Opening Note:
Yesterday
As expected yesterday's action was slow and choppy in preparation for the afternoon FOMC announcement with a second consecutive Corn rally failure and a sell off in Crude Oil on a weak October contract expiration the notable early moves. It was not a shocker that The Fed did not change any key rates or enact further quantitative easing, but the statement they released suggested that easing would begin if economic conditions declined further. While the Equity markets took off on a gut reaction (or short squeeze, or over-enthusiasm) rally for the first half hour after the announcement this was not the real move to get on as it faded into the close. The rallies in Gold and Bonds (and other fixed income vehicles) were the real assets that you wanted to buy post-announcement, with the U.S. Dollar clearly the best sale. I did find it a bit curious though that despite The Fed's statement falling near the consensus that we saw market movement of that magnitude yesterday afternoon as I believe the whole market is rather jumpy, uncertain, and inconfident right now.
The Bond move was an easy one for me to understand and jump on as I believe The Fed statement supported the market from both ends. Quantitative Easing will likely involve the purchase of Bonds and if QE is to happen then we will see a decline in Economic data that should drive down interest rates. That's why I was pleasantly surprised when the initial computer algorithm response was to sell Bonds and provide a great buying opportunity. The Dollar Index sale was also logical in hindsight although I have not been on the move recently. More money....weaker dollar...easy. Predicting the Equity market's reaction is a bit more complicated though. Yes there is another round of stimulus on the horizon that can be front run, but this implies that the Economy is flat out weaker than expected and I believe also implies that valuations, future estimates, and expectations by many analysts are still over-inflated. Add to this the fact that the Nasdaq is on a sharp 15 day rally with Bullish enthusiasm near Summer highs after rallying above the 3 1/2 month range and you have another layer of complexity if it is not confusing enough. Finally, I think I grasp yesterday's Gold rally reaction fundamentally for the first time really in months. Weaker Dollar does mean Gold higher usually, but if you also take into account that the Fed is looking to protect against deflation, more purchases as a Currency reserve, and the overall uncertainty surrounding everything I think Gold was an easy buy as well. Gold continuation at this level though...we shall see.
So, coming to the conclusion that Fixed Income Bullish, Dollar Bearish, Stocks Neutral, and Gold Bullish where does that leave the Physical Commodities? The things that grow (specifically Corn and Cotton lately) have been on a tear this summer, the Industrial Metals have risen over the same time frame, and Energy prices both present and future are always in the back of Economists minds. The weaker Dollar tends to support these Commodity prices to a degree, but overall I believe that it is the global Economy and individual market fundamentals that really create price movement more than the U.S. Dollar's movement that day or month. This leads me to believe that while each specific Commodity will have its own market influences we will see these markets correlate more to the movement in the stock market more than any sort of run away inflation tied to the U.S. Dollar over the following 1 - 2 years barring any catastrophic shift in the macro fundamentals. This leaves me saying Commodity markets Neutral.
Lastly, on a brief side note...I have heard some discussion about inflation lately in regards to the Grains and Softs while The Fed still is occupied with preventing deflation. While global Food and related product demand has increased as some countries look to stockpile reserves, the real runaway markets are coming under supply shortage that has driven prices higher. The Meats, Softs, and Grains are all correlated on some basis and the fact that global Corn and Wheat yields have suffered setbacks this summer does not attribute this rise in prices to the U.S. inflation story as much as some analysts make it out to be. Take a look back at the weekly charts for the Grains and compare where the markets were in 2008 versus the Energies, Metals, and Currency markets were and you can see that the Grains may only be finally catching up to these other sectors as prices recover after the Recession. The increases in some of these markets on a yearly percentage basis may seem troubling for right now, but putting together some correlated Bullish supply markets this year does not concern me about overall inflation right now. Let's wait on the inflation cries until we see the Industrial Metals and Energies begin to rip.
Today
Dollar weaker, Fixed Income Higher, Equities slightly weaker. Disturbingly the Nasdaq is the weakness among the Equities, which is not a Bullish signal as it is the directional leader for the Sector right now. Gold is going after $1300 today. I believe that we may see a pullback on the Equity rally today as sentiment has become a bit too Bullish, so look for the Bonds to continue higher. The overall theme of Sell Dollar, Buy Fixed Income, Buy Gold, Neutral Equities & Physical Commodities will likely be recurring over the next several months.
