.

Bear markets do have a positive side to them, which is not evident during this one, and that is that some traders may take a vacation. But, unfortunately with the Coronavirus around I can’t even suggest that we all go fishing.

 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 hereI’ll have more for subscribers in this week’s Portfolio Summary. For a 30-day Free trial subscription go here. For more direction on managing the GILD trade, go here.

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