Top Advisors Corner

At the Edge of Chaos: Has a New QE Cycle Begun? Markets Think So

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It's hard to argue with a momentum market when it seems to be bulletproof. Take last week's volatility, in which a market that seemed to be setting up for a significant decline turned around and ended the week with new highs.

But, despite the volatility, one theme holds up: the ongoing bull market in stocks is all about central bank liquidity. And, if last week's loud actions by the Chinese central bank, along with the subtle rumblings at the Fed, don't change course, we may be in the early rounds of yet another QE cycle. This, of course, means that, until proven otherwise, the odds of stocks continuing to rise remain favorable.

A Changing Tide in QE?

If you're asking yourself: what could possibly go wrong in a market and an economy which depend solely on the Federal Reserve's constant QE? Think about what happened when the Fed snuck around in the repo market and drained liquidity at the same time the economy was starting to show signs of slowing, with a rise in inventories, new orders and prices, combined with employment and transportation issues plaguing businesses. In addition, despite Friday's rally as I describe in the next section, the message from the housing sector, a key component of MELA, should be of some concern to the Fed as it ponders its next step in its QE process.

So, while anyone who traded the markets last week knows that stocks reeled as fears of Fed tightening were combined with headlines hinting at a new surge of COVID-19 (now featuring the Delta variant); by Friday, it didn't matter to the algos. Even though there are now reports of perhaps even more souped-up versions of the virus beyond Delta that could be lurking, the algos didn't care. That's because, in this market, news and reactions to news only last until the next news items hits, especially if the news is about easy money.

Indeed, what happened last week, as with every other recent market pullback, was another rinse-repeat cycle as (wait for it) despite news of the Fed wanting to taper, and of more COVID shutdowns early in the week, by Friday, the Bank of China (PBOC) decreased reserve requirements in what could be the beginning of yet another cycle of QE. And we were off to the races, as the algos are programmed to buy stocks when central banks ease.

But here is where it gets interesting. There are now reports the Fed, due to concerns about COVID, may put off the increasingly expected and stealthily under way tapering of QE in the U.S. As a result, we may have a double barrel of QE heading down the pike, as the PBOC once again hit the digital money printing presses and the Fed changes its mind.

Stay tuned. Things are about to get interesting.

Bonds Got the QE Message but Homebuilders Might Have Missed the Memo

Following up on last week's post where I noted that the Fed's "taper" maneuvers (talk and stealth tapering via repo market) may "set off a chain reaction through MELA, the complex adaptive system composed of the markets (M), the economy (E), people's lives (L) and the algos (A)." Specifically, I noted that the chain reaction might be most notable in the relationship between bond yields (TNX) and the homebuilder stocks (XHB).

Under normal circumstances, a decline in TNX would be a positive for the housing stocks, meaning that, if MELA was functioning at its best, the recent drop in bond yields would be a boost for XHB. But last week's yield volatility and the lack of any meaningful response in the homebuilders is a sign of concern. In fact, homebuilder stocks failed to rally with any conviction when bond yields dropped early in the week, while rolling over when yields climbed on Friday.

Moreover, the Homebuilders ETF (XHB) has thus far failed the test as it did not rise above its 50-day moving average, even after TNX dropped well below the 1.4% yield, which was key support. Moreover, the bad vibes for XHB may be just starting if TNX moves back above the key 1.4% yield.

SPY Options Action Improves, But All Clear Remains Elusive

The tenor of the options market improved some late last week. But it's not what it was a few weeks ago when the market's upside momentum was essentially relentless. The bottom line is that we are not out of the woods yet as the call buyers are not completely overwhelming the put buyers. As a result, market makers are still selling puts and selling stock index futures and stocks to hedge. This continues to put pressure on every rally. So, until we see this pattern change, we can expect the volatility in the market to continue.

Last week in this space, I suggested that the algos were tightly hedging against a decline in stocks via put buying just below the most recent high in the SPDR S&P 500 ETF. I also noted that a breach of the 430 price area for SPY could lead to aggressive selling. Indeed, that's what happened after a squishy SPY weekly options expiration, which saw a fair amount of negative action sneaking in toward the close. That was likely enough to hit the S&P 500 futures overnight and the slicing of prices through key support levels on 7/8/21. Of course by Friday, things had changed.

Incidentally, to learn more about how options may make sense for you, check out my presentations "How to Let Your Stock Charts Lead You to Great Covered Calls" and "Five Things to Know About Covered Calls" on StockCharts TV.

Keep Your Eyes in the Sky As Trimble Looks to Take Off

Shares of GPS-based technology solutions company Trimble Inc. (TRMB) look set to move decidedly higher, as rising weather and global uncertainty are likely to increase demand for its services and products.

Trimble is one of those companies whose business is spread around many sectors: transportation, agriculture, construction and engineering. As a result, it's easy to lump the company with others in the field. But where TRMB is different is in its business being built on the principle that linking on-the-ground assets with satellites and delivering a reliable connection between technology and the physical world.

Specifically, TRMB satellites keep track of customer assets and coordinate all aspects of agricultural, defense, oil and gas, transportation, utilities and government projects and operations. Their satellites take the pictures and their hardware and software (sigh, algos) monitor and track situations, then calculate probabilities and possibilities of what could happen next based on the data. As a result of constant monitoring and surveillance of on-the-ground conditions, companies are able to have early warnings, which in turn help them anticipate issues as well as to optimize movement of vehicles, provide adaptation to weather patterns such as changing field irrigation routines, and helping to manage supply chains.

What that means is that, as the West Coast drought rolls on, the worker shortages continue, the supply chain disruptions remain in place and the rise in infrastructure projects continues, TRMB is in a good position to grow and maintain its businesses. Putting it all together, TRMB upgraded its guidance for the second half of the year, especially based on its expectations for the U.S. government's infrastructure initiatives along with commodity-based businesses.

The stock is now entering a potential long-term breakout zone, with resistance at 85 holding the key. A move above this area could take the stock to the low 90s in a few weeks or less, depending on how key situations develop. Accumulation Distribution (ADI) and On Balance Volume (OBV) are both pointing to higher prices while Volume by Price (VBP) suggests there is little resistance to a move higher.

I own shares in TRMB at the moment. You can review more stock and options recommendations with a FREE trial to Joe Duarte in the Money Options.com. Click here.

SPX Makes New High. NYAD, NDX Lag

There was a lot of talk about new market highs on 7/9/2021; certainly, the S&P 500 (SPX) made one. But the New York Stock Exchange Advance Decline line (NYAD) and the Nasdaq 100 (NDX) index failed to measure up.

This lack of confirmation, especially from NYAD, may prove to be a problem if not corrected. Of course, if NYAD makes a new high in the next few days, then the uptrend will again be confirmed.

The Nasdaq 100 index (NDX) closed at a new high on 7/2/21, but did not fully recover from the beating it took on 7/8; it came up short on 7/9 while SPX made a new high. Accumulation/Distribution (ADI) and ON Balance Volume (OBV) remain bullish while RSI remains well above 70, which keeps NDX overbought and suggests that some consolidation is in order in the next few days.The new high on the S&P 500 (SPX) is more likely to expand, as its RSI is not quite overbought yet.

Good news! I've made my NYAD-Complexity, Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.


Joe Duarte

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.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

Joe Duarte
About the author: is a former money manager, an active trader and a widely recognized independent stock market analyst going back to 1987. His books include the best selling Trading Options for Dummies, a TOP Options Book 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 Book of the Month. To receive Joe’s exclusive stock, option and ETF recommendations in your mailbox every week, visit the Joe Duarte In The Money Options website. Learn More
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