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At the Edge of Chaos: The Fed is About to Tinker with QE – and Stocks and Bonds Could Get More of a Boost

As I’ve suggested over the last two weeks, the stock market was poised for a breakout. And the odds for more gains in the short-term are still well above average. As a result, I am still not bearish, but, as time passes, it seems plausible that the market

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As I've suggested over the last two weeks, the stock market was poised for a breakout. And the odds for more gains in the short-term are still well above average. As a result, I am still not bearish, but, as time passes, it seems plausible that the market may change its general tone over the next few weeks.

Of course, much depends on what the Fed does, especially if it alters the way it buys bonds and delivers its QE. And there is emerging talk that changes are coming. Certainly, the biggest positive influence for stocks would be that the Fed increases the amount of money it puts into bonds, which is still an unknown. Moreover, even if the Fed doesn't change the amount of QE but directs its purchases toward key areas in the yield curve, the likely decline in interest rates which could result from these maneuvers could have a positive effect on key market rates, especially mortgages, which is why the homebuilder stocks are showing signs of life and the lumber stocks continue their bullish advance as I describe below.

Meanwhile, after a torrid March, volume in the options market had fallen off some, resulting in a slower trading pace for stocks early in the week – until Friday, when the volume in the SPY options picked up, especially on the call buying side. This, in turn, tilted the expiration toward the bullish side, as the dealers were forced to hedge their bets and, in the process, bought stock and stock index futures.

Subsequently, unless something very dramatic happens, the Fed's ongoing QE is more likely than not to keep the uptrend in stocks intact. That said, it seems that we may be nearing a point where some areas of the market will see more selling while others may see positive money flows. Thus, the bottom line remains that success will still be about selectivity.

Option Bulls Returned to Market at Week's End

The three weekly expirations (M,W,F) for the SPDR S&P 500 ETF (SPY) last week were mixed, with Monday and Wednesday delivering lackluster volume and generally sloppy directional conviction. But, by Friday, the call buyers were more or less back in business and the directionally bullish expiration went off well for those of us long 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, check out my upcoming options presentation "How to Let Your StockCharts Lead You to Great Covered Calls," on StockCharts TV's Options 101 program this week. You can catch me on Wednesday April 14th at 12:30 Eastern Time. More details here.

ASGN – Breakout Shows that a House in Order is Better than Being a Household Name

Flash isn't always what makes a stock worth owning. And, in the case of the shares of midsize IT and government contractor ASGN Inc. (ASGN), this is the take-home message for sure, as the stock delivered a nice chart breakout on 4/9/21. Certainly, ASGN is not a household name, but it does have its house in order as its business recovers amidst expectations of increasing revenues due to government contracts. The company offers cybersecurity, website design and artificial intelligence, along with management and related services to health care.

According to the company's most recent earnings call, EBITDA and free cash flow for its most recent fiscal year were above analyst expectations, but not above management's expectations. In fact, the company's moves during the COVID pandemic's most troublesome period were more than adequate to continue and to deliver year-over-year growth in two of its business segments. Moreover, other areas of the business, especially due to acquisitions, were able to show sequential growth and were nearing breakeven point.

Moreover, the company now expects to grow its business due to the White House's push toward IT modernization in the government, especially in defense and social services. And, with a $2 billion contract backlog in place and the addition of recent government contracts in place, the revenue stream should remain in good shape for some time.

The options data for ASGN is directionally bullish, which is a nice confirmation of its technicals where Accumulation Distribution (ADI) and On Balance Volume (OBV) suggest the stock is under aggressive accumulation. A decisive move above $102 could take the stock 5-10% higher in the next few weeks, barring an all-out market meltdown.

I just recommended an interesting option trade based on MSNT. You can access it and the rest of my model portfolio with a FREE trial here.

I have positions in ASGN and MNST as of this writing.

NYAD Makes New High along with SPX, NDX

The New York Stock Exchange Advance Decline line (NYAD) caught up to the S&P 500 (SPX) and made a series of new highs last week, confirming that we are still in an uptrend for stocks. More encouraging is the fact that RSI has not moved above 70 for NYAD yet, suggesting that stocks can still climb further. Moreover, even if the 70 area is breached, the market can stay in that overbought state for some time. In fact, what we've seen recently is that readings above 70 are more likely to lead to consolidations, not necessarily full-blown corrections. Of course, there is no guarantee that this will repeat, but it is worth noting.

