T2108 Status: 15.8%
T2107 Status: 15.7%
VIX Status: 22.5
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #13 under 20%, Day #16 under 30%, Day #32 under 40%, Day #36 below 50%, Day #51 under 60%, Day #392 under 70%
Commentary
Will the U.S. Federal Reserve deploy its typical forces of anti-volatility? Or will the Fed put on some blinders to the ugliness in financial markets and charge forward with talk of rate hikes and policy normalization?
In the first case, the Fed acknowledges and defers to the market’s on-going push-out for the next rate hike. The odds are now borderline for a July rate hike at 51.5%. I added September given it is now the first month with significant odds for the next rate hike.
Source: CME Group FedWatch
The market is now pushing out the next rate hike as far out as September.
If the Fed hints it is fine with the current set of market expectations, I fully expect a major sigh of relief that could create a rally strong enough to put a quick end to the current oversold period. T2108, the percentage of stocks trading above their respective 40-day moving averages (DMAs) closed the day at 15.8% – just under 5 percentage points away from the 20% oversold threshold.
A Fed-inspired sigh of relief should at least grease the skids for a volatility index that is finally cooling off a bit. The VIX is still holding onto support at its uptrending 20DMA, but it looks ready to take the next step lower given Tuesday’s (January 26, 2016) decline.
The volatility index is still holding up after last week’s major fades at resistance and subsequent gap down.
I positioned for Fed relief by purchasing a fresh tranche of put options on ProShares Ultra VIX Short-Term Futures (N:UVXY) expiring this Friday. This position is pitted against a second round of shorting a Feb put option as a hedge on future volatility. The chart below compares the current period to the same period a year ago. Note how August, 2014 led to an extended period of an elevated UVXY. It did not resume its “natural” downtrend until late February, 2015. The large surge in trading volume is partly a result of the lower share price and partly a result of the heightened fear in the market.
Will ProShares Ultra VIX Short-Term Futures (UVXY) repeat last year’s history?
The second Fed case features guidance to tease the market toward expecting earlier rate hikes. Such a move should cause fresh hand wringing about the potential willingness of the Fed to get “hawkish” just as the global economy is falling apart. In this scenario, the market should experience sudden regression: volatility should spike, T2108 should descend all over again, and the S&P 500 (N:SPY) would lose the little momentum it has obtained since last week’s bottoming action.
The S&P 500 (SPY) is finally experiencing some stabilization as it moves away from the downtrend channel defined by the lower-Bollinger Bands.
On the currency front, I have cleared space in my positions to buy any dip in the U.S. dollar index (DXY0). Last week, I discussed the Canadian dollar (N:FXC) in “The Canadian Dollar’s Rapid Devaluation: A Precarious Predicament for the Bank of Canada.” Since then, the Canadian dollar’s post-Bank of Canada strength continued as expected. On Tuesday, USD/CAD got “close enough” to the 1.40 target for me to close out the position and take profits. I am VERY keen to get back on trend (long USD/CAD), and I will be a buyer on a dip toward or to 1.40. This level now happens to coincide with 50DMA uptrending support.
The Canadian dollar (FXC) has strengthened sharply over the past week (USD/CAD weakness) partly thanks to the Bank of Canada.
In my previous piece on the Canadian dollar I failed to acknowledge the likely contribution of the current surge in oil prices from recent lows. That rise continued on Tuesday and seems to confirm my claim that the United States Oil ETF (N:USO) has printed a bottom that should last longer than previous bottoms.
United States Oil ETF (USO) is starting to build an ever so slight uptrend from the recent all-time low. This bottom SHOULD last for a considerable time.
To summarize, I am thinking of the latest Fed trade as a binary trade. Either the Fed sticks to market expectations, or the Fed tries to convince market to price in an earlier rate hike. These options encompass the Fed’s simple calculus for hiking rates according to market expectations. If the Fed agrees with the market, the market will act agreeable. If the Fed starts a fight, the market will bite (before budging). I am expecting agreeable behavior but bracing for the bite. I do not expect the immediate reaction to be a lasting one. Very quickly, I think the market will return its attention to its on-going obsession with China, oil, and now earnings season.
Just in case you were wondering again, yes, the sky is STILL falling in China. The Shanghai Composite Index (SSEC) plunged over 6% on Monday to levels last seen in 2014. At least the U.S. stock market is standing firm in the face of this latest wave of selling.
Here are three charts to whet the appetite, so to speak. The first two are particular potential for new swing trades that become even more interesting once T2108 exits this oversold period.
Coach Inc (N:COH) (COH) is pressing against resistance at its 200DMA. Earnings may provide the force to reach escape velocity. A launch from here would extend the current choppy uptrend from recent lows.
Weight Watchers International Inc (N:WTW) clings to 200DMA support just as it reversed all its incremental post-Oprah gains. Oprah came to the rescue again.
Don’t look now: SPDR Gold Shares (N:GLD) is making another run at stubborn 200DMA resistance.
The push-out of rate expectations is likely helping to push gold off recent lows…
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)
Weekly T2108
Be careful out there!
Full disclosure: long SVXY shares, long and short UVXY put options, long SSO call options, long SSO shares, short USO call and put options and long call options, long WTW call options, long FXC, long GLD