July 9, 2014

QE to end in October and the Rally Continues

The markets interpretation of the FED putting a date on the end of QE was more of a relief than a shock.  Seems that instead of saying interest rates are going up, the FED lessened the blow by masking that fact with putting a completion date on quantitative easing without changing earlier statements that interest rates will remain low for the foreseeable future.  Seems that the economy is progressing as expected with all parties still believing that inflation somehow remains under control.  Eventually, though, reality will catch up but until then the game of musical chairs continues.

FederalreserveDow Jones Newswires summed it up as follows:

Stocks and bonds both gained after the release of minutes from the FED’s June policy meeting.  The document reinforced the view that the FED is in no rush to raise interest rates, maintaining an accommodative stance that has helped power stock indexes to record highs this year. 

            For many investors, the news was in line with expectations.  But at the margins, investor positioning for an earlier-than-expected rate increase kept a lid on stock and bond demand in recent days. 

            When it comes to stocks, bulls point to corporate earnings growth and improvement in the labor market and other parts of the economy.  Meanwhile, returns on other assets that compete for investors’ dollars look muted, with bond yields still stuck near historic lows.  – Courtesy of Dow Jones Newswires © 2014

earningsSecond quarter earnings are gearing up with Alcoa kicking off the party on Tuesday with a favorable report and adding 5.6% on Wednesday.  It seems that current expectations lean towards more positive results and coupled with Wednesday’s relief rally after the FED announcement it appears the rally will continue towards 2000 in the SPX, 4000 in the NDX, and 17,500 in the DJIA.

Expectations will be high for AAPL (7/22), AMZN (7/24), FB (7/23), GOOG (7/17), IBM (7/17), INTC (7/15), LNKD (7/31), MSFT (7/22), NFLX (7/21), TSLA (8/06), TWTR (7/29), and WFM (7/30).  Within the financial sector BAC (7/16), C (7/14), GS, (7/15), JPM (7/15) and WFC (7/11).

Not included in the above but nonetheless just as important is the biopharmaceutical sector.  Expectations there also remain high that results will exceed expectations.


volatilityMonday and Tuesday saw the markets slip a bit.  While it might have felt intense in the heat of the moment the overall damage done was miniscule.  Volumes did increase somewhat in the futures and a few individual stocks, but overall there wasn’t a rush for the exits and after today’s FED announcement and reaction I doubt it will begin soon.  That is not to say corrections are sidelined for the time being.  Overbought readings remain at extreme levels in the DJIA, SPX, and NDX.  The RUT is the only index that has dipped below extreme overbought and generated a sell signal on the monthly chart.  The overall health of the markets remains in question as well.  There remains ample cash in the markets and earnings normally bring a capital rotation in search of yield as money managers move capital around.  The actual inflow of new capital will begin to give a clearer picture as to the longer-term health of the bull market. Notably, the summer months tend towards lower volumes, which can be somewhat deceptive with regards to total participation.  This works in both directions as well.  While volumes did expand somewhat on Monday and Tuesday, it didn’t appear that the larger players holding long positions were ready to sell and it is the absence of the larger players that continues to fuel a “buy the dip” mentality amongst short term players.

Volatility indexes saw a small pop on Monday and Tuesday, but the failure of follow through selling on Wednesday saw volatility once again get crushed particularly in the shorter term indexes such as the UVXY.

Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

Three-keysTrading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.