Thus, as long as NYAD continues to make new highs, remains above its 50- and 200-day moving averages and has its corresponding RSI reading remain above 50, the trend remains up. This combined set of observations has been extremely reliable since 2016.

The Nasdaq 100 index (NDX) also caught up to SPX and, along with NYAD, has made new highs confirming the uptrend in stocks.

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.

Big Move Ahead Likely in Bonds

Stocks are still benefitting from what seems to be an intermediate-term consolidation in what is now a fairly clear pause in what has been the quietest bear market in U.S. Treasury bonds, probably in history. In addition, the trading range now for the U.S. Ten Year note (TNX) remains between 1.4 and 18%. That said, TNX continues to test the key 20-day moving average area, which could lead to a test of its 50-day moving average if the support at the 20 fails to hold. A fall below the 50-day moving average support level would put yields in an intermediate-term downtrend.

However, the U.S. 30-Year T-Bond yield (TYX) has fallen less than TNX, which suggests traders are still concerned about inflation but, given the potential for some difficulties in getting the infrastructure package through Congress, (at least without some changes that could decrease its inflationary potential), TYX may consolidate in a narrower range.

Still, the key remains what happens if and when TNX reaches 2% and TYX reaches 3%, how the Fed responds and then – of course – how stocks respond. For its own part, TYX is trading below its 20-day moving average, with the Bollinger Bands shrinking and the bond ETF options delivering a neutral message.

Finally, the price of lumber (LUMBER) continues to skyrocket, which is pulling along the lumber stocks, such as Louisiana Pacific (LPX), and homebuilders, such as KB Homes (KBH). Indeed, supply, demand and pricing power remain on the side of those two sectors of the economy, another example of how the markets, the economy and people's lives are intertwined in the MEL system.

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).

I own shares of LPX and KBH as of this writing.


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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Spread & Containment

COVID-19 may never go away, but practical herd immunity is within reach

It is unlikely that we will reach full herd immunity for COVID-19. However, we are likely to reach a practical kind of herd immunity through vaccination.

The level of immunity needed — either through vaccination or infection — for practical herd immunity is uncertain, but may be quite high. (Shutterstock)

When people say that we won’t reach “herd immunity” to COVID-19, they are usually referring to an ideal of “full” population immunity: when so many people are immune that, most of the time, there is no community transmission.

With full herd immunity, most people will never be exposed to the virus. Even those who are not vaccinated are protected, because an introduction is so unlikely to reach them: it will sputter out, because so many others are immune — as is the case now with diseases like polio and mumps.

The fraction of the population that needs to be immune in order for the population to have “full” herd immunity depends on the transmissibility of the virus in the population, and on the control measures in place.

It is unlikely we’ll reach full herd immunity for COVID-19.

For one thing, it appears that immunity to COVID-19 acquired either by vaccination or infection wanes over time. In addition, SARS-CoV-2 will continue to evolve. Over time, variants that can infect people with immunity (even if this only results in mild disease) will have a selective advantage, just as until now selection has mainly favoured variants with higher transmission potential.

Electron micrograph of a yellow virus particle with green spikes, against a blue background.
The B.1.1.7 variant of the SARS-CoV-2 virus. Over time, variants of concern will likely continue to emerge. NIAID, CC BY

Also, our population is a composition of different communities, workplaces and environments. In some of these, transmission risk might be high enough and/or immunity low enough to allow larger outbreaks to occur, even if overall in the population we have high vaccination and low transmission.

Finally, SARS-CoV-2 can infect other animals. This means that other animal populations may act as a “reservoir,” allowing the virus to be reintroduced to the human population.

Practical herd immunity

Nonetheless, we are likely to reach a practical kind of herd immunity through vaccination. In practical herd immunity, we can reopen to near-normal levels of activity without needing widespread distancing or lockdowns. This would be a profound change from the situation we have been in for the past 18 months.

Practical herd immunity does not mean that we never see any COVID-19. It will likely be with us, just at low enough levels that we will not need to have widespread distancing measures in place to protect the health-care system.


Read more: COVID-19 variants FAQ: How did the U.K., South Africa and Brazil variants emerge? Are they more contagious? How does a virus mutate? Could there be a super-variant that evades vaccines?


