We are likely in for an interesting debate ahead. Central Banks lower policy accommodation to astonishing levels and then suggest that markets might be a touch expensive. Funny that. The warning from the Fed Chair Janet Yellen was heeded late yesterday, with US equities lower and Bond Yields higher across the board. The rally in Oil and the move lower in the US Dollar continues with the Euro benefitting most from the carry trade unwind.
Fed Chair Yellen was responding to a panel question when she noted that equity market valuations might be ‘quite high’. She then went on to note that Bond Yields were also ‘very low’ and that there might be ‘dangers there’. She warns that we might see a sharp jump in Yields when the Fed raises Interest Rates.
The distortions in the markets which arise from extremes in policy accommodation have been pondered for some time now but we are likely getting to the pointy end of the debate. How to extricate yourself from such policies without causing a rapid re-pricing in markets is the question. We do not want a ‘taper tantrum’ but neither can we see Rates on hold forever – which can create overvaluation in Assets, it is a tangled web.
Markets are testing out the possible implication and we continue to see Bond Yields rise sharply. One of the additional explanations of yesterday’s move is the stabilisation of Oil prices which raise inflation expectations. And in the Currency World, the narrower Yield differential to the US, and higher volatility, means an unwinding of short EUR trades. The EUR has recovered the ground it lost from February and this process was helped by some modestly positive news from Greece and better Services PMI data.
On the downside for US risk assets, was the poor ADP Employment data which came in at 169K versus last month’s 185K rise. Interestingly the Fed’s Lockhart noted that a possible interest rate hike was still ‘reasonable’ in September. So while the data remains mixed as we move on from the Q1 weather distortion, the first baby steps towards normalisation are still in play thus keeping volatility supported.
Today the big news is the UK General Election with Polling Stations already open and not due to close until 10.00 pm. We have no economic data of note due from either the Euro-Zone or the UK while at 1.30 pm we have the US Weekly Jobless Claims. Finally at 8.00 pm we have US Consumer Credit.
June S&P 500
The S&P plan worked out very well yesterday as both my sell level and buy level both got triggered on what was another very volatile trading session. Yesterday after I posted the S&P traded higher to my 2091 sell level with a 2093.75 high before selling off aggressively on the awful ADP Employment Report which enabled me to cover this short position at 2082. Subsequently the S&P dropped to my 2075 buy level with a 2071 low before having a nice rally initially of this key support range which enabled me to cover this long position at 2082 and I am now flat. After I covered this position the S&P got smashed on the Yellen comments that the Stock market was overvalued which saw the S&P trade as low as 2061 before rebounding on the comments from Fed Member Lockhart who still sees a first Rate Hike in September. I must confess to growing more and more bearish in relation to the stock market as the market is continuing to make lower highs. However so far when we see a sell-off in the market it does not last very long as buyers keep returning. For me to start to put on a more long-term short position I still need to see the S&P close below the now crucial 2035/2040 support area. Today I will again be a small seller on any rally higher to 2076/2082 with a 2086 stop. My only interest in buying the market is on a test of yesterday’s lows from 2058/2063 with a 2053 stop as I would then expect the S&P to stabilise ahead of tomorrow’s now really key Non- Farm Payrolls Report.
EUR/USD
I was very lucky yesterday as shortly after I posted the Euro traded lower which enabled me to cover my short 1.1260 position from early yesterday morning at 1.1210 and I am now flat. Subsequently after I covered the Euro rallied nearly 2% as one short position after another is forced to cover their position. Incredibly the Euro has now rallied 8 big figures in just three weeks and is now short-term overbought as it trades at the top of its Bollinger Band and Williams Index. Today I will again be a small seller on any rally higher to 1.1360/1.1420 with a 1.1450 stop. My only interest in buying the Euro is on a dip to 1.1190/1.1230 with a 1.1160 stop.
June US Dollar Index
Thankfully I moved my stop higher on my 94.85 position to 94.50 as soon after I posted I was stopped out of this position for a small loss and I am now flat. The Dollar has now weakened by nearly 6% since making it high in early April and given the fact that the market is now oversold I will again look to buy the Dollar on any further sell-off to 93.60/94.00 with a 93.20 stop.
June DAX
The DAX plan also worked well as shortly after I posted the DAX was getting hit hard to the downside which enabled me to go long at my 11330 buy level before having a nice rally which enabled me to cover this position at 11400 and I am now flat. The DAX is down nearly 10% since the beginning of April and is of no coincidence that the DAX started to sell-off as soon as the Euro commenced its rally. The DAX has very strong support from 11170/11220 and I will be a reasonably aggressive buyer in this area with a 11130 stop. I still do not want to be short the DAX at this time.
June FTSE
This morning the FTSE is continuing to get hit hard to the downside as nervousness as to the outcome of today’s General Election continues with both main parties neck and neck in the latest Polls. The FTSE is now trading outside the bottom of its Bollinger Band and I will still be a small buyer from 6810/6850 with a wider 6750 stop.
Dow Rolling Contract
The Dow plan also worked well yesterday as shortly after I posted the Dow rallied to my 18010 sell level before getting crushed to the downside. The big question is whether this is the start of the major move lower that I have been looking for over the past two months. As everyone knows at this stage I am very concerned for this market especially with the confirmed Hindenburg Omen’s still on the clock. Given my concerns I have covered just half of my 18010 short position at 17910 and I will lower my stop on the other half to 17950. The McClellan Oscillator closed last night at -191 so we still have plenty of room on the downside if the market continues to sell-off.
June BUND
Just like the EUR/USD above I was very lucky with how the Bund played out yesterday as shortly after I posted the Bund was trading at my 154.40 buy level before having a nice rally before lunch which enabled me to cover this position at 154.80 and I am now flat. Subsequently the Bund got slammed and this theme is continuing this morning with Bund off over 700 points since its high made a few weeks ago. The Bund is extremely oversold on a Daily Basis and has major support from a wide parameter of 150.20/151.90 and I would the market to find good support in this area. Given how oversold the Bund is trading and the fact that long positions are been forced to liquidate their positions I will be a small buyer on any further dip to 152.50/152.90 with a tight 152.25 stop.
Gold Rolling Contract
I am very surprised how low Gold is trading especially with the Dollar very weak as normally when we see a sell-off in the Dollar, the precious metals start to rally. This morning Gold is trading at my 1182 buy level. I am still long but only in small size and I will leave my stop the same at 1172.
Silver Rolling Contract
No change as I am still long at 16.40 with the same 15.90 stop.
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