Buys to Watch:
Bonds- Fundamental analysis in the Opening Note so just some technicals here. On the initial reaction to the FOMC announcement the Bond market sold off right into the lower volume buy level suggested yesterday between 130.19 - 130.22 while holding the higher volume support down to 130.13. The market then proceeded to rally nearly 2 full handles and has continued again this morning. Stochastics and RSI for the daily chart have already produced strong buy signals earlier this week, but it is noteworthy that RSI has maintained a Bull market range despite the 2 week break in prices. This means that it is very possible that this is in fact a new rally leg that could establish new highs on the Bullish move. For right now I have an objective of 133.29 for the market on the Bullish cup and handle reversal above the 131.20 breakout level. The market is already stronger this morning making a pullback for entry less likely, but 132.09 is a low volume level with higher volume support from 132.04 - 132.08 if the market does pull back to this level. This is my favorite and most recommended trade right now.
Nasdaq (but let's wait for a pullback)- The Nasdaq is the weakness this morning among the Equity Sector as the market continues to mull over what QE means going forward. As the Nasdaq has been the strength this morning's weakness is a Bearish signal that leads me to believe the market is due for a pullback. Both the Nasdaq and S&P 500 produced Stochastics sell signals yesterday that show momentum is waning and the Nasdaq trend from the low Sept. 8th - Sept. 15th is in trouble today at 1977.50. Support for the Nasdaq from 1973 - 1978 (which correlates to 1129 - 1131 in S&P) has held on numerous encounters, but I believe it is unlikely to hold later today. Below this there is some moderate support at 1962.50, but the real volume support for the market sits between 1950 - 1956. This 1950 - 1956 will likely correlate to the higher volume support for the S&P 500 from 1117 - 1121 and is the level that I recommend looking to buy against on a possible 1 - 2 day pullback. Long term objective for Nasdaq = 2080 - 2135.
Sells to Watch:
Dollar Index- Longer term objective of 75 handle within next 30 days. Parameters for entry to come tomorrow as the market is already much lower. Look to sell rallies.
Put on the Radar:
Crude Oil- Yesterday's October contract expiration was a debacle as the Oct. - Nov. spread plummeted out below $2 prior to the close, dragging the outright Crude market along with it. However, the spreads have come back in since yesterday afternoon signalling that a rally would be supported for the November contract. Right now I am keeping an eye on the recent Bearish trendline from the High Sept. 14th - High Sept. 21st at $75.87 today to see if it holds today. Crude remains a market weakness for the time being, so I strictly recommend selling rallies and avoiding long positions for the time being as this looks like a pullback rally on a Bear move for the time being. The conditions are still not right for me to suggest it as a sale, but keep it on your radar because it is nearly there again.
Industrial Metals (Copper, Palladium, Platinum)- Over the last week the Copper and Palladium markets have been laggards among the macro picture so I have kept a close eye on them. I know Gartman likes Copper and I still read analysts that put the market on a move above $4, but I am staying off that train for right now as it is not acting right with the Bullish Equity and Metal story lately. This morning Copper is higher along with every Commodity, but the market refused to rally yesterday even after a surprisingly Bullish Housing Starts number. I still peg the market as reaching its $3.50 head and shoulders objective and believe that it could continue to be a weakness. Palladium also reached my 3rd leg objective of $551 and has sold off since. The market is firmer this morning off of Dollar weakness, but this could further support my weaker Copper theory. Finally, the entry parameters I provided yesterday for Platinum worked perfectly although it was likely not very comfortable as it was right after the FOMC that the market rallied. Objective range for Platinum remains $1711 - $1723.
Currencies- The Dollar is WEAK after taking out the previous swing low near 80.75. As explained above I believe that the Dollar will continue to weaken and now put the market on a target of the 75 handle on a 2nd leg lower. While I believed that European weakness could become the dominant story yet again over this fall it now looks like QE for the U.S. will be the Currency leader meaning that the Euro will rally regardless of the European Economy. The Euro now has an objective of 140.50 on this possible 2nd leg rally. Finally, the Canadian Dollar has seen spiky rallies over the last 18 hours, but the Currency remains the obvious laggard this morning. There will likely be a Currency spread suggestion on the horizon to take advantage of this weakness with Long Euro/Short Canadian a possibility.
Notes:
Corn- Corn had 2 straight rally spike failures, but I still believe that the market is not done rallying yet. There is a good lower volume zone around $4.98 that I am keeping my eye on as a buy zone on a market pullback. However, with Commodity strength everywhere today on the weaker Dollar I believe that we could see an opening rally along with the rest of the Grains.
A Combination Trade That I Like But Too Tricky To Recommend:
Long - 4 Nasdaq, 2 Bonds, 1 Gold, 1 Silver
Short- 1 Crude Oil, 1 Copper, 4 Dollar Index, 2 Canadian Dollar
The explanation is intricate, but the entire trade comes out rather hedged, but takes adavantage of the strengths and weaknesses that I believe exist right now. I am not doing it personally, but I believe that if you put it on today and look at it in two weeks it will be a winner. I will "paper trade" it with entry at 8:30 am this morning and give a report in 10 trading sessions.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment