At the Edge of Chaos: Stock Momentum Gathers Steam; Plus, a Small Stock with Big Upside Potential Under the Hood

As crazy as it may sound, the odds are still better than even that this rally in stocks may be well from over. And while there may be some bumps along the way, there are so many traders and perma-bears that have missed the rally, especially since the March 2020 bottom, that every dip is still being bought. Moreover, the rally seems to be gaining momentum just as earning season gets into full swing.

Of course, given the potential for all kinds of unexpected surprises to reveal themselves at any moment, I know that this rally could end as suddenly as it started, which is why I remain cautiously bullish with a heavy dose of reality attached to it. Yet, right or wrong, the Fed’s money pumping, along with the fact that there is little incentive to have money in cash, continues to drive money into stocks.

Bears Continue Capitulation

The gravity-defying rally in stocks still has legs, as those worried about COVID-19 who’ve missed the rally since March 2020 are starting to capitulate. Moreover, this is not entirely unexpected, as three weeks ago in this space, I noted: “the current move has the feel of what could be a major capitulation rally in stocks, as those who have fought the Fed and the tape for years and short-sellers decide to finally throw in the towel and buy.” And while those of us long the market are in a good position at the moment, there is still plenty of worry out there, which means that prices could still go higher, at least in the short-term, as bull markets climb walls of worry.

The bottom line is that as long as the Fed continues to pump money into the financial system and there is no “Black Hole” that sucks up all the liquidity from the system, the path of least resistance for stocks remains up and, while the trend is up, there is plenty of rotation in the market, which means that selectivity remains the key to success.

So what could go wrong? More than anything, aside from yet another hedge fund blowing up – presumably one who loses more than $80 billion and takes down Goldman (GS), Morgan-Stanley (MS), JP Morgan (JPM) and for, good measure, Robinhood along with it – we’re probably okay enough, since the bots continue to buy into the “Fed has the market’s back” story.

In other words, since the bots run the market, success is built on trading with the bots, as long as you know that bots have no conscience and are prone to change their mind at the speed of light. So trade with them, but don’t trust them.

Bulls Overtake Bears in Options, Pushing Stocks Higher

The three options expirations (M, W, F) for the SPDR S & P 500 ETF (SPY) last week started on a decidedly bearish note on Monday, as put buyers emerged at key strike prices – 410-413. But, by late Wednesday, the call buyers came in and, by Friday, they were back in charge. Remember, call buyers force dealers to hedge their call option sales via stock and stock index futures purchases, which adds to the bullish tone in the market.

What this means is that, for now, the market remains in the hands of the bulls and that the odds of higher prices remain well above-average. Next week may be interesting, as Friday’s monthly expiration would mark three weeks of very bullish action in the markets – and could be an opportunity for the market makers to take some money off the table.

Incidentally, to learn more about options check out my recent presentation “How to Let Your Stockcharts Lead You to Great Covered Calls,” part of StockCharts TV’s Options 101 special event. Watch it in full here.

And you can catch me live and in person at The Money Show in Orlando, where I’ll be speaking about options. Register here

Valvoline – Big Doings Under the Hood

It’s hard to get excited about motor oil and oil changes – unless, of course, you own shares of Valvoline (VVV), which not only makes and markets the stuff, but also owns a global chain of oil change stores whose recent performance is actually pretty sexy.

In fact, VVV actually grew its business during COVID-19 by expanding its footprint, purchasing more Quick Lubes outlets which it will rename with the Valvoline brand. Meanwhile, the company improved its balance sheet by using the lower market interest rates to refinance a big chunk of debt and thus improve its free cash flow. The bottom line was a record first-quarter EBITDA, a higher dividend, and a stock that looks ready to move decidedly higher if it can take out the $27 area. Moreover, the company expects double-digit EBIDTA growth and is likely to expand its store purchases, adding further to its market share while actually increasing prices, which will also likely add to its top and bottom lines.

The stock is under excellent accumulation, as both Accumulation Distribution (ADI) and On Balance Volume are rising. It’s not overbought either, which means upside is likely. And its Volume by Price (VBP) activity suggests good support at $25 with little resistance above $27.

For more stocks and options with huge upside potential, check out a FREE trial to here. I have a position in VVV as of this writing.

NYAD Makes More New Highs Confirmed by SPX, NDX

The New York Stock Exchange Advance Decline line (NYAD) continued its recent ramp up with another series of new highs last week, which means the trend for stocks remains up.

Indeed, as long as NYAD continues to make new highs, remains above its 50- and 200-day moving averages and keeps its corresponding RSI reading above 50, the trend remains up. This combined set of observations has been extremely reliable since 2016 and shows no signs of becoming unreliable as of this writing.

The Nasdaq 100 index (NDX) also made a new high, with volume, Accumulation Distribution(ADI) and On Balance Volume (OBV) confirming the new high.

The S&P 500 (SPX) is now firmly leading the market after making a series of new highs, Support for SPX is now above 4000, with another band of support near 3930 and 3970.

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.

Falling Bond Yields Juice Housing and Lumber Stocks Further

Key bond yields retreated as algo futures traders covered short positions last week, giving stocks another reason to rise as the Fed is still pumping money into the banking system. But the real question is whether the U.S. Ten Year note (TNX) will break below the lower boundary of its trading range, between 1.4 and 1.8%, and whether either TNX or TYX will break below their 50-day moving averages decidedly.

Indeed, the U.S. 30-Year T-Bond yield (TYX) is now gyrating around its 50-day moving average, confirming the notion that the intermediate-term trend in long-term yields is in play.

Thus, we could see a period of lower yields on the horizon, which, if it does arrive, could give stocks a sustainable reason to rise further.

Meanwhile, a bellwether for inflation, the price of lumber (LUMBER, upper graph), recently rolled over. However, it quickly recovered and, in the process, gave housing stocks, such as KB Homes (KBH, lower graph; also one of my recently recommendations) a boost. Note the following on the lumber chart:

  • Quick recovery on rising volume, showing aggressive buying on the dip
  • New price highs confirmed by rapidly rising On Balance Volume (OBV)
  • ROC steadily above zero
  • RSI is overbought but prices keep rising
  • Louisiana Pacific (LPX, middle graph, upper panel) confirms the new highs on Lumber contract
  • General price trend of KB Homes (KBH) and other housing stocks is keeping up well with moves in lumber

The bottom line is that money continues to move aggressively into lumber and related stocks. I own shares in KBH and LPX as of this writing.

To learn more about bonds, lumber, and homebuilders and more, check out my recent Money Show presentation: The Trade of the Year. Check it out here, and consider a Free Trial to my service (click 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 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.

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