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 Fed bailing out hedge funds, the selling could accelerate to a huge climactic point that could precede a serious buying opportunity. Thus, being ready for any scenario is the best option.
Yet, as I write on 3/22/2020, 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 to 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 3/13/2020 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, as I expand on below.
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 importantly, people are ripe for a pleasant surprise - meaning 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, then the repercussions for MEL will have far-reaching consequences and any bounce in stocks could be short-lived.
Starbucks: Can Strong Coffee and High Levels of Board Room Testosterone Build a Trading Bottom?
Shares of coffee shop giant Starbucks (SBUX) fell nearly 47 percent 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 and I suggest taking advantage of our 30-day Free Trial to have a look at our current premium strategies. Visit HERE for more information.
Starbucks is certainly an interesting company with a widespread global footprint and, clearly, a contrarian bent. Moreover, as other companies are panicking and hitting their lines of credit, Starbucks is doubling down on its business plan via its recently announced plans to further expand its China footprint to 6000 stores by 2022, while adding another 40 million shares to its already existing stock buyback program. Thus management is either showing a lot of hubris, a great deal of confidence in its business, or there is a high level of testosterone in the board room which may lead to unfortunate developments.
That said, for us, it's not about making judgments or discussing biology. It's all about price action and whether the stock is worth nibbling at for more than a day or two as it bounces around with the market.
Of course, the truth is that it may be too early to put a big chunk of money into this or any other stock. But you just can't blow this corporate strategy off either. Moreover, we can certainly stipulate that it's a big company with deep pockets ($3.1 billion in cash on balance sheet as of 12/31/19), which will suffer some but maybe not too much as long as people can drive up to their shops and stay in their car to avoid the coronavirus in order to get their caffeine fix.
Clearly, from a technical standpoint, the stock was extremely oversold. Its RSI was well below 30 in mid-March, with the indicator making a nice higher low on the lowest low for the stock, a very positive technical sign signifying a loss of selling momentum. Moreover, money took its cue from the technicals and the company's announcements and moved back into the stock, as signaled by a big jump in Accumulation Distribution (ADI) and no new lows in On Balance Volume (OBV).
Furthermore, the stock didn't just bounce but actually moved well above its lows, certainly helped by short covering. But maybe that's the point, at least in this case, and perhaps in the whole market. If the shorts are bailing out, then maybe the real buyers will be coming into the SBUX and other stocks soon. And that's what the next few days will tell us, not just about Starbucks but also the rest of the market.
So is it time to jump in? Not likely, unless we get the all clear signal or you are willing to be very patient perhaps for a long period of time. Certainly the stock is cheap enough price-wise, especially after it took a beating at the end of the day on 3/20/2020 as options expiration hit the entire market. But things could get a lot worse in a hurry, for SBUX, as well as for the whole market as no one knows what the future holds, and all stocks could still get cheaper.
Yet at this point, in a market which is full of dead stocks, it's good to see even tentative signs of life in severely oversold stocks with solid businesses even during tough times - even if they may be fueled by caffeine at the storefront and testosterone in the board room.
Technicals Leave Door Open to More Selling
The market was unable to hold its gains on 3/20/2020, 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.
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 albeit dim hope that maybe we've seen the worst of it. What was encouraging is that, even though there were new closing lows, 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.
Specifically, what is worrisome is the new low in ROC (Rate of Change) 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.
Thus, 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 algos and possibly exacerbate the selling.
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.
It's Best to Wait for All Clear Signal before Diving Back into Stocks
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 that 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 one 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.
In The Money Options
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 best selling Trading Options for Dummies, rated a TOP Options Book 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.
To receive Joe's exclusive stock, option, and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.