While the recent rebound was impressive, equity markets still have not provided an all-clear signal, reports Joe Duarte.

After the past six weeks of bearishness, this market needs a pause. But as we’ve seen over the last few weeks, by Monday morning anything is possible, especially after the National Institute of Health infectious disease chief, Dr. Anthony Fauci told CNN that models are projecting the possibility of millions of Coronavirus cases and one hundred to two hundred thousand deaths.

The bottom line is that for now, the most aggressive bear market many of us have ever seen has delivered a spectacular short term upside reversal but faces important overhead resistance. Thus, the real question is whether this is the real bottom, the beginning of a bottoming process, or worst of all, just a really good bear market rally with a new down leg coming in the next few days.

As I noted last week, and in light of Dr. Fauci’s comments, waiting for the all-clear from the market is a sound strategy and our best bet. No one has ever suffered financial ruin in a bear market by holding large sums of cash and avoiding losses. Moreover, it’s crucial to remember that the all-clear is traditionally described as a rebound from the lows followed by a period of stability in stock prices, even a slowing in volume and actually some boring days.

So much for that; I mean what could possibly be the next act for the algos after a 35% decline in six weeks? How about a full on bull market in just three days followed by a fourth day, which looked as if we were right back into the bear market?

Well, that’s what happened as stocks bottomed and rallied 20% in three days as global central banks flooded banks with newly minted out of thin air money as global governments dug their debt holes deeper while concocting wildly hyped fiscal stimulus packages. Certainly, the algos liked the news. And I didn’t mind them either as there were some worthwhile trading opportunities during those three days – think Starbucks (SBUX), as I noted last week.

But guess what? I still haven’t gotten the all-clear, which means I won’t be plunking huge bucks into stocks until the dust clears, which of course, could be anytime or in months, considering the way the market is trading on a daily basis.

Still, take a step back and think what would happen if the market can shake off Friday’s decline and fully recovers the entire bear market loss in the next week or two. What would be its next move and what would we do? Would we dance in the streets? Would we take the rest of the year off? Or would we be numb as the whole thing collapses yet again? Your guess is as good as any, which is precisely why I am still holding lots of cash and am only willing, at most, to take small risks under the right circumstances.

Taking Stock

The Coronavirus and its repercussions are still the major factor affecting everyday life. But in the market it’s all about liquidity; specifically, liquidity provided by central banks via asset purchases and injections of cash into the repo, bond and money markets. This point was clearly evidenced by Friday’s selloff in stocks in response to the Federal Reserve reducing the amount of money, from $75 billion to $60 billion, that it will inject into the markets on a daily basis; just a few days after saying that there were no limits to their largesse.

Moreover, since the Markets, the Economy, and people’s lives are now one interconnected system (MEL), my bet is that some of that money will be used to repatriate production capacity from China, back to the United States, voluntarily or by force, which means that companies with domestic production capacity are likely to fare better in the long run.

Simply stated, as time passes, and purely from a survival perspective, more and more people openly or privately, will come to the realization that the world can’t take a chance on this happening again without being more prepared. This, of course means that even as the daily grind of self-quarantine, social distancing, and working from home continues, people are thinking, and complexity — the process of system adjustment and operational optimization through which the Universe evolves — is active. Indeed, decision makers across the spectrum, most importantly at home, where 401 (k) plans and Home Equity Lines of Credit are crucial tools of wealth, are thinking about future preparations for the next visit from the unpredictable and destructive phenomenon known as chaos.

Moreover, there will be some seriously pent up demand for, well, everything. Indeed, the trillion dollar questions are what type of recovery are we likely to see and when will it come? Which way will Complexity steer MEL once the current Chaos simmers down? What goods and services will be in the highest demand when all of this is over? And more importantly, which companies will benefit the most? As I discuss below, one unlikely high tech company is unexpectedly cashing in from the current situation and is interestingly looking positively toward the future.

Micron Technology Offers Glimpse into Future

The recent rally in the shares of Micron Technology (MU) may have been a shot across the bow of the next technology revolution. As Wall Street analysts scramble to cut future earnings expectations and economists argue about the depths of the contraction in GDP due to the Coronavirus, Micron, the global leader in flash memory, recently delivered a huge earnings beat, which took the stock nicely higher in response. Tomorrow we will provide a close look at Micron and why it is a stock to watch.

Oversold NYAD Rebounds

Last week, I suggested a credible bottom was possible due to the oversold state of the New York Stock Exchange Advance Decline line (NYAD). I also expressed my concerns regarding key technical indicators; the rate-of-change (ROC) for NYAD, and the Accumulation Distribution (ADI) and On Balance Volume (OBV) indicators for the Nasdaq 100 (NDX) and S& P500 (SPX) indexes (see chart).

nyad

And while the subsequent rebound in NYAD and the indexes was spectacular, we could still see a reversal and a retest the lows for the cycle as early as March 30, although end of month seasonal tendencies for money flowing into stocks could delay any potential decline.

spx

What we saw last week was that the market responded to the oversold relative strength index (RSI) readings on NYAD, NDX, and SPX, and the positive indicator divergence illustrated by lower prices but not lower RSI readings. Next, the market responded to the Fed’s liquidity moves instantly, clearly forecasting what will happen if the money spigot is turned off as Friday’s action showed.

ndx

Finally, and perhaps most important are these crucial technical signs; the NYAD is now testing its 200-day moving average while both NDX and SPX have overhead resistance levels coming up at their 20-day moving averages. If the market fails to rise above these key levels, convincingly, we are likely to see retests of the recent lows.

Trading Small Has been Excellent

As I’ve recommended for the past few weeks, trading small lots of liquid stocks has been profitable. With many blue chip and large cap stocks soaring to large gains on short covering and some buying, a small amount of money, in many cases, has delivered an excellent percentage gain. Moreover, I am not changing my recommendations for now, given the potential for either a consolidation or a retest of the lows.

Meanwhile, the key to success until proven otherwise will be to keep cash at above average levels while deploying enough to make some money via short term trading in and out of liquid stocks as we wait for the market to finally reveal its true intentions. The next couple of weeks should give us a good idea as to what comes next.

Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the bestselling Trading Options for Dummies. To learn more about how Chaos and Complexity move the markets, and how to adapt this information into your daily trading routine check out my presentation, “ Trading at the Edge of Chaos” and take me up on a FREE 30-day trial offer.