x
Breaking News
0

A Post-Fed Market Still In Bullish Position

By Dr. Duru Stock MarketsJun 19, 2017 06:28AM ET
www.investing.com/analysis/a-post-fed-market-still-in-bullish-position-200195878
A Post-Fed Market Still In Bullish Position
By Dr. Duru   |  Jun 19, 2017 06:28AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

AT40 = 56.7% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 57.5% of stocks are trading above their respective 200DMAs
VIX = 10.4 (volatility index)
Short-term Trading Call: cautiously bullish

Commentary
The Federal Reserve gave the permission to the stock market that I awaited…well, sort of.

On Wednesday, June 14, 2017, the Federal Reserve issued its latest statement on monetary policy. The statement included another rate hike of 25 basis points (.25%) and the official launch of the Fed’s effort to reduce the size of its balance sheet. During the Q&A period, Fed Chair Janet Yellen had the opportunity to knock down stocks but instead took a pass:

“We have certainly noticed the stock market is up considerably over the last year. That usually shows up in financial conditions indexes and is an important reason why some of them show easier financial conditions.”

With the Fed ever so slowing tightening monetary conditions, Yellen could have easily noted a relative loftiness of stock valuations.

The S&P 500 (SPY (NYSE:SPY)) ended that day flat but lost a few points going into the end of the week. Its 20-day moving average (DMA) uptrend held up as support. Another Bollinger Band® (BB) squeeze seems underway, but I am guessing the index is in for an extended period of consolidation until at least earnings next month. Investors will likely want to confirm all is well (or not) on the earnings front before making any decisive post-Fed moves.


SPY Looks Like It Has Started Another Consolidation Period
SPY Looks Like It Has Started Another Consolidation Period

The S&P 500 (SPY) looks like it has started another consolidation period that will include marginal all-time highs.

For the first time in a while, the NASDAQ is under-performing the S&P 500. The tech-laden index has yet to mount a serious reversal of the big 1-day sell-off from June 9th. Its 50-day moving average (DMA) is still holding as support; the same for the related PowerShares QQQ Trust Series 1 (NASDAQ:QQQ) which represents the biggest 100 stocks of the NASDAQ.


NASDAQ (and QQQ) is holding support at its uptrending 50DMA.
NASDAQ (and QQQ) is holding support at its uptrending 50DMA.

Despite a sudden and sharp 1-day plunge, the NASDAQ (and QQQ) is holding support at its uptrending 50DMA.

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, fell from its high pre-Fed perch of 64.2% and closed the week at 56.7%. This performance is still impressive given the recent calamities in big cap high-tech. AT40 did not get quite close enough to overbought status (above 70%) for me to declare this pullback a bearish moment. AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, is performing similarly to AT40.

To underline the overall strength of the market, the volatility index remains comfortably seated in extreme lows. Each visit above 12, and even each stretch to solid intra-day gains, has been met with a subsequent implosion of volatility. In the wake of the Fed on Thursday, I departed from my strategy of quickly locking in profits from my call options on ProShares Ultra VIX Short-Term Futures (NYSE:UVXY). I thought maybe, just maybe, the market might churn further, even if just for one more day, in angst over the implications of the Fed’s latest move. I am now sitting on a small loss as a sharp reminder to stick to the script!


 the VIX, has a path of least resistance to 14 year lows
the VIX, has a path of least resistance to 14 year lows

The volatility index, the VIX, has a path of least resistance…down to 14-year lows!

UVXY continues to be attracted to all-time lows
UVXY continues to be attracted to all-time lows

The ProShares Ultra VIX Short-Term Futures ETF (UVXY) continues to be attracted to all-time lows like a moth to a flame.

There are a lot of sub-themes I want to cover for additional color on the market and for my strategy going forward (for at least the next month or so until earnings). I have divided these into sections.

Tech stocks
As I stated in a prior post, I used the swoon on big cap tech to trade the call options and/or shares of PowerShares QQQ Trust (QQQ), Apple (NASDAQ:AAPL), and NVIDIA Corporation (NASDAQ:NVDA). Seeing AAPL continue to weaken, I decided on Thursday to speculate on a hedged (swing trade) approach. I bought call options on Alphabet (NASDAQ:GOOGL) and put options on Netflix (NASDAQ:NFLX). While I eked out a small gain in GOOG, NFLX was a complete bust as it rallied into the end of the week – the exact opposite of what AAPL did.


AAPL has yet to recover form the swoon in big cap tech stocks
AAPL has yet to recover form the swoon in big cap tech stocks

Apple (AAPL) has yet to recover form the swoon in big cap tech stocks.

NFLX: broke down below 50DMA support
NFLX: broke down below 50DMA support

Netflix (NFLX) broke down below 50DMA support but sellers have yet to follow-through. Based on trading volume, buying interest is starting to take shape over selling interest.

