Top Advisors Corner

At the Edge of Chaos: Seasonality, Options and Market Breadth Remain Bullish for Stocks

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Stocks love free money and, with the Fed tapering starting in December, it is likely that traders will hang on to the hope that the infrastructure bill's money starts trickling into the economy quickly.

That's certainly a growing view in some circles. And while it does have some merit, in the short term, the more likely reason for stocks to move higher is the fact that we are in the best seasonal period of the year, the months of November and December, along with the bullish action in market breadth and the options markets. I have much more on the latter point, just below. But here is a hint: more stocks are moving higher than those falling in price and option players are buying more calls than puts, which raises the potential for short term gains.

Nevertheless, despite the short-term bullish vibe in the stock market, I'm still of the view that when the Fed's tapering reaches a certain point, whatever and whenever that is, the market will start to roll over. That's because, with less liquidity injected into the bond market, banks and related institutions will have less money to spend on stock buybacks and speculative derivative trades. This, in turn, will eventually work its way into lower trading volume and, at some point, outright selling.

The good news is that there is no indication that we are close to that point yet, as the Fed is just getting started by reducing its bond purchases by $10 billion per month, starting in December. All of which means that we continue to take the long side of trades, albeit with a few caveats:

  • Take profits sooner
  • Use tighter sell stops
  • Don't lose sight of the fact that the odds favor that we are closer to the end of the current rally than many may realize

For more info on how to adjust your trading approach to this market, check out my latest interview with StockCharts.com's Dave Keller here or my latest Your Daily Five video here. Stay tuned.

"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 bounded instability that engenders a constant dynamic interplay between order and disorder." – Complexity Labs

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 also check out one of my recent Your Daily Five videos, which expands on these strategies, here.

Location, Location, Location: Matson Inc. Delivers the Goods as Pacific Logjam is Likely to Persist

I recently recommended shares of Matson Inc. (MATX), a Honolulu-based logistics and transportation company whose geographic location is paying off in a big way.

We normally associate the phrase "location, location, location," with real estate, but, in this case, it's well applied to the transportation sector, especially in the case of Matson Inc. That's because the company is located in Hawaii, a strategic midpoint between China and the U.S. West Coast and a de facto shipping hub. As a result, aside from servicing the Hawaiian Islands, Matson's shipping and logistics is essential to the delivery of goods to major U.S. ports.

The stock, as I will describe directly below, has had a good run in 2021. But, more importantly, since the port logjam situation is not likely to change for the next several months, the stock still has room to run.

And here is why. After beating expectations on its Q3 results, Chairman and CEO Matt Cox, noted the following:

  • Expectations for "continued elevated goods consumption, inventory restocking and favorable supply and demand fundamentals in our core markets" remain.
  • No real end in sight for a "supply chain environment" which "continues to be one of widespread congestion at many key points within ocean and overland transportation."
  • Growth in container volume in Hawaii, the West Coast of U.S., and in traffic between China and the U.S.
  • "Volume demand in the quarter was driven by e-commerce, garments and other goods heading into peak season. We continue to see sustained and elevated consumption trends and low inventory levels drive increased demand for our expedited ocean services."
  • "All elements of the supply chain infrastructure from origination in China to the distribution points in the U.S. are in chaos."

In other words, Matson's business is in high demand. Moreover, they are literally delivering the goods and therefore have pricing power, which may be in place for a longer period than one may expect given the lack of slack in the entire supply chain. As Mr. Cox noted, he expects "elevated consumption demand and inventory restocking to remain largely in place, at least through mid-year 2022."

After a bullish response to the earnings, the stock has formed a nice consolidation pattern, which offers an opportunity to enter the shares. Accumulation Distribution (ADI) shows that short sellers have been building positions while On Balance Volume (OBV) has been moving higher. This suggests that smart money has been moving in and that short sellers are likely to get squeezed.

I own shares in MATX as of this writing. For detailed option strategies and stock picks chose a FREE trial to Joe Duarte in the Money Options.com. Click here.

Options Traders Remain Bullish and Control the Stock Market

Little has changed in the options market over the last few weeks other than recent data confirming what I've been saying here for some time. Which is that the options market is a greater influence on the stock market than the opposite.

And so the action this week that saw a large amount of money go into Friday's weekly SPY call options, and the usual reactions that this causes (dealers and algos having to hedge by selling calls and buying stocks), is essentially bullish for stocks, as long as it remains in place.

How does it work? Here are the simple steps again:

  • Call buyers force market makers to sell calls
  • Market makers hedge their call sales by buying stocks and stock index futures
  • The cycle self-reinforces as long as call buyers persist and the stock market moves higher

So until this pattern changes, the odds of higher stock prices remain better than even.

To get the latest up-to-date information on options trading, check out Options Trading for Dummies, now in its 4th Edition – Get Your Copy Now!

#1 New Release on Options Trading

Market Breadth Remains Bullish

The New York Stock Exchange Advance Decline line (NYAD) delivered a convincing breakout last week and remains in a bullish configuration. Certainly, as I expected, it seems to have entered a short-term consolidation pattern. But at this point, all signs remain positive.

The S&P 500 (SPX) confirmed the new high on NYAD last week and remains well above its 20-, 50-, 100- and 200-day moving averages, with good confirmation from Accumulation Distribution (ADI) and On Balance Volume (OBV). As with NYAD, we are seeing a short-term pullback.

The Nasdaq 100 index (NDX) also confirmed the recent high on NYAD. Even better, the NDX breadth line made a new high, with Accumulation Distribution (ADI) and On Balance Volume (OBV) confirming.

Small stocks (SML) have also joined the rally, which is a bullish development, although it may also be related to seasonal trading patterns.

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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