Last night the Fed left its Funds Rate at effectively zero and continued with the tapering of it’s purchases of Treasuries and Mortgage Backed Securities by another $10 billion from July 1, taking it down from $45 billion to $35 billion. No real surprises there.The market, however, had expected a larger reduction in the Fed’s Unemployment Rate forecasts, some increase in Fed Funds expectations for 2015 and more recognition of rent inflation warnings. It was disappointed on all three counts. In the end the forecast changes were at the margin and not material. Moreover Fed Chair Yellen’s press conference downplayed some of the changes, adding fuel to the pull-back in the US Dollar.
The Dow and S&P rallied to new closing highs whilst 10-Year Treasuries rallied 6 basis points to 2.59%, pushed ahead by the Fed revising down their forecasts of the ‘neutral’ long term Fed Funds Rate to 3.75% from 4.0% previously. The US Dollar Index fell by 0.2% whilst the VIX (Volatility Index) was hit hard, closing down 12% to a new post-Financial Crisis low of 10.61.
The formal Fed Statement revealed little change from the late April one. It recognised that since they had last met, economic activity had rebounded in recent months but Q1 had been flat and this has led to a notable downgrade to 2014 growth to 2.1%-2.3% from 2.8% previously. However the FOMC still held to their 2015 growth forecast of 3-3.2% now seeing that growth has since rebounded. The Statement also noted that Inflation has been running below the Committee’s longer run objective notwithstanding a clear uptick in inflation in recent months. When asked at her press conference whether the Fed was behind the curve on inflation, Ms Yellen noted that recent figures had been ‘noisy’ and ‘ a bit on the high side’ seemingly downplaying recent increases.
This morning on the economic front we have UK Retail Sales and CBI Trend Orders at 9.30 am. For the second consecutive day we have data of note from the Euro-Zone whilst at 1.30 pm we have the US Weekly Jobless Claims. This is followed at 3 pm by the Philadelphia Fed Business Outlook and Leading Index.
September S&P 500
I have now rolled to the September Contract which trades at a discount of 7.5 handles to the cash market. Following Ms Yellen’s press conference last night the S&P rallied to a new closing all time high with the VIX closing down an incredible 12%. The bullish Investors Intelligence Advisors Survey rose to a massive 79% last week (investorsintelligence.com). The last six months has now seen the two greatest periods of optimistic advisor percentages since the first Quarter of 1987. A nearly three-decade long sentiment extreme is meaningful in and of itself but even moreso when it occurs in the late stages of a massive rally which has now lasted three years without a 10% correction.
After the FOMC released its Statement and following Ms Yellen’s press conference the June S&P rallied to my 1950 sell level before stopping me out of this position for a small loss at 1955 and I am now flat.
The next major resistance level is at 1970 in the cash market which is 1963 in the September Contract and today I will be a small seller on any further rally to 1955/1961 with a 1965 stop. This market is still very overbought on a Daily, Weekly and now Quarterly basis but it could take until the June Expiration is out of the way tomorrow before we get a meaningful pull-back. I will also be a small buyer on any dip to 1940/1944 with a 1937 stop.
Euro/USD
The Euro plan worked well yesterday as it had a nice rally ahead of the FOMC which enabled me to cover my long 1.3540 position at 1.3570 and I am now flat. It is very clear to me that the Fed do not want a strong Dollar at this time. Every meaningful drop in the Euro is bought by the market as it continues to trade strongly following the upward Key Day Reversal following the ECB rate cut two weeks ago. It is clear that the 1.3480/1.3520 is now key support and it will take a break of this level for me to turn bearish. Today I will raise my buy level to 1.3570/13595 with a 1.3545 stop. I still do not want to be short the Euro at this time.
US Dollar Index
The US Dollar Index is finally approaching my buy level at 80.10/80.35 and I will still be a small buyer in this region with a 79.80 stop.
September DAX
This morning I have rolled to the September contract which in contrast to the S&P is trading at a 6 point premium to the cash market. After I posted yesterday morning the June Dax was trading at my 9960 sell level and after a nice sell-off ahead of the FOMC I was able to cover this position at 9930 and I am now flat. The September Contract is now back trading over the 10000 resistance level. The Dax is very close to my long term sell level and today I will be a small seller on any further rally to 10050/10110 with a 10140 stop. Given the volatility and the high price of the Dax I have to use wider guidelines with a wider stop which means trading in smaller size. If I am taken short and subsequently stopped out I will be a more aggressive seller on any further rally to 10215/10300 with a 10450 stop.
I am still short the DAX/FTSE spread at 3110 in very small size with the same 3200 stop. If I am stopped out of this position I will look to reset on any subsequent rally to 3250 with a 3320 stop.
September FTSE
I have now rolled to the September Contract which is trading at a 50 point discount to the cash market. Yesterday the June FTSE plan worked well as shortly after I posted itwas trading at my 6800 sell level and after a nice sell-off ahead of the FOMC I was able to cover this position at 6780 and I am now flat.
The cash FTSE is trying to break this key 6810/6830 resistance level this morning and I am going to stand aside today as I want to see how the market trades at this level plus it is difficult to sell the September FTSE here whilst it is trading at such a huge discount to the cash market. Therefore I will take another look tomorrow as I do not feel I have an edge in this market today.
Dow Rolling Contract
Thankfully we have not been short the Dow for the last two months as every dip is just being bought by the market. The Dow is now so close to the key 17000 round number resistance level that I would expect the market to at least test this level before attempting to trade lower. Today I will raise my buy level to 16810/16840 with a 16780 stop. I still do not want to be short the Dow at this time until we trade higher to my long term target of 17200/17400.
September BUND
The September Bund plan worked very well as the market did indeed hold the key 144.80/145.00 support level. The Bund had a nice rally ahead of the FOMC which enabled me cover my long 145.10 position at 145.50 and I am now flat. Today I will raise my buy level to 145.40/145.60 with a tight 145.25 stop. The price action is continuing to tell me not to be short the Bund at this time even though the market is very overbought.
Gold Rolling Contract
Unfortunately Gold just missed my 1262 buy level with a 1266 low before spending the rest of the day trading higher and is now back above the key 1280 resistance level this morning. I still like Gold, especially the way it has reacted to the extreme sentiment readings that it had at the 1240 price level two weeks ago, making higher lows since then. Today I will raise my buy level to 1270/1276 with a 1265 stop which is just below yesterday’s low.
Silver Rolling Contract
No change as I am still long from earlier in the week at 19.58. Today I will raise my stop on this position to 19.40 as I finally look for Silver to break the key 20.20/20.50 resistance level A closing break above 20.50 will be very constructive for Silver.
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