GOOG has yet to test uptrending 50DMA support
GOOG has yet to test uptrending 50DMA support

Alphabet (GOOG) has yet to test uptrending 50DMA support. However, sellers still have the advantage in trading volume.

It just so happened Amazon.com (NASDAQ:AMZN) was the best big cap tech stock to play for the week. On Friday, AMZN even came within $0.25 of returning to the psychologically important $1000 level. I wish I had AMZN call options in play, but at least I did not leave the AMZN story of the week empty-handed.

Retail/Groceries
The biggest news from Friday was the move by Amazon.com (AMZN) to buy out Whole Foods Market Inc (NASDAQ:WFM). AMZN offered to buy WFM for $13.7B in an all-cash deal. While this deal sent WFM soaring 29.1%, the truly remarkable reaction was the parallel 2.4% gain in AMZN which added about $11.1B in market cap.


WFM completes breakout from extended consolidation period
WFM completes breakout from extended consolidation period

Whole Foods Market (WFM) completed a breakout from a very extended consolidation period. Ironically enough, M&A speculation was rampant at the beginning of this period.

AMZN 50DMA survived as firm support in big cap tech stocks
AMZN 50DMA survived as firm support in big cap tech stocks

Amazon.com (AMZN) essentially purchased WFM for “free” with a 2.4% gain in its stock as a reward for offering to buy WFM. AMZN’s 50DMA survived as a firm support for the swoon in big cap tech stocks.

The stock market essentially made the deal a no-brainer for AMZN as the company received WFM almost for free. Yet, industry-wide there were PLENTY of costs which turned the AMZN/WFM gain into a giant sucking sound. Nightly Business Report delivered extensive deal coverage that outlined a slew of casualties. The collateral damage ranged from grocery stores…


Amazon’s offer for Whole Foods Market
Amazon’s offer for Whole Foods Market

Grocers suffered substantial losses on the day thanks to Amazon’s offer for Whole Foods Market.

…to any store which sells food: trading down on heavy volume were Wal-Mart (NYSE:WMT) by 4.7% although up notably from its low of the day, Costco (NASDAQ:COST) by 7.2%, and Target Corporation (NYSE:TGT) by 5.1% which was down as much as a whopping 12.4% at its low of the day (I wish my trading radar was up on THAT move!).

…to packaged goods companies which now face potentially tougher negotiations from a robust Amazon grocery business… Hershey Company (NYSE:HSY) lost 2.7% (my buying radar is up!), Kellogg Company (NYSE:K) lost 1.7%, and Mondelez International Inc (NASDAQ:MDLZ) lost 1.5% all on heavy trading volume.

…to shopping center REITs which include grocers as tenants, considered by many to be stable renters…


Ripple Effect
Ripple Effect

Shopping center REITs took major hits thanks to the Amazon offer for Whole Foods

Even payment processor Vantiv Inc (NYSE:VNTV) took a 3.8% hit on high volume because presumably it will lose business due to the combined AMZN/WFM entity. The one sliver of sympathy benefit came from Impinj (PI) which soared 19.1% on high volume. This is a gain I will not chase: the move seems like an extremely speculative bet on a gain in business from WFM transactions that will presumably use RFIDs (Radio Frequency Identity tags) thanks to Amazon’s prowess in inventory automation. PI went public a year ago. The stock now sits at a fresh all-time high.


PI soars to new all-time high thanks to the Whole Food deal
PI soars to new all-time high thanks to the Whole Food deal

Impinj Inc (NASDAQ:PI) soared to a new all-time high thanks to the Amazon for Whole Foods deal.

The ironic component of the market action was the large dip in WFM the previous day. Presumably in sympathy with a poor earnings report from Kroger Company (NYSE:KR), WFM plunged 6.7%. KR sank 18.9%. I happened to be holding a substantial amount of WFM stock from an accumulation I made after fresh buyout talk/rumors in April. If I had not just gone through a similar situation with Nordstrom (NYSE:JWN) where that stock plunged ahead of fantastic news and a big one-day jump, I would have cut my losses and bailed on WFM. Instead, I bit my lip, ground my teeth, and held. Thank goodness I did. I sold my shares into the post-Amazon gap up.

On Friday, I decided to start accumulating KR. The grocery business has been a rough business for a very long time. It has gone through cycles like the current one. Sure AMZN is poised to put a new twist on the competitive pressure, but the history for grocers is one of adaptability. To start my bet on a future rebound, I sold a single put option on KR expiring in January, 2018. I will be looking for additional opportunities to accumulate (likely using long-term call options). I have yet to figure out how to play the rest of the ripple effects of AMZN/WFM, but I strongly suspect some good value will emerge from the rubble. There are likely even good pairs trades in the mix.


