Yesterday has been a real trading session of risk-off emanating from the US and the Twitter sphere going into overdrive over speculation around whether the President pressured James Comey – then FBI Director – to drop his investigation into Mike Flynn, former National Security Adviser, with Russia in the mix. This news is not going to go away with the Democrats agitating for copies of memos. This all comes on the heels of the sharp dive in the US Economic Surprise Index, last week’s further softness in US inflation, now politics intervening to add more noise into a market already wondering whether the US economy is slowing or not.
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For anyone following my Platinum Service it made 179 points yesterday and is now ahead by 712 points for May, having made 1276 points in April, 1335 in March, 1481 in February and 1734 in January. The previous seven months saw gains of 1351, 1971, 1582, 1142, 1782, 1682 and 2550 points respectively. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1750 points.
The result of all this was a sharp dive in US stocks, the Trump reflation trade now totally unwound as far as the big dollar and US Treasury yields are concerned. The USD is under pressure, while the VIX is up sharply, closing at 15.59, up 4.49 index points, or 46.4%. US bonds have rallied sharply, and gold is higher. The market is holding – at least for now – to an above 50% view that the Fed will still hike at the June 14 FOMC, but that priced-in probability is naturally under pressure too.
The market understands that the Fed policy is very sensitive to any material lift in market volatility. Were such volatility to continue, at the minimum the Fed would be delaying a rate rise beyond June. The Dow has dropped 374 points, down 1.78%, with a similar story for the S&P 500, the Nasdaq down a larger 2.6%. All sectors bar Utilities have declined in the S&P, while the KBW Bank Index down 4.08% and the Dow Transport Index down 3.08%. US Treasury yields have slumped, 10s down a cool 10bps to 2.22%, 2s holding up relatively, down 5.3bps to 2.22%. Gold has risen $24.80/oz to $US 1261.20, up 2.01%, WTI oil up $0.30 to $48.96.
The Bloomberg spot Dollar Index is down 0.50%, the largest gainers on the FX leader board being the yen (+1.47%) and interestingly the Kiwi (+0.78%). The Euro is up 0.47%, while Sterling and the Aussie have flat lined. The AUD has continued to trade in the lowish 0.74s ahead of today’s employment report and even after yesterday’s statement from S&P affirming Australia’s AAA sovereign rating and maintaining the negative outlook. Spot iron ore was up $1.03/t yesterday to $62.20, with met coal and steaming coal up, though somewhat less.
European economic news saw mixed news from the UK labour market report with faster than expected employment growth, record low unemployment but with slower growth in wages. Sterling rallied a little from that, also supported by USD subsequent weakness. Euro CPI rose from 1.5% to 1.9% as expected, core CPI also in line at a steady 1.2%. There was no significant US economy news.
This morning on the Economic front we already had the Australian Employment Change which came in stronger than expected with a 37.4K rise. At 9.30 am we have UK Retail Sales and this is followed at 1.30 pm by the US Weekly Jobless Claims and the Philly Fed Business Outlook. Finally at 3.00 pm we have the US Leading Index.
At 6.00 pm ECB President Draghi is speaking in the wake of the French Presidential election in Tel Aviv, though I expect him to remain quite cautious rather than spooking markets too much by sending the Euro higher on any firmer hints of slowing down ECB QE. At 6.15 pm Fed President Mester will speak on the Economy and Monetary Policy, while there is always the potential (likelihood?) for more news from the White House. Treasury Secretary Mnuchin is speaking so the market will be alert to any views he has to offer on the economy, trade, currencies and indeed the Administration’s tax and infrastructure plans, all being put to one side for now it seems.
June S&P 500
I do not ever remember a trading session when the VIX rose 46.4%. If you remember last week when I wrote about the VIX only closing below 10 in the past 28 years eleven times until we had two more last week and that this was always followed a by a major sell-off within days/weeks of this happening. Last night the VIX closed at 15.59. Yesterday’s sell-off is just an idea of the kind of volatility we can expect later in the year when in my opinion is when the real crash will start. Yesterday my S&P plan worked well with the market trading at my 2382 buy level shortly after I posted before rallying to a 2388 rebound high and this rally enabled me to cover this position at my 2387 revised T/P level and I am now flat. Subsequently I emailed my Platinum Members to re-buy the S&P at 2377 before the market again rebounded to a 2384 high and this rally enabled me to cover this position at 2381 and I am now flat. I cannot emphasise enough how important my Platinum Service especially when the markets turn volatile as I ended the day sending 5 updated emails to my members. Subsequently the S&P continued to sell-off to a 2354.50 low print which unfortunately just missed my 2352 buy level. As I have consistently said over the past few weeks all ‘’Open Gap’s’’ in the S&P get filled and now the gap has narrowed to a still wide 2345/2354.50 from before Round One of the French Election. Yesterday’s huge move lower has left another ‘’Open Gap’’ from Tuesday’s Chicago close at 2397 to yesterday afternoon’s 2384 rebound high. The S&P has very strong resistance from 2378/2384 and I will now lower my sell level to this area with a 2389 stop. I am not going to chase this market higher and I will leave my buy level unchanged at 2346/2352 with the same 2341 stop. For me to turn fully bearish I need the S&P to close below 2300 and if the market continues to sell off over the coming days I will be a very aggressive buyer from 2301/2311 with a wider 2290 stop.
