Does it make sense for the Fed to taper as a “fourth wave of COVID” begins to develop?
Welcome to the Edge of Chaos:
“The edge of chaos is a transition space between order and disorder that is hypothesized to exist within a wide variety of systems. This transition zone is a region of regional instability that engenders a unvarying dynamic interplay between order and disorder.” – Complexity Labs
Talk well-nigh that butterfly flapping its wings, eh? Sure enough, recent events suggest that the combination of a pandemic surge simultaneous with the start of the Fed’s QE tapering may be too much for the stock market to handle, despite its heading into what is usually a very positive season.
Not Flipside Perfect Storm, Please
Let the games begin. The Federal Reserve will be reducing its yoke purchases by $10 billion per month starting in December, formalizing the whence of the tapering of its COVID-19 pandemic record-setting QE. And while the stock market initially took the news in stride, it seems as if traders are suddenly running for the exits. Here we go again, as the CTA algos hit the sell sawed-off on the headlines and the equally-algo market makers retread to the spritz of orders with the result being
The stock market’s breadth, as I describe below, swooned last week, as news reports of rising COVID numbers and the expansion of lockdowns in Europe (Germany, Austria, Gibraltar) hit the wires. Moreover, plane if it’s suddenly not a hot topic, there is that unresolved matter of the Fed starting its taper gaining weight if a revived COVID season delivers flipside wrack-up to the global economy.
Sure, we can unchangingly vituperation the options expiration trundling (11/19/21) for the market’s recent bumpiness. And there is a unrepealable value of truth to that, given that recent trading metrics in options showed that options trading was 1.4 times the size of stock trading. So, yeah, the tail is definitely wagging the dog.
Still, what really matters is whether $10 billion less of self-ruling speculating money for the big banks per month will be unbearable to make the market roll over meaningfully, expressly in the presence of a potential new set of COVID-related lockdowns tween the current inflation and supply uniting situation.
So, for now, we trade the market on the long side for now, but protract to:
- Take profits sooner
- Use tighter sell stops
- Not lose sight of the fact that the odds favor that we are closer to the end of the current rally than many may realize
In addition, if the market reacts to COVID as it has in the past, we can expect money to spritz to sectors which could goody from an extended lowdown. I full-length a stock which could fit that snout just below. For increasingly info on how to retread your trading tideway to this market, trammels out my recent interview with StockCharts.com’s Dave Keller here or my latest Your Daily Five video here.
There are still some stocks and option strategies which may yield sizeable gains when properly managed. You can see my latest recommendations with a FREE trial to my service here. You can moreover trammels out one of my recent Your Daily Five videos, which expands on these strategies, here.
YETI: Cool Products, Upper Growth Rates, Clever Management and Upper Holiday Expectations
I recently recommended shares of outdoor and recreational products powerhouse Yeti Holdings (YETI), as the stock seems poised for a major upside breakout.
Yeti is weightier known for its metal cups, but has a wholesale range of products aimed at the outdoors, recreational and working markets, which makes its wares ideally suited for filling holiday stockings — expressly if increasingly COVID lockdowns rationalization a resurgence of outdoor activities.
But, yonder from the obvious, YETI is an interesting management story. That’s because, unlike other companies, it has begun to limit its wholesale partner numbers to virtually 3000. And while at first glance that may sound like a negative, it’s unquestionably an spanking-new move as the visitor is planning to increase its merchantry with the strongest of its partners. In other words, they are playing to their strengths. Moreover, the visitor is slowly developing its own retail presence, but is not doing it at an unsustainable pace, which will pension expansion financing under control.
As a result, the company’s recent results and guidance are quite bullish:
- 23% revenue growth year-over-year
- 31% growth in direct-to-consumer sales
- 69% growth in international sales
- 57% growth combined over the first three quarters on 2021
- 20% margin growth
- Increasing focus on e-commerce combined with key placement of vendors
In addition, the visitor is expanding its margin growth rate for the year from 20.5% to 20.8%. On the lanugo side, they are, like everyone else, concerned well-nigh supply uniting issues and higher financing of doing business.
