The Federal Reserve meeting: The market may have been expecting the Fed to “hint” at some very modest “tightening” of policy…but that didn’t happen…the Fed remained as “dovish” as ever…it seems that the Fed is “more than willing” to tolerate inflation running well above their 2% target for several months before they will start “tightening.” Therefore:
Stocks: after a very brief 2% decline on “geo-political concerns” the DJIA and the S+P have resumed their uptrend…registering new All Time Highs…long live the Fed!
US Dollar: fell modestly against most currencies.
Bonds: May start to “worry” more about inflation.
Canadian Dollar: jumped to 5 month highs on anticipation that stronger CPI and retail sales may stop Poloz from “talking the dollar down.
Gold: jumped over $40…breaching resistance levels…it appears poised to move higher.
Option Volatility: for most asset classes remained near historical lows…with stock market option vol moving to new multi-year lows.
Crude oil: Consolidated last week’s sharp gains and moved modestly higher.
What are we trading? The Driving Force behind current Market Psychology remains the anticipation of Central Bank policy/action…last week the market had “hints” from the UK and New Zealand CBs that interest rates would be rising…and their currencies rallied…this week the “dovish” tone from the Fed gave the stock market a green light to rally to new highs…while the USD fell…while “hints” from the Norwegian Central Bank that interest rate hikes would be delayed caused the Krone to tumble.
It’s a Central Bank Market: The absolutely massive “money printing” from the world’s CBs has clearly caused asset inflation in stock and bond markets…and now we have reports that CBs around the world have been directly buying equities as well as bonds!..that huge Chinese buying of European equities probably caused the Euro to be much higher than it would otherwise have been!
DEFLATION/INFLATION: Last week we wrote the following paragraph…and we want to repeat it again this week: For years we have steadfastly embraced the Gary Shilling “Age of Deflation” view…and that seems to have been correct…but…we are beginning to change our mind on that score. This past week saw Central Banks in New Zealand and Britain caution that interest rates will be rising. Current Market Psychology seems to expect that interest rates will be kept low for a long time and that any increases will be very timid. If Market Psychology changes, and begins to anticipate a shift to a more inflationary environment with higher interest rates, we could see big moves in the market.
Trading this past week: We started the week short gold but…the rally in gold the previous week had put gold price action on our “radar screen” and we covered our short positions mid-week as gold began to rally through resistance levels. We continue to hold our long US Dollar Index positions and…we are hanging onto our cheap out-of-the-money S+P puts…the trade was a “punt” and we are losing money…the puts have lost ~50% of their value and if the stock market doesn’t roll over next week we will liquidate. We have NOT moved to sell short the COMDOLS as we thought we might…we had thought that Market Psychology was underestimating how quickly the Fed might move to “tightening”…but it seems we were wrong about that…our trading is out-of-sync with the market…we need to “clear our minds” and get back in sync!
