“The edge of chaos is a transition space between order and disorder that is supposed to exist within a wide variety of systems. This transition zone is a region of bounded instability that generates a constant dynamic interaction between order and disorder.“- Complexity laboratories
The stock market continues its slow upward pace, with no convincing confirmation of new highs in market breadth indices, even as traders quietly worry about what may come out of the Jackson Hole Fed summit , Wyoming. scheduled for August 26-28. Meanwhile, as investors continue to walk down a potentially unstable loose rope, solid trading principles are the most likely way to survive and perhaps thrive, regardless of what comes out of the summit.
Specifically, the elephant in the summit room is whether the Fed will indicate that it is about to reduce its QE, which would mean it would buy less than $ 120 billion in treasury bonds in the system in the future. bank per month. If this happens, it would mean two things:
- Less liquidity in the banking system
- Less money for banks and shadow banks to speculate on stocks as a source of income
In other words, the stock market would probably stumble significantly, probably at lightning speed, as the algae press the sell button at the same time. On the other hand, given the growing geopolitical uncertainties and COVID, it is possible that the Fed will not shrink soon, although in the short term we can also talk about volume reduction.
However, since no one really knows what the Fed can do, and since it has a history of serious policy mistakes in the past, the next two to four weeks will favor the following sound trading tactics:
- Be prepared for the Fed to make a bad decision and the market to fall quickly and at some point earn 100% cash if things get ugly
- Given the effects on markets of a return from China to a major blockade and subsequent supply chain compressions
- Use options-related strategies to hedge any stock market bets and generate revenue
- When buying stocks, buy small lots
- Keep sales a little tighter than usual in a range of 5% instead of 5-8%
- Never let a winner become a loser
- Considering opposing strategies like the ones I describe in my latest version Your Five Diary video:
Housing: It is a source of supply, not a bubble
The widespread view that we are in a real estate bubble can be wrong and perhaps completely wrong. This is due to the fact that although prices are rising and some buyers are out of the market due to cost, the supply and demand equation still favors the continuation of the bullish market for home builders.
The fact is that the housing sector is an important part of MELA, the complex adaptive system composed of markets (M), the economy (E), the financial decisions of people (L) and algae (A) . This is because choosing where and how to live is usually the most important financial and vital decision for a person.
Think now about the fact that as large cities become difficult to live with due to COVID floods and other problems inherent in their operational status, there are likely to be renewed and recurring waves of people wanting to relocate. Your demand is stable and, from time to time, growing. Meanwhile, as most housing builders note in all earnings calls, there is a limited supply of land and labor. And, as real estate agents continually point out, there is not enough supply of existing homes to meet demand, even at historically high prices.
So, unless I’m wrong, these are the basic principles of a bullish market: supply adjusted for strong demand that shows no signs of falling. Also, there is nothing on the horizon that says this dynamic is likely to change in the near future (or perhaps even in the distant future). In addition, a key part of the definition of a bubble is that the rapid increase in assets is not proportional to the underlying fundamentals, which is probably not the case at this time.
In fact, the point becomes very clear when comparing the basics of a real bubble, that of subprime mortgages with the present. Specifically, the subprime bubble was based on the existence of empty subdivisions aimed at ghost or completely unqualified buyers, along with fraudulent mortgages and equally questionable derivatives, while there are currently many potential buyers and not enough homes.
Certainly, the current situation of supply and demand is not a guarantee that house prices can rise forever, nor that home builders and fins have eternal profit happiness. And there is no way to know how many derivatives are waiting to be exploited.
But given the current situation where millions want to move to different locations and the supply of housing is limited, it seems as if the historical definition of the fundamentals of the housing market has evolved, while those who oversee them, describe and measure seem to use what at this time may be obsolete metrics.
Flip or Flop: The builder and wooden stocks bounce while Zillow sleeps
Those who have followed this column over the past few weeks have probably drawn my attention to the housing sector. Specifically, I suggested that the Homebuilders ETF (XHB) seems ready for the breakout and that the $ 76 area was a crucial resistance area, above which the ETF could move to the $ 80 area with quite fast.
In fact, this is what happened, as the $ 76 area was finally breached and XHB has steadily risen. Meanwhile, I’ve also noticed that timber stocks, specifically Louisiana Pacific (LPX) also seemed willing to move forward, which has been the case again.
This week, I want to highlight an interesting divergence between the stocks of leading home builder DR Horton (DHI) and the online listing service and the aggressive pinball of existing Zillow (Z) homes.
DHI, the representative of the new homes, has been forming a base in a comfortable area of complexity above its 200-day moving average and has recently resisted short-term at $ 97.
Meanwhile, Z, the representative of the existing houses waiting to be turned upside down, is in the Chaos area well below the 200-day line, with the intention of starting to form a base in the coming weeks. What this difference in stock price suggests is that in a difficult market, buyers are more willing to pay high prices for new homes with a lower potential for need for repairs. It may also be suggestive that since new housing subdivisions are more likely to be located in less populated areas than existing homes, this may be an attractive option for buyers.
Finally, the yield on ten-year U.S. (TNX) notes, the benchmark rate for many mortgages, is now on the brink of chaos, trading between its 50- and 200-day moving average. This means that we can expect a decisive kind in the not too distant future. If, as I hope, TNX does not rise decisively above 1.4-1.5%, it should be a very bullish development for home builders and perhaps even for existing homes.
I recently recommended DHI and other actions related to the home builder, which is why a FREE trial subscription toTA to Joe Duarte in the Money It may be worth considering Options.com. Click on here for more information.
Right now I have shares of DHI, LPX and XHB.
SPY options suggest traders are cautiously bullish
Player options continue to play with caution. Call volumes remain high at current and close to SPY strike prices above the current price. At the same time, sales volume remains high just below the current active strike price. This suggests that traders are willing to bet for the market to move more, keeping a short strap at any possible disadvantage.
What this means is that if the market shrinks, it is likely to do so in a hurry.
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The width of the market maintains the upward trend with the highest SPX of all time
The New York Stock Exchange’s (NYAD) early downtrend line has given no full and clear signal for the current slowdown in equities. However, it continues to move higher, providing higher highs and lows as it clears a recent potential sell signal. Therefore, the breadth of the market is still reasonably good, but not entirely excellent.
This means that the general stock market gets the advantage of the doubt. However, it would be best if we reached a new high in NYAD sooner rather than later, as the longer the high rates without NYAD confirmation, the more likely it is that there will be a chance of a fall at some point in the future. And with the Fed hinting at a QE reducer, things could get in the way quickly.
The S&P 500 (SPX) and Nasdaq 100 (NDX) held up pretty well, with SPX a new high and NDX again not far behind.
So for now, the upward trend in the market, albeit a little softened, remains in place.
Good news! I created my NYAD Complexity Chaos chart (which appears in my paper YD5 videos) and some other favorite audiences. You can find them here.
A Money Options
Joe Duarte is a former money manager, active trader and independently recognized stock market analyst since 1987. He is the author of eight investment books, including bestsellers. Trading options for mannequins, classified as TOP Book Options for 2018 by Benzinga.com and is now in its third edition, as well The book While investing in the 20s and 30s and six more business books.
The book While investing in the 20s and 30s is available and Amazon i Barnes and Noble. It has also been recommended as Washington Post Color of Money Book of the Month.
To receive Joe’s exclusive stock, options and ETF recommendations in your weekly mailbox, visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.