KR Suffers A Double Whammy
KR Suffers A Double Whammy

The Kroger Company (NYSE:KR) suffered a double whammy on its way to losing as much as a third of its value in two days. Buyers stepped in at Friday’s lows in a move that looks like an early attempt at bottoming.

Amazon
Amazon

Autos
In an earlier Above the 40 post, I introduced my thoughts on plays in the market for used cars. Since then, I made major changes to my positioning. With earnings approaching on Wednesday, June 21st for CarMax Inc (NYSE:KMX), I decided to take a small profit in my short position. I will be watching the results closely and looking for a reason to get short again. I also took profits and sold my latest tranche of shares in Carvana (CVNA). With CVNA trading above its upper-Bollinger Band (BB), I figured it would pull back, and I would buy back shares relatively quickly. That trade turned out to be premature in a big way. CVNA is up another 27% and running!


CVNA
CVNA

Carvana Co (NYSE:CVNA) is on the verge of going parabolic in the wake of an earnings report that has clearly excited investors and traders.

The spin-off Cars.com Inc (NYSE:CARS) finally showed some life. On Friday, CARS jumped 3.2% off its lows on slightly higher volume. I am still looking for this stock to challenge, and then surpass, its highest trading level to-date.


CARS: Is this the beginning of recovery from a brief pullback
CARS: Is this the beginning of recovery from a brief pullback

Cars.com (CARS) finally stirred again. Is this the beginning of a recovery from a brief pullback?

Snapchat
Snap Inc (SIX:SNAPC)deserves its own section. I covered my last short position on June 7th as I figured SNAP was “close enough” to its IPO price and thus presented a poor risk/reward for staying short. Moreover, margin interest continued to creep higher. I think when I locked in profits, interest charges had gone up as high as 32% (annualized). I am now 100% long again as I fully speculate that by next earnings SNAP will figure out a way to re-excite investors and traders about its shares (perhaps with some timely help from underwriters). I just hope the stock does not break below its $17 IPO price again: otherwise SNAP could be launching through earnings from much lower levels. Also at stake will be pricing the deluge of shares sure to come after insider lock-ups expire starting sometime in September (I assume).


SNAP
SNAP

Snap, Inc. (SNAP) closed the week with a 3.2% pop, but the stock is in a precarious position now that it managed to close below its IPO price (every post-IPO bull is now a loser in this stock).

Fed Rate Trades
Now I bring things all the way back to where I started…the Fed. As has been the case for some time, the market reacted to the Fed’s rate hike in exactly the opposite intended direction: long-term rates decreased further. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) gapped up above 200DMA resistance and closed at its highest point since election day. TLT seems perfectly poised to join the long and growing list of Trump trades that have completely reversed.

TLT Gained From The Fed Hike
TLT Gained From The Fed Hike

The iShares 20+ Year Treasury Bond ETF (TLT) GAINED from the Fed’s rate hike and has confirmed a bullish breakout above 200DMA resistance.

The decline in rates made the going tough for financials. The Financial Select Sector SPDR (NYSE:XLF) remains in a bullish breakout from a previously ominous head and shoulders pattern. Yet, XLF has also failed to follow-through on the breakout.

XLF Still Looking For Follow Through
XLF Still Looking For Follow Through

The Financial Select Sector SPDR Fund (XLF) is still looking for follow-through on its bullish breakout.

Strangely enough, gold (GLD (NYSE:GLD)) and iShares Silver (NYSE:SLV) failed to gain from the decline in interest rates. Both precious metals gapped higher along with TLT and maintained a correlation that I would expect. Yet both faded hard into the day’s close and closed the week with a slight post-Fed loss. I will be watching this divergence closely for a new opportunity to execute pairs trades.


GLD Struggling To Hold 50DMA Support
GLD Struggling To Hold 50DMA Support

The SPDR Gold Trust (P:GLD) is struggling to hold 50DMA support.

SLV: confirmed resistance at its now downtrending 50 and 200DMAs
SLV: confirmed resistance at its now downtrending 50 and 200DMAs

The iShares Silver Trust (NYSE:SLV) confirmed resistance at its now downtrending 50 and 200DMAs.

And then there is the U.S. dollar index. The dollar had to rally off its intraday low to close flat on Wednesday. The dollar rallied the next day and sold down on Friday. It sits on a very marginal post-Fed gain that I am betting will melt away in due time with the dollar index returning to its previous (grinding) downtrend.


DXY0 churning below its level from its close on election day
DXY0 churning below its level from its close on election day

The US Dollar Index is churning below its level from its close on election day.

