Le Plus Que Ca Change… (HD,SPY)
Bull and bear markets can be defined in a great many ways, but the simplest and most direct (and correct) definition is, naturally, our own:
And there you have it.
Not much more need be said.
With what appears to be a war looming in the Far East with North Korea (and maybe China), in the Middle East with Syria (and maybe Russia), at home in Berkeley for safe space, on airplanes that don’t have enough space, and quite possibly in outer space for new tourist destination space, there’s every reason to believe that a bear market is coming.
It’s all rather dire, and yet the market shrugs it off, one editorial at a time, one bombing run and explosion at a time, one inflammatory, knife-wielding, Facebook live-stream crime at a time.
And the rates they keep a’rising.
But no one cares.
Or, rather, the market doesn’t.
In what should be understood as the quintessential wall of worry, today’s headlines offer the ideal backdrop for Wall Street to play the buyer.
And so it’s doing.
Despite the news, a look at any of the major market averages reveals a picture of strength and resilience, with the NASDAQ 100 showing perhaps the greatest steadfastness.
Get inspired –
After posting an overbought signal in late February (green circle), RSI fell back considerably, moving sub-waterline just a week ago. Then she turned up.
The resulting price pattern produced is a ‘pennant’ (in red), which technicians understand to be a continuation pattern. A breakout above the upper edge would bring on a great deal of piggy-back buying, particularly as new highs are set above the NDX 5479 line.
Also, with both RSI and MACD currently trending above their respective waterlines, we have an additional assurance that the uptrend remains in force.
As a side note, both the Dow and S&P 500 are also sporting continuation patterns , in their cases, ‘flags’ – a different look but the same prognosis: there’s more upside in the pipe.
And that bodes well for Main Street investors, who, according to the most recent Conference Board numbers, are now more bullish on the market that at any time in the last seventeen years!
Have a look here –
Over 47 percent of those questioned said they expect equities to rise over the next twelve months. The last time we saw such a sunny outlook on the part of Joe Q. Investor was when the lid was blowing off the dot.com bubble and internet stocks had P/E ratios in the hundreds. Needless to say, that was the end of the ride in the year 2000, as a vicious bear market ensued immediately thereafter.
Not So Today
And while many believe the current market is overpriced, a great many of those same dot.com bellwethers are priced far more cheaply than they were back then, relatively speaking.
We note, too, that these same securities remain the darlings of the professional investor set. In fact, a look at the most widely held stocks by fund managers across the country reveals the following –
Of the top 12 most dearly held American securities in the equity realm, five are internet related, three are healthcare/pharma, two are banks, one is a consumer discretionary and one a telecom.
But it’s the technology sector, in all its iterations, that sets investor heartstrings a’flutter. We’ve said it many times before: they’re the ones that will ultimately soar the highest and longest, and be the last to tumble back to earth when the great day of reckoning arrives.
Lots of noise, but no one gets hurt.
With that in mind, we turn to our trade for the week.
But before we do, we have an important trade-related announcements to make.
It pertains to our Valentine’s Day trade of February 14th, a supercharged love affair that brought both pain and pleasure.
The letter was called The Cure? A Few Mixed Metaphors and a Good Bloodletting, and in it we recommended you purchase the SPDR S&P 500 ETF (SPY) April 21st 244 CALL for $0.30 and the SPY April 21st 200 PUT for $0.33. Total outlay on the trade was $0.63.
The gist was that a big move was at hand and we wanted to be ready to catch regardless of direction.
A week later, on April 21st, we penned a missive called Run For Your Life! INFLATION!, in which we recommended closure of the long SPY CALL, then trading for $0.48. We believed the next move for the index would be lower, and thought we’d be able to pocket on both sides of the straddle.
Alas, it was not to be.
We waited and watched, but the fall we anticipated turned out to be nothing more than a slow grind sideways, and nothing was to be had. The PUT expired worthless last Friday and we ended up short $0.15 on the initiative.
Neither a disaster, nor an eve with Marilyn at the Bellagio.
All of which brings us to our trade for the week.
We’re going to focus on the fallout from the first round of the French elections and the apparently joyous effect it has had on markets about the globe. As we write, VIX has dropped over 21%, as implied volatility gets a smack in the mouth and everyone expects more of the same bullish market action as we move through spring into summer.
Look here –
With VIX subdued, it’s clearly time to buy.
We buy what everyone has been buying until now. What all the mutual fund and pension fund and hedge fund gurus have been packing their suitcases with – those same stocks we mentioned above.
But we’re going to veer off course here (slighty) and deviate from the tech realm. Because it’s the single consumer discretionary stock that most appeals to us – retailer Home Depot (NYSE:HD).
Take a peek –
Home Depot has been trapped in a tight range for coming on two months and shows no signs of being overbought (green squares).
But today’s French election results – regardless the fact that the two mainstream parties have been ousted from the race – are the latest excuse to buy.
So we buy…- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew