Hope you are ready for some action. Last week’s price action was pretty weak for equities. There were concerns over emerging markets such as Argentina and Turkey. Some stories of signs of a slowdown in the Chinese economy. Earnings have not been particularly stellar save for a few exceptions. The continued expectation of the US Fed tapering their bond purchasing program. All of these factors were reported in regards to the sell off. The post sell off reaction along with a flurry of news and reports should lead to a busy week for trading. Highlights will include:
Monday – Apple Earnings, New Home Sales. Tuesday – Durable Goods Orders, Ford Earnings. Wednesday – FOMC Announcement, Boeing Earnings. Thursday GDP, Amazon and Google Earnings. Friday – Mastercard Earnings, Personal Income.
Before you go running in a frenzy, let us remember that the S&P 500 had been showing signs of not being able to break out above it’s highs. The futures have had a hard time peeping their heads over the USD$1845 water line. Perhaps this is the breather that is needed to entice new market participants to drive the index higher. Perhaps this is the start of a normal correction. Regardless it is better to be prepared than to be surprised even if you think your reasoning is sound. A two day, 3% sell off in the market should ideally have occurred 18 times in this decade so far. We have seen it 30 times already. Therefore you should be prepared to see this. Whether this is all because of the news or just a market bumping it’s head on a ceiling remains to be seen. One thing to consider is that all the “news” explaining the drop isn’t really all that new. Perhaps we are seeing more of the resistance being met more than anything else. A support point, or rather a decision point at 1765 for the S&P futures seems imminent, especially if there is any follow through on the downward price movement. From there the market can decide to rally or begin to try and find support around the 1730 level. Can a rally be a “dead cat” bounce? Possibly. However if futures can quickly get above 1806 there might be some more upside in the near future.
For the SPY traders an average week should see the range of $175.20 and $182.00
Gold has seem to have sprung to life in recent days. While all the “market fear” will make gold bulls sound smart at happy hour, gold is still in the doldrums. It is still trying to recover from touching the USD$1180 (futures) area twice since the past summer. The past summer may represent a short term bottom of that dramatic slide that began in October of 2012. A bit of a rally and a possible test of the USD$1300 level may be in order, especially if the news and sentiment of the general markets does not improve. As much as media makes the case for gold to be a safe haven, it is the trading and transactions that ultimately count. Therefore buyer beware. Gold is not a direct hedge for market turbulence and is more volatile than the S&P 500. More on this topic in a future post. Gold still has a lot to prove before it can be safe to be bullish. GLD ETF traders can in a typical week end up somewhere in between USD$119.30 and USD$125.00
Special attention will be paid to bonds as the US FOMC (Federal Open Market Committee) is set to make their statement on Wednesday. Will they continue to reduce their bond buying program that has went from USD$85 Billion to USD$75 Billion? Will the FOMC continue to taper at the same pace? Will the FOMC seek to reduce current market fluctuations and reverse the tapering? The last possibility is the least likely as the “fluctuation” really isn’t significant and would indicate that the underlying problems of the US economy may not have improved as previously reported. This would really send mixed signals to the global markets. At this point, regardless of the perception the FOMC is committed to its plan.
In any event, expect some movement in bond prices. The US ten year bond futures have had a pretty decent start to the 2014 year bucking the recent trends and numerous people declaring a bearish period in bonds. However the 10 year treasury has a lot of work to do in the face of an announcement that has the potential to really move the bond market. Bullish sentiment may set to creep in if the bond buyers can keep the 10 year futures above USD$125’28/32. However if the FOMC bond buying program is scaled back further than expected, bonds might retest recent lows. Institutional traders may try to keep the prices in check as the unwinding of spread trades could start to take place. Puerto Rico Municipal Bond issues, EM debt and currency gyrations, and FOMC mortgage purchases can all contribute to the closing out of the short bond positions that are typically in place to hedge some of those asset classes.
Always remember who the game players are in the market. Analyze what their best response would be to market dynamics.
Good luck and trade rationally.