Note well that the market disagrees with the Fed on the timing for the next rate hike. Yellen is still talking up at least one more rate hike this year. The 30-day Fed Fund futures say another rate hike is not coming until at least March, 2018; this behavior may explain how and why long-term rates decreased. From the transcript

“The median projection for the federal funds rate is 1.4 percent at the end of this year, 2.1 percent at the end of next year, and 2.9 percent at the end of 2019, about in line with its estimated longerrun value. Compared with the projections made in March, the median path for the federal funds rate is essentially unchanged.”


30-Day Fed Fund Futures Market
30-Day Fed Fund Futures Market

Despite another Fed rate hike and messaging indicating another should come this year, the 30-Day Fed Fund futures market has pushed out the 50/50 point on the next rate hike from January to March!


Source: CME FedWatch Tool

Finally, here are snippets from the rest of the transcript that I found of greatest interest:

    • The Fed admits inflation remains surprisingly low but insists inflation has to increase given other economic conditions…

“Our statement indicates that we expect inflation to remain low in the near term. But on the other hand, we continue to feel that with a strong labor market and labor market that’s continuing to strengthen, the conditions are in place for inflation to move up. Now, obviously we need to monitor that very carefully.”

    • Business people and consumers have yet to plan for any economic impact from President Trump’s wishes for fiscal policy…

“I would say that based on my observation of actual spending behavior and my discussions with our wide range of contacts that I haven’t seen very much evidence that thus far expectations of policy changes have driven substantial changes in either consumer spending or investment spending.”

    • Monetary policy remains accommodative…

“We’re not moving so aggressively as to put a break on continued improvement in the labor market.”

    • No one has any good idea on where the neutral Fed rate sits…

“And also the fact, we’re quite uncertain ourselves about what the likely– what the evolution will be of the neutral federal funds rate. So, we do try to write that down and provide the public with information about our current expectations. And the median now stands at around 3 percent but we have uncertainty about that. Many of my colleagues, and I, think that the current neutral level is lower than that. And as I said in my opening statement, the fed funds rate path reflects an expectation that that neutral rate will be moving up some in future years. But that remains uncertain and I think that’s something that market participants are trying to assess and we will be as well.”

    • Balance sheet reduction will have no market impact…(emphasis mine)

“So that when this plan does go into effect, no one is taken by surprise and market participants understand how this will work. I think that we– the plan is one that is consciously intended to avoid creating market strains and to allow the market to adjust to a very gradual and predictable plan. My hope and expectation is that when we decide to go forward with this plan, that there will be very little reaction to it, that it’s clear how we intend to proceed and that this is something that will just run quietly in the background over a number of years, leading to a reduction in the size of our balance sheet and in the outstanding stock of reserves, and that it’s something that the committee will not be reconsidering from time to time. We think this is a workable plan and it will, as one of my colleagues, President Harker described it, it will be like watching paint dry, that this will just be something that runs quietly in the background.”

    • The best estimate for the launch of balance sheet reduction is “soon”…

“…if the economy evolves in line with our expectations which, you know, we will be watching, always are, we could put this into effect relatively soon.”

    • Dodd-Frank regulations have not impeded credit growth…

“…with respect to the impact of credit conditions and bank regulation on slow growth, I previously in testifying indicated that I don’t think that our regulations have played an important role at least broadly speaking in impeding credit growth and the growth of the economy. And I’ve pointed in the past to a number of statistics suggesting that credit growth continues to be healthy, including among small– smaller community banks that are most concerned with regulatory burden.”

“Above the 40” uses the percentage of stocks trading above their respective 40-day moving averages (DMAs) to assess the technical health of the stock market and to identify extremes in market sentiment that are likely to reverse. Abbreviated as AT40, Above the 40 is an alternative label for “T2108” which was created by Worden. Learn more about T2108 on my T2108 Resource Page. AT200, or T2107, measures the percentage of stocks trading above their respective 200DMAs.

Active AT40 (T2108) periods: Day #339 over 20%, Day #153 over 30%, Day #20 over 40%, Day #7 over 50% (overperiod), Day #2 under 60% (underperiod), Day #99 under 70% (corrected from June 9, 2017 post by doing complete recount!)

Daily AT40 (T2108)

Daily AT40 (T2108)
Daily AT40 (T2108)

Black line: AT40 (T2108) (% measured on the right)

Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%)

Weekly AT40 (T2108)

Weekly AT40 (T2108)
Weekly AT40 (T2108)

Be careful out there!

Full disclosure: long AAPL call options, long NVDA call and put spread and shares, short KR put option, long GLD, long SLV, long CARS, long JWN call options, long XLF call options

A Post-Fed Market Still In Bullish Position
 

Related Articles

A Post-Fed Market Still In Bullish Position

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

 
Are you sure you want to delete this chart?
 
 
Replace the attached chart with a new chart ?
Post
Post also to:
1000
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
 
Replace the attached chart with a new chart ?
Post 1000
Please wait a minute before you try to comment again.
 
 
 
Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Add Chart to Comment
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.