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Irrational Exuberance 2.0: Over-the-Top Stock and Bond Markets are Due for Reversal

During a New York speech, Fed Chairman Alan Greenspan, aka “The Maestro,” uttered the phrase: “Irrational Exuberance.” He was referring to the bullish action in the stock market at the time, which, in his mind, might have been ahead of reasonable expectations about the future of corporate earnings and the state of the economy.

We are currently in one of those periods of irrational exuberance. Except this time, it’s the bears in the stock and bond markets who are channeling Greenspan.

And yes, I’m aware of the inflation figures and the market’s consensus that we are in a period of stagflation. But even as the Fed talks about keeping interest rates “higher for longer”, what I see is that it’s getting harder for businesses to operate, which historically is a prelude to a slowing economy.  That’s because the Fed and the bond market have pushed interest rates beyond what the markets and the economy can handle. Thus, some sort of reversal is in the cards, perhaps in both bond and stock markets.

Something’s got to give; soon. So the best approach is to stay patiently alert, compile a shopping list, and be prepared to deploy cash when the market turns.

Costco Banks on Consumer Fear

If there is such a thing as life being oversold, we’re looking at it. Consumers are tapped out. Business confidence is hugging its recent bottom. Governments are running irreparable deficits and insurmountable debt levels. And public opinion on just about everything is near the lows of recent history.

Fear in the real world is so high that Costco (COST) is selling gold bars on their website. They recently ran for $1900 per ounce and sold out in a blink. It’s also increasing its survival food offerings.

In fact, it’s that fear in the public’s mind that led to the company’s beating analyst of expectations in its most recent quarter. In good old contrarian fashion, Costco monetized the fear factor handsomely. Here’s what they said in their earnings news release:

  • Comparable sales rose 1.1% year over year, but only 0.2% in the U.S.;
  • Rising sales registered in groceries, but not in big ticket discretionary items;
  • Members made more trips to the stores but spent less on average; and
  • There was higher store traffic, but smaller average tickets.

One percent sales growth total and flat sales in the U.S. is a cautionary sign. But the company was able to beat estimates by converting the cautious into executive memberships (twice the cost of regular memberships) and by catering to their concerns.

The market clearly liked what it heard from the company, as the shares rallied and are on the verge of a price breakout. On Balance Volume (OBV) and Accumulation/Distribution (ADI) are both moving higher, confirming positive money flows into the shares.

Costco is profiting from the public’s fear, while the market is not quite there yet. But, as I describe in the sections below, we are closing in on oversold levels in the market from where a meaningful bounce can materialize.

Irrational Exuberance: Bond Yields Should be Topping Out as Homebuilders Look to Bottom

If Costco’s flattening sales, which are leaning toward gold bars and survival food, are a hint as to where things stand, then it follows that bond yields are too high, which implies that the Fed has already gone too far in the tightening cycle and that lower yields are in the offing.

So again, I am noting that the U.S. Ten Year Treasury Note (TNX) yield is well above its normal trading range as it skirts along the upper Bollinger Band aligned with its 200-day moving average. As I noted in my recent video on Bollinger Bands, when this happens, it’s usually a prelude to a reversal the current trend.

Rising bond yields have led to rising mortgage rates and weakness in the homebuilder stocks, which, as I recently noted to subscribers of Joe Duarte in the Money Options.com and members of my Buy Me a Coffee page here, may be poised for a rebound.

As the chart below shows, rates (MORTGAGE) are even further outside their upper Bollinger Band than TNX. That’s a picture of a market which is on the verge of something big happening. A normal response would be for a downside reversal.

You can see that smart money is starting to build positions in the SPDR S&P Homebuilders ETF (XHB) as the On Balance Volume (OBV) line is stabilizing even as the Accumulation/Distribution (ADI) line still heading lower. This is a bullish divergence, as OBV measures the action in real buyers while at this stage of the cycle, ADI’s downtrend points to activity by short sellers.

Together, these indicators suggest that a potential short squeeze in homebuilders is likely, once bond yields and mortgage rates come down to earth after the extended period of irrational exuberance created by the Fed reverses.

Join the smart money at Joe Duarte in the Money Options.com, where I have just added five home builder stocks to the model portfolios. You can have a look at my latest recommendations FREE with a two week trial subscription. And for frequent updates on real estate and housing, click here.

The Market’s Breadth Tests Key Decision Point; Money Moving Back into Tech

The NYSE Advance Decline line (NYAD) clawed its way back to its 200-day moving average behind an oversold RSI reading. The short term could be bumpy, so the outcome of what happens here could well define the action in Q4 for stocks.

The Nasdaq 100 Index (NDX) found support and is now negotiating the 14500-15000 support area. ADI is falling, but OBV has turned up, which means we are likely to see a bigger clash between short sellers and buyers at some point in the future.

The S&P 500 (SPX) is not faring as well, as it remains below 4350 and its 20- and 50-day moving averages. On the other hand, SPX closed below its lower Bollinger Band on 9/22/23 and remains near its recently oversold level on RSI.

VIX Remains Below 20  

VIX remains stubburnly below the 20 area. A move above 20 would be very negative.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity is Tightening Some

Liquidity is tightening. The Secured Overnight Financing Rate (SOFR), is an approximate sign of the market’s liquidity. It remains near its recent high in response to the Fed’s move and the rise in bond yields. A move below 5.0 would bullish. A move above 5.5% would signal that monetary conditions are tightening beyond the Fed’s intentions. That would be very bearish.


To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

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.

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