What level of immunity (either through vaccination or infection) we need for practical herd immunity is uncertain, but it may be quite high. The original strain of SARS-CoV-2 was highly transmissible and transmission is thought to be higher still for some variants of concern.

Empty vials of Pfizer's COVID-19 vaccine
To achieve two-thirds immunity, 90 per cent of the eligible population would need to be vaccinated or infected naturally. (AP Photo/John Locher)

The amount of immunity we need will also depend on what level of controls we are willing to maintain indefinitely. Continued masking, contact tracing, symptomatic and asymptomatic testing and outbreak control measures will mean we will require less immunity than we would without these in place.

Some estimates suggest that we may need two thirds of the population to be protected either by successful vaccination or natural infection. If 90 per cent of the population is eligible for vaccination, and vaccines are 85 per cent effective against infection, we can obtain this two thirds with about 90 per cent of the eligible population being vaccinated or infected naturally.

The United Kingdom has already exceeded these rates in some age groups. Higher rates are even better, because there is still uncertainty about the level of transmissibility and vaccine efficacy against infection (although research shows they are very good against severe disease). We don’t want to discover that we do not have enough immunity through vaccination and have another serious wave of infection.

Emerging variants

A sticker reading 'I'm COVID-19 vaccinated' from Vancouver Coastal Health
Booster vaccinations will hopefully allow us to maintain long-term practical herd immunity against future variants of COVID-19. THE CANADIAN PRESS/Jonathan Hayward

Higher vaccine uptake will mean there are fewer infections before we reach practical herd immunity. The remaining unvaccinated individuals will be safer, protected indirectly by the immunity of those around them. Outbreaks will be smaller and rarer, and there will be fewer opportunities for vaccine escape variants to arise and spread.

That said, variants of SARS-CoV-2 will continue to emerge, and selection will favour variants that escape our immunity. Vaccine developers will continue to broaden the spectrum of the vaccines that are available, and boosters will hopefully allow us to maintain long-term practical herd immunity.

It’s possible that an immune escape variant will emerge that is severe enough, and transmissible enough, that it will cause a new pandemic for which we do not have even practical herd immunity. But barring that, while we may not be free of COVID-19, we can be confident that in the not-too-distant future it will be manageable when we return to near-normal life.

Caroline Colijn's research group receives funding from the Natural Sciences and Engineering Research Council of Canada, Genome British Columbia, the Michael Smith Foundation for Health Research, the Public Health Agency of Canada and Canada 150 Research Chair program of the Federal Government of Canada.

Paul Tupper's research group receives funding from the Natural Sciences and Engineering Research Council of Canada.

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Science

No Vax, No Phone – Pakistan Province Blocks Sim Cards Of The Unvaccinated

No Vax, No Phone – Pakistan Province Blocks Sim Cards Of The Unvaccinated

Pakistan is expected to spend more than a billion dollars in the next fiscal year to import COVID-19 vaccines to inoculate around 100 million people. The trouble is,…

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No Vax, No Phone - Pakistan Province Blocks Sim Cards Of The Unvaccinated

Pakistan is expected to spend more than a billion dollars in the next fiscal year to import COVID-19 vaccines to inoculate around 100 million people. The trouble is, anti-vaccine groups have sprung up around the country and have deterred some from taking the vaccine. In response, one local government in Pakistan has a new weapon in its war chest against vaccine hesitancy: disable the SIM cards of mobile phones of people who decline to get jabbed, according to RT News

Punjab Health Minister Yasmin Rashid decided on Thursday during a meeting with the Punjab provincial government and military officials that anyone who denied the COVID-19 jab will have their SIM cards disabled at "a certain time." 

"We are doing all we can to compel people to get vaccinated… The government cannot allow individuals, who do not want to get vaccinated, to risk lives of those who are already vaccinated," Rashid said. She added that a timeline from when a person denies the jab to SIM card denial would be hashed out once the new measure received formal approval from the National Command and Operation Center, which supervises Pakistan's national response to COVID-19. 

After the meeting, Punjab's Primary and Secondary Health Department tweeted"Mobile SIMS of people not getting vaccinated may be blocked, it was decided in Cabinet meeting under the chair of Minister for Health Dr. Yasmin Rashid at Civil Secretariat. The government will open walk-in vaccination of over 18 years of age group."

There was no word on when the SIM card blocking would begin.

