Risk appetite has continued to improve with a promise from the Fed to be ‘patient’ in normalising interest rates thus sending equities through the roof, with the Dow now up over 700 points in two days. There still seems to some confusion about what the Fed communicated on Wednesday. To be sure, there is certainly a marked difference between the tone struck in the policy statement (modestly dovish) and at Fed Chair Yellen’s press conference (clearly hawkish). For me, the end result is a Fed that has effectively said that it could begin raising rates as early as April 2015 which is much sooner than the market has priced in. This does not seem consistent with the idea of a ‘dovish’ Fed. Their action has inspired equities to rally, as some commentators are suggesting, as one does not expect the stock market to respond favourably to the prospect of interest rate hikes within the next six months.
Instead, I suspect that investors were heartened by 1) the confidence that Fed Chair expressed in the US economy, and 2) the reassurance that the coming hiking cycle will not be like the last where there was a series of 17 consecutive 25bp hikes. The Fed seems more likely to raise rates in bursts and then pause for assessment.
Oil, having initially been up over 5%, fell 3.8% after Saudi Arabia’s Oil Minister rebuffed any ideas that the kingdom and its fellow OPEC Members had begun considering production cuts to stem the rout. The stock markets were also helped after the Swiss National Bank surprised markets by introducing a negative deposit rate.
This morning on the economic front we have the ECB Current Account at 9.00 am. This is followed at 9.30 am by the UK Public Sector Net Borrowing. We have no data of note due from the US while at 5.30 pm the Fed’s Lacker speaks on the economy in North Carolina.
March S&P 500
As I have mentioned countless times over the years, you have to be very careful when we have a Contract Expiration such as we have today with the December S&P going off the boards at 2.35 pm. For example, back in 2008 the September Contract was expiring and the S&P rose 160 handles between Thursday and the expiration on Friday as every short position was squeezed. Following this massive rally the S&P collapsed after the US Markets opened – it is one lesson that I have not forgotten. I am not saying that the same thing is going to happen today but the risk reward strategy is to short this market near 2.30 pm with a tight stop.
By the time I posted yesterday morning the S&P was already trading at the top of my sell level at 2030. Soon after I went short at this level I was quickly stopped out for a small loss at 2034 and I am now flat The movement in the last 15 minutes of trading was staggering with the Cash S&P closing at 2062 implying a futures price of 2055 and yet we traded up to 2075 overnight. Yesterday’s move has left a massive ‘Open Gap’ from the close on Wednesday at 2007 to yesterday’s low at 2029 which I would expect to be filled sooner rather than later.
Today I will look to go short on any rally back in small size to 2073/2080 with a 2085 stop or else I will look to go short at 2.30 pm with a six handle stop. It is amazing that the S&P traded up to 2075 overnight to a new all time high. My only interest in buying this market is on a sell-off back to the ‘open Gap’ where I will be an aggressive buyer but I will only look at this if we trade back to this level.
Euro/USD
After I posted yesterday morning the Euro traded lower to my 1.2280 buy level. I am still long and today I will raise my stop on this position to 1.2245. If I am stopped out of this trade I will be a more aggressive buyer in front of 1.2200 with a 1.2165 stop.
US Dollar Index
No change as I am still a seller from 89.85/90.15 with a 90.35 stop.
March DAX
Thankfully I have not been short any of these stock markets over the last few days especially with the Dax trading 8% higher off its last Tuesday low. The Dax is getting very expensive again and today I will be a small seller from 9920/9950 with a 9980 stop. My only interest in buying the Dax is on a dip to 9740/9780 with a 9690 stop.
March FTSE
The FTSE just missed my 6290 buy level by three points before having a 200 point rally and I am still flat. Today I will be a small seller on any further rally to 6490/6530 with a 6560 stop. My only interest in buying the FTSE is on a drop to 6350/6380 with a 6325 stop.
Dow Rolling Contract
What can I say about the Dow over the last 10 days! The market falls 925 points and looked like the World was over especially with the awful price action close into the end of last Tuesday’s trading session only for it turn around and rally 850 points to the overnight high at 17900. The Dow is again approaching all-time highs which is incredible when we only barely have a positive reading for the McClellan Oscillator at +12. Today I will be a small seller from 17930/17980 with a 18020 stop. I do not want to be long the Dow at this time.
March BUND
The Bund short trade finally worked out with this morning’s sell-off as I have covered my 155.10 short position at 154.60 and I am now flat. Today I will again be a seller on any rally back to 154.90/155.20 with a 155.40 stop.
Gold Rolling Contract
Gold has traded in a narrow range yesterday. I am still flat and today I will raise my buy level slightly to 1182/1190 with a 1175 stop.
Silver Rolling Contract
No change as I am still long Silver at 15.80 with the same 15.45 stop.
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