The stock is in a bullish unifying pattern, with a breakout point near the $108 level and solid support near $100. Accumulation Distribution (ADI) and On Balance Volume (OBV) are trending higher and the stock’s recent sideways whoopee has worked off a big portion of its overbought level, with RSI when to the 50 area.
Finally, the visitor should get a nice uplift from holiday sales, which could well lead to a nice write-up on its Q4 earnings. So, once Wall Street starts to work that into the equation, I would expect the stock to move higher.
Bullish Tone in Options Market Faded at 4700 on SPX
Options traders turned surly at 4700 on SPX and near the 470 zone on SPY, as evidenced by rising put option worriedness and the subsequent hedging. As a result, stocks rolled over on Friday’s option expiration. The real question is what the market will do during the holiday-shortened week, with thin volumes and the potential for bad news on COVID.
How does the options market stupefy stocks? Here are the simple steps again:
- Call buyers gravity market makers to sell calls
- Market makers hedge their undeniability sales by ownership stocks and stock tabulate futures
- The trundling self-reinforces as long as undeniability buyers persist and the stock market moves higher
The opposite is true when put buyers are in charge. The marrow line is that the stock market’s trend is highly influenced by the sentiment and the whoopee in the options market.
In other words, bullish option traders (call buyers) usually midpoint rising stocks and surly option traders (put buyers) usually lead to lower stock prices.
To get the latest up-to-date information on options trading, trammels out Options Trading for Dummies, now in its 4th Edition – Get Your Copy Now!
Market Unrestrictedness Bends as Early Divergence Develops
The New York Stock Exchange Advance Decline line (NYAD) rolled over last week, delivering a note of circumspection to what was starting to be a good start to the usual holiday rally. Nevertheless, NYAD remained whilom the support of its 20- and 50-day moving averages, which is a positive.
At the same time, however, the RSI fell unelevated 50. That said, only when NYAD breaks unelevated its 50-day moving stereotype and falls unelevated 50 on RSI simultaneously do we consider it a Duarte 50-50 sell signal. Still, it’s quite well-spoken that the market’s unrestrictedness is weakening, so circumspection is warranted.
Even increasingly cautionary is the fact that the major indexes rallied in the squatter of weakness in NYAD, which is of major snooping if it is not corrected.
The S&P 500 (SPX) made a new upper last week, which was not confirmed by NYAD. This is a developing divergence.
The Nasdaq 100 tabulate (NDX) moreover confirmed the recent upper on NYAD. Even better, the NDX unrestrictedness line made a new high, with Unifying Distribution (ADI) and On Balance Volume (OBV) confirming.
Meanwhile, small stocks (SML) rolled over withal with NYAD, a well-spoken sign that most of the money in stocks is suddenly moving into large stocks, which may not be healthy over the long haul.
In The Money Options
Joe Duarte is a former money manager, an zippy trader and a widely recognized self-sustaining stock market reviewer since 1987. He is tragedian of eight investment books, including the weightier selling Trading Options for Dummies, rated a TOP Options Typesetting for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.
The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has moreover been recommended as a Washington Post Color of Money Typesetting of the Month.
To receive Joe’s sectional stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.
Joe Duarte is a former money manager, an zippy trader and a widely recognized self-sustaining stock market reviewer going when to 1987. His books include the weightier selling Trading Options for Dummies, a TOP Options Typesetting for 2018, 2019, and 2020 by Benzinga.com, Trading Review.Net 2020 and Market Timing for Dummies. His latest best-selling book, The Everything Investing Guide in your 20’s & 30’s, is a Washington Post Color of Money Typesetting of the Month. To receive Joe’s sectional stock, option and ETF recommendations in your mailbox every week, visit the Joe Duarte In The Money Options website.