VIDEO: Interview with Market Guru Joe Duarte

Welcome to my interview with Dr. Joe Duarte, a member of the Investing Daily team.

Dr. Duarte has been a professional investor and independent analyst since 1990. He is a former registered investment advisor and author of the bestselling Options Trading for Dummies, and several other books including Market Timing for Dummies and Successful Biotech Investing. Below is a condensed transcript of our discussion. My questions are in bold.

How would you describe yourself as an analyst? Is there a school of thought, or a set of overarching precepts, that you follow?

The stock market moves the economy now in a reversal of the traditional relationship. I call it the MELA system: M for markets, E for economy, L for people’s life and financial decisions, and A for algos (artificial intelligence).

The four components are centered by the state of the 401k plan from which people borrow and make future decisions. Bull markets make 401k plans rise in value. People feel good and buy houses and cars. Algos accelerate this dynamic via stock market trend enhancement and social media.

This in turn makes people feel wealthier. It’s what the Federal Reserve calls the “wealth effect.” And this wealth effect gives people a good feeling about the future and makes them spend money in the present.

Since the economy is fueled by consumer spending, the economy grows. This in turn leads to improving corporate earnings which increases stock prices and again fuels the 401k, and so on in a virtuous cycle.

The final step is the role of artificial intelligence, aka algos. In the real world, social media allows for the near instant transfer of information.

When all these factors are combined, the net effect is that market trends last longer due to the virtuous cycle. Unfortunately, the reverse is also similar. As we saw in March 2020, a 30% drop in stocks can take place in six weeks. And as we experienced, the drop in the market was almost instantly followed by a caving in of gross domestic product.

Once I gauge the state of the MELA system, I move on to the markets, where I have four major principles that I follow.

  • Don’t fight the Fed.

I learned this one from the late Martin Zweig, one the best stock analysts of all time.

It’s folly to fight the interest rate trend. When the Fed is easing, either via lowering interest rates or quantitative easing (QE), the odds favor an increase in stock prices. That’s because interest paying securities yield less and stocks offer better odds of gains.

  • Don’t fight the market’s momentum.

This one is also from Zweig and it’s a perfect corollary to “Don’t fight the Fed.” It’s actually simple. When the Fed lowers interest rates look for stocks to buy. And as long as the market keeps going up, keep buying.

  • Study the New York Stock Exchange Advance Decline line (NYAD).

This indicator has been better than the major indexes as a gauge of the true market’s trend for decades. But since the 2000s it’s been even better. That’s because large-cap stocks such as Amazon (NSDQ: AMZN) and Microsoft (NSDQ: MSFT) distort the price of the S&P 500 via their market capitalization.

In a well-functioning market, most stocks trend higher in bull trends, and lower in a bear trend. However, there are times when the indexes and the NYAD don’t correlate.

When divergences go on for several days or longer, it’s a sign that the market is malfunctioning and that risk to the downside is increasing.

Fortunately, the reverse is also true. In this case you would see flat or down trending indexes but a rising trend in NYAD.

As a result, by comparing the action in the NYAD to that of the indexes, you are able to make better decisions.

The bottom line is that a rising NYAD is an indication that your odds of picking winners are better than when NYAD is moving down.

  • Use a hybrid approach when picking stocks.

I combine the approaches of the best analysts. I’m part Martin Zweig, part Warren Buffet and Peter Lynch, and largely a chartist.

My first step in stock picking is reviewing price charts. When I see an attractive looking chart I follow it with a deep dive into the business of the company, much as what Buffet might do.

I look at earnings, valuation, and I spend a lot of time reading earnings calls transcripts and getting a feel for how management deals with good and bad times. And if possible, I kick the tires. I look at the business, like the legendary Fidelity Magellan fund manager Peter Lynch used to do.

So, if I’m looking to invest in restaurants I like to go to the shop, try to sample the food, look at crowd size, try to figure out what the place looks like at peak times and trough times. Then I compare it to what management is saying and what the company’s earnings, balance sheet and other financials are saying.

As Q4 unfolds and the start of 2022 looms on the calendar, which sectors look the most appealing to you?

Those areas of technology that allow online collaboration. Collaborative platforms and the cloud are likely to be the most resilient remnants of the COVID pandemic. People have learned that working from home is not just possible but, in many ways, it’s better than being at the office.

Any platform that lets this dynamic unfold is likely to have good sustainability for the foreseeable future.

As a medical doctor, one of your specialties is biotechnology investing. What trends excite you about biotech right now?

Biotech is in a bit of a funk because of the focus on COVID. Once this period sorts out, I would expect a return to those companies focused on arthritis-related diseases and cancer.

Moreover, companies that develop non-vaccine treatments for COVID are also likely to see some benefit for their share prices.

Thanks for your time, Joe.

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John Persinos is the editorial director of Investing Daily. Subscribe to his video channel.