As I went home last night long the Dollar Index I cancelled my sell order in the Euro. For anyone who did sell the Euro it traded into my 1.1160/1.1200 sell range with a 1.1172 high and is currently trading at 1.1125. If you are still short I would take your gain here and look to re-sell on any move higher to 1.1180/1.1220 with a 1.1260 stop. The Euro is severely overbought at this time and is due a correction. It will be interesting to see what Dragi has to say when he speaks this evening. Remember as I mentioned yesterday this 1.1200 level is massive as a break and close over this price for a few weeks opens up the possibility of a move higher to 1.20 ahead of 1.30 over the coming months.
June Dollar Index
Yesterday I bought the Dollar at 97.70 and 97.50 which has me long at an average rate of 97.60. I will now raise my stop on this position to 97.20 which is just below the 97.25 overnight low print. On Tuesday the Daily Sentiment Index slumped to 17 bulls and with yesterday’s 0.5% move lower I would not be surprised to see bullishness falling to single digits. At 17% the percentage of bulls was below its August 18, 2016 low, which was followed by a substantial rally.
My DAX plan worked well but you had to be quick. After the DAX traded lower to my initial 12660 buy level we had a quick rally to 12700 and this rally enabled me to cover this position at my revised 12685 T/P level and I am now flat. The DAX has very strong support from 12470/12530 and I will be a buyer in this area with a 12430 tight stop. Despite the negative price action I still do not want to be short the DAX at this time especially with my view that the Euro will find it difficult to break 1.12 initially.
As yesterday was a successful trading session plus the fact that I had a live lower buy level in the S&P, I cancelled my buy 7435 buy order in the FTSE. For those members who did buy the market, this morning the FTSE having traded to an overnight high at 7470 is currently trading at 7455 and I would take your gain here and go flat. Today I will only be a buyer of the market on any further dip lower to 7370/7405 with a 7335 stop. The price action for the FTSE continues to be bullish especially given the continued weakness in Sterling and for that reason I do not want to be short the market at this time.
Dow Rolling Contract
I cannot emphasise enough about the importance of the Intra-market divergence that we have had in the Dow versus the S&P since the Dow made its all-time high on March 1, at 21,169. I must say I am very concerned about the health of the consumer/borrower. The New York Fed released hard data yesterday afternoon showing that consumer debt is now higher than in 2008. We are also reading more often about financial institutions having to increase reserves to cover loan losses as underlying asset valuations are eroding. This news all fits in with my thinking that the US is close to entering a recession despite the economy being at full employment. Yesterday after I posted the Dow did rally to my 20880 target price on my 20840 long position. However when the market initially fell short of my 20880 target price I covered this position at my revised 20860 T/P level. I must confess when I covered this trade I did not expect the Dow to subsequently fall another 300 points and in the process hit my second buy level at 20710. Having read about the consumer debt levels I emailed my Platinum Members to exit any long Dow position at 20740 and I am now flat. This morning the Dow has strong support at 20500 ahead of the key support at 20390 from early April and today I will again look to buy the Dow on any dip lower to 20470/20530 with a 20435 tight stop. Given the extent of yesterday’s sell-off I do not want to be short the Dow at this time especially as we are near the bottom of the Daily Bollinger Band.
Unfortunately after I posted yesterday morning the Bund just missed my 160.35 buy level with a 160.45 low print before rallying over 100 points and I am still flat. Today I will raise my buy level to 160.40/160.80 with a tight 160.10 stop which is just below Monday’s 160.17 low print.
Gold Rolling Contract
Yesterday’s aggressive move higher in Gold has cleared the 1240/1250 previous resistance level and this area should now act as strong support. Therefore I will now raise my buy level to 1235/1245 with a 1228 tight stop.
Silver Rolling Contract
Yesterday after I posted Silver thankfully traded below my 16.86 buy level before rallying small. The rally in Silver has certainly lagged Gold which is a worry and I subsequently emailed my Platinum Members to exit any long position at 17.00. Unfortunately I emailed them again to re-buy Silver again on any dip lower to 16.55/16.85 and I am now long at an average rate of 16.72. I do not want to risk too many points on this position and I will now raise my stop to 16.40. I will also lower my T/P level to 16.90 and if this happens I will stand aside.