However, provincial officials announced the plan was moving ahead: 

"Final decision has been taken to block the mobile SIM cards of people not getting vaccinated," department spokesman Syed Hammad Raza told Pakistan's Dawn newspaper.

Critics said Punjab's new measure is a dangerous move by the government. 

"This is a regressive step as it affects the right to freedom of speech of citizens. What is required is to raise awareness about vaccinations, and not coercion," Prasanth Sugathan, legal director at India's Software Freedom Law Centre, told The National.

"During the pandemic, mobile phones are important for people to connect with others and to receive information," Sugathan said. 

Besides SIM card bans, those who deny being vaccinated might also be restricted from restaurants, malls, and parks. 

This is absolutely absurd, and imagine if a liberal-run metro area in the US resorted to this no jab, no phone measure - people would lose their minds and likely rebel.  

Tyler Durden Sat, 06/12/2021 - 13:00

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Stocks

Citadel Settles Suit Alleging Former Senior Trader Shared Its Algorithmic “Secret Sauce”

Citadel Settles Suit Alleging Former Senior Trader Shared Its Algorithmic "Secret Sauce"

Citadel has reached a settlement with the British hedge fund it accused of trying to plunder one of its senior traders in an effort to get to its algorit

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Citadel Settles Suit Alleging Former Senior Trader Shared Its Algorithmic "Secret Sauce"

Citadel has reached a settlement with the British hedge fund it accused of trying to plunder one of its senior traders in an effort to get to its algorithmic "secret sauce".

GSA Capital Partners LLC and Citadel announced the settlement late last week after Citadel accused the fund of obtaining "closely guarded" trading strategies when it hired the employee in question, Vedat Cologlu, according to Bloomberg. 

GSA said of the settlement that the two firms “recognize and respect the importance and value of the other’s rights over their confidential information and intellectual property.”

We first documented that Citadel was suing British hedge fund GSA Capital in January of 2020, after GSA attempted to hire Cologlu, allegedly in hopes of accessing the quant secrets at the core of Citadel's "ABC" automated trading strategy. 

Recall, we wrote back in November of 2020 that Citadel was seeking around $40 million over claims that GSA was able to obtain information on the strategy via texts and WhatsApp.

Citadel argued late last year that GSA "can't unsee" and can't forget the information that was taken from Citadel's secret algorithm. Citadel is also moving to try and block GSA from using their trading model. GSA has argued that they found no "secret sauce" from a high-level description of the structure of a trading algorithm. 

David Craig, a lawyer for Citadel Securities, said in late 2020: “GSA’s most senior managers now know where and how Citadel makes hundreds of millions of dollars in annual revenues. They cannot forget that information, or put it out of their minds.”

He noted that only 15 of Citadel's 3,000 employees ever had access to the "strategic logic" of the strategy. One of those employees was Cologlu, a 2007 Wharton grad and self-described "stat arb trader", who helped operate and administer the models whose "returns were notably high given the low level of risk it took on."

Citadel has claimed its "ABC" quant strategy cost more than $100 million to develop. In its lawsuit, Citadel alleged that the UK fund wanted Cologlu to hand over confidential information about the strategy:

GSA asked for sensitive information on his equity-trading including his profits and the speed of the trades. And then Cologlu handed over a plan that Citadel argues was based on its own confidential model, including the way the algorithm made predictions.

And there's good reason for the information to be coveted. Citadel Securities has been wildly profitable: the company posted a record $6.7 billion in revenue in 2020. This was almost double the previous high in 2018. The blockbuster result came after some of its traders moved from Chicago and New York to set up shop in a Palm Beach hotel in late March 2020 as the pandemic upended lives and markets across the globe. The results of the privately-held company were released in presentation to investors as part of a $2.5 billion loan Citadel Securities was seeking.

The Citadel securities trading arm started as a high-frequency market-maker in options before pushing into equities. Today, the firm dominates that realm and has had a very close relationship with the likes of the millennials' favorite trading platform, Robinhood. We documented back in September 2020 that Citadel now controls 41% of all retail trading. 

GSA was spun out of Deutsche Bank AG in 2005 and manages around $7.5 billion. Citadel’s legal filing names GSA founder and majority owner Jonathan Hiscox as a defendant, alongside other officials including the chief technology officer.

Back in January 2020, we noted the full details of Citadel's lawsuit. 

Tyler Durden Sat, 06/12/2021 - 14:00

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