The market action over the last 36 hours has me thinking that we could be in for a great market for trading over the next six months to a year.
While traders can find opportunities taking sides in trending markets, it’s during the times that markets become range bound and stage significant swings
in both directions that trading approaches can really outshine long-term investors who get nowhere except whipped around.
It’s common coming out of cycle bottoms for markets to rally fuelled by improving expectations and monetary stimulus from central banks following the path of least resistance into stocks and commodities. (It’s much easier to put hot new money into the market then to lend it to individuals or businesses on Main Street). Eventually, though, this stimulus needs to be removed or central banks run the risk of creating asset bubbles.
The removal of stimulus takes the rocket fuel away and has tended to knock stocks back from overinflated levels as people find it harder to get cheap loans and have to repay. Recall that following the end of both the QE1 and QE2 programs, major US indices fell by over 10% within three months.
Stocks contracting because the easy money punch bowl has been taken away can only fall so far, however, before running into support from an improving economy as rising corporate corporate earnings reduce overvaluation.
Which of these forces has the upper hand can vary from day to day but over a period of weeks or months, they offset each other and create trading swings within sideways trading ranges. The last two decades saw this type of mid-cycle consolidation take place in 1994-1995 and 2004-2005 each time running over a period of 8-12 months.
Over the last 36 hours, we saw stocks get knocked down hard late Wednesday on indications that the Fed is likely to continued tapering through this year and could start raising rates in mid-2015 with several members expecting rates to rise to (gasp) a whopping 1.00% (ooooh) by the end of 2015.
Yesterday, however, stocks have rebounded on stronger than expected Philadelphia Fed and leading index, indicating that the US economy is accelerating out of a difficult winter, creating a positive environment for corporate earnings and potentially resource demand.
The way that these forces have driven big moves in both directions suggest that we could be moving into a range bound market that could create a number of opportunities in both directions for active swing traders to take advantage of in the coming months.
There are a number of other factors that could also spark market moves in the coming months. Seasonality may remain a significant influence on trading. While the period from now through May has historically been strong for markets the period between mid-May and Mid-October has historically been the weakest time of the year for stocks (although sometimes we get a relief rally in July around the start of earnings season).
In addition, developments in other countries can move markets. Political tensions in Ukraine can still move the markets Today, we have seen more duelling sanctions as Russia has formally annexed Crimea in response to last weekend’s vote. Gold is trading higher again along with Brent Crude although wheat remains down on the day.
China sensitive markets including the Hang Seng, China A shares, copper, AUD, CNH and the S&P/ASX all rebounded overnight as selling pressure eased and we may have seen some short covering ahead of the weekend. Japanese markets were closed for a holiday.
The loonie is rallying this morning and USDCAD
has dropped back under $1.1200 on the back of a very strong Canadian retail sales report. This provided more evidence that Canada’s economy remains robust, has rebounded from the December ice storm and January polar vortex that kept Canadians at home, and can benefit from the accelerating US economy.
Trading may remain active through the day today, with a number of FOMC members scheduled to speak. The street may look to member comments for more insight into when interest rate increases may start. Minneapolis Fed President Kocherlakota’s comments may attract the most attention though with the street looking for more insight into why he dissented to the dovish side.
Symantec fired CEO Steve Bennett, appointed an interim replacement and maintained $0.40-$0.42 earnings guidance
Nike $0.76 vs street $0.72
Fed bank stress tests 29 out of 30 banks passed. Worst case scenario for 30 banks Tier 1 capital would fall from 11.5% to 7.6%, better than the 5.5% level hit in early 2009
Economic reports released overnight and this morning include:
Fitch Ratings maintained its AAA rating on the US and raised the outlook to stable from rating watch negative.
Fitch Ratings maintained its BBB rating on Russia but cut its outlook to negative from stable.
S&P maintained its B rating on Greece and its stable outlook.
Canada retail sales 1.3% vs street 0.7%
Canada retail ex auto 1.0% vs street 0.7%
Canada consumer prices 1.1% vs street 1.0% and previous 1.5%
Australia leading index 0.2% vs previous 0.8%
NZ consumer confidence 132.0 vs previous 133.0
UK public finances (£0.2B) vs street (£7.0B)
UK public net borrowing £.B vs street £7.9B
Economic reports due later today include:
11:45 am EDT onward Speeches from FOMC members Bullard, Fisher, Kocherlakota and Stein