With stocks at all-time highs, Yellen had little choice but to spout waffle – which she duly did on Wednesday – so as not to induce another tantrum on Wall Street. But that didn’t stop markets going haywire on her speech. Virtually all markets were sharply higher, which makes little sense if the Fed expects to raise rates soon. To have Treasuries, stocks, crude oil, gold/silver all move sharply higher together was a sight to behold – and justified my taking profits in all markets before the blessed event.
We should all understand by now that markets are not rational – and this performance verifies that truism in spades (so stop trying to apply logic to your analysis!). But the day after the night before was another question. It usually takes two days after a major shock to bring the markets back to their senses – and to map out the next direction.
The euro was the most spectacular performer with a sudden lurch up by 5 1/2 handles to 1.1040 off Monday’s low and back down by 4 handles on Thursday – and back up yesterday. Now, that’s what I call volatility – and I took the opportunity to go long for VIP Club members on Thursday’s dip while the dust was settling.
Of course, the Fed is trying to put off the evil day when they will have to acknowledge that their ZIRP policies have not helped Main Street one jot – and have created a monster (which is getting bigger all the time). US economic data remains weak — housing starts being the latest big disappointment after the retail sales fiasco – but shares keep sailing upwards regardless.
And the kick-the-can Marx Brothers- inspired shenanigans over the Grexit comedy continues. I can’t wait for the sequel to come out. But rest assured, they will find a new lease of life in that battered old can and Grexit will be delayed even further down the line. That has major bullish implications for the euro of course.
Will the ECB stop its mad QE money printing this summer?
But another other factor which appears on the radar of few is the very real possibility that the ECB QE bond-buying programme could be stopped this summer. Yes, you heard that here first, folks. And what an outrageous proposal – even a heresy. And they have only just started printing the euros this month. Can the bureaucracy-ridden ECB turn around that quickly?
But the rumours of EZ QE in 2014/2015 have already done their primary job of deflating bond yields into negative territory so they have reached their max prices, thus enriching the hedge funds and banks in order to get them out of a big hole from the 2008 collapse – and enable bankrupt sovereigns to unload even more debt very cheaply to stave off the evil day of reckoning. This was their only intention, by the way; it was never about boosting EZ growth and jobs. That has to be done by the real economy and consumers, not by a central bank. Remember the pushing on a string theme?
Also, EZ economic growth is crawling off the basement (cheaper exports) and if the figures improve further, there will be even less incentive to keep supporting QE. After all, QE has done little for the real US economy.
But the main fly in the ointment is the rout in the EUR/USD exchange rate. The Fed must have reached maximum annoyance at the rampant dollar having decimated US corporate overseas earnings. I am quite sure they have had a quiet a word in Draghi’s ear telling him to ease off on the QE so as to strengthen the euro, which was ridiculously under-valued at the 1.05 level. Just the rumours of QE made the euro overshoot to the downside.
Naturally, if this rumour of mine catches on, the euro will take off like a rocket. Sentiment remains on the floor – the ideal condition for a massive short squeeze. I have been waiting for this for some time – and such a rumour, if more widely spread, would be dynamite. Already, we are seeing massive swings up and down in the last two days – this is typical highly emotional activity when a major trend change is under way – and can be a nightmare to trade with whipsaws common.
Apple in, AT&T out
The Dow 30 Industrials now has Apple – so look out for heightened volatility in my favourite trading vehicle. Just like Alcoa before – where VIP Club members cleaned up after it too was dropped from the Dow – AT&T has been a dullard, going nowhere. One year ago, it traded at $32 and today it is at $33.50 (52-week high = $37.50, 52-week low = $32 for a spread of 14% from high/low to median).
On the other hand, Apple has literally shot up from $75 one year ago to its Feb high of $134 – almost 100% gain.
So, what do you think will happen to Apple now it is in the Dow? Yeah, me too. Actually, that would be fitting because the chart shows a magnificent complete five waves up and any false step (see smart watch?) could reverse the trend.
If my experience with Alcoa is anything to go by, maybe an investment in AT&T would not be a bad idea. The downside must be limited. Hmmm.
How to escape unharmed from stepping in front of a steamroller? I advised VIP club members to short the Dow at 18,050 on Thursday. Market fell 100 pips thereafter, but started to rally. That was when I advised members to lower protective stop to break even – and were stopped out yesterday on the rally for zero loss. Phew! It was a classic example of the use of my break even rule in action.
With new highs yesterday (again) , the recovery has clearly not ended, but the all-time high remains the 18,280 print on 2 March.
But yesterday saw a rare triple conjunction of the solar eclipse (it was beautifully clear where I live!), a full moon and the vernal equinox. Emotions usually run high at all three events so this conjunction could well mark major turning points for many markets – could that apply to US stocks? It has certainly heightened volatility – a sure sign of high emotion among traders.
Here is hourly chart:
Since the 2 March high, there have been umpteen 300 pip plus swings. What do you make of that? Like you, I am stumped. We do have a budding mom div and the retrace has been typically deep (over 78%).
Next week should give a few more clues, so stay tuned. Eventually, the fog will clear and when it does, that will be when a tradable pattern should emerge.
For a display of even greater volatility post-Wednesday:
As you know, I have been banging on about an imminent short squeeze in the oversold euro for a while – and here it is in glorious technicolour.
This is about as textbook a reversal that I have seen in a while. I have a H&S at the lows (with pos mom div at the head), the Wednesday thrust up past the green neckline in the massive short squeeze. Then, a pull-back but only to plant a kiss on the neckline, and then zoom off upwards yesterday.
I have had targets in place for a while and now my 1.22 target is on the board.
I have similar thoughts re GBP/USD.
And if you want to receive my trades in real time as I make them, drop me an email at email@example.com and I will send you details of membership in my VIP Traders Club.
Have a great weekend!