What a holiday week we just had in the US markets. The shorter week was full of surprises and all-time highs in equities, the 3000 level in the ES futures market was finally hit and broken on the back of lower interest rates. The facts that global economic data and US economic data remained for the most part soft throughout the week was the main catalyst for global central bank dovishness. The ECB announced they will not be hiking rates when they were expected to while the US still remained on the rate cut front, softer than initially expected. As we explain below.

The dovishness was helped by the news that Mario Draghi is going to be replaced as the head of the ECB by IMF’s Lagarde, over Bundesbank’s Weidmann. While in the US, the Fed is set to cut rates and was pushed even more to do so with the uncertainty of the trade talks between the US and China. Gold futures failed to maintain the crazy bullishness and fell back into the $1400 level from $1440 highs while the USD gained some ground into the end of the week and government bond yields fell to fresh cycle lows.

Friday’s jobs numbers came out as a strong beat of the expected 162K at 224K which decreased the chance of a 50 basis point cut but increased the chances of a 25 basis point cut. While average hourly earnings missed and so did the unemployment rate. The market fell from this strong news as the expectations of a large cut decreased. If there are further surprises in economic data such as better inflation data and so on we could be in danger of losing the 25 basis point cut. The VIX rallied to 14% and the USD rallied on weaker gold into the close of the session finally getting back to a more standard equity x gold correlation.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks down 0.91%
  • Technology up 2.37%
  • Financials up 2.07%
  • Retail up 1.34%
  • Utilities up 1.66 %

Overview of key markets last week (bottom chart):

  • Crude oil down 2.63%
  • S&P500 up 2.20%
  • Silver was down 0.89 %
  • Gold down 0.30%
  • US dollar up 1.05%

The Fed’s Cut, reality or spoof?

Fed Chair Powell will make three appearances this week, two before Congress at the semi-annual Humphrey Hawkins testimony on Wednesday and Thursday and one with FOMC. The shock of the huge non-farm beat on Friday turned good news into bad news with a simple assumption that the Fed would no longer be cutting rates aggressively since economic data was firming up. Sending equity markets plummetting from all-time highs.

In last months report, the Fed removed a very key part of the language used, they would be “no longer patient” in the matter and would be ok with cutting rates should they see economic data continue to falter, this was to reflect “transitory influences”. The inflation data that came out in a decline as to what was expected the year to year 1.6% in May versus the expected 2.0% “reflect soft readings in the monthly price data earlier this year, which appear to reflect transitory influences”.

The percentage chance of a double rate cut on July 31st, or a 50 basis point cut was just over 30% prior to the non-farm announcement with the rest being a chance of a 25 basis point cut. Take a look at the Fed Watch chart below. The mega dove was stifled and the chance of a double cut fell down to 5%. While the chance of a 25 basis point cut increased to 95%. This is still very dovish, the market, however, fell due to the change from a double cut, to a single cut.

Confusingly, the Fed remained interested in cutting rates in the strong bull market we’ve ever seen and all-time market highs, the longest expansionary cycle in history and the lack of inflation was noted to be “transitory”. Yet the Fed is still interested in cutting rates twice to end the year as they apparently anticipate further weak economic figures. For more information check out the following article, Fed’s Decision.  There is a lot of pressure on the trade deal to produce better import and export data along with GDP growth difficulties in the US. The uncertainty of the trade deal is driving everyone insane, including investors and the Fed. Should the Fed cut twice as markets are over 3000, we will be in for an interesting ride.

The 3 potential Economic Bubbles.

We’ve all heard of the Dot Com bubble, and other huge market crashes due to overbuying. This time around we may see three separate bubbles, The Stock Market Bubble, The Bond Market Bubble and The Real Estate Bubble. 

Now, what makes a bubble? False inflation of a particular asset class to oversaturated buying leading to autoregulation or a market correction and even crash. In this case a potential economic recession.

The Stock Market Bubble

We’re at all-time highs, the S&P 500 futures market just broke the 3000 level and the Fed is talking about rate cuts due to weak economic data. The current bull cycle is 11 years old, however, we have had a slight correction and a temporary slip into the bear market territory into the end of 2018. This was quickly bought up by the “data dependent” Fed and all was well again. Money is pouring out of the equity markets as capital outflows are riddling 2019, larger outflows than we saw in 2008. To add to it all, margin debt is at all-time highs, global debt not to mention US debt is ever growing and supporting the bull market. Let’s face the number of stop losses that are set below certain round figures such as 2900, 2800, 2700 and so on are massive and should the slip happen those stops are all getting eaten up quickly. This means there’s a potential for a massive drop, even as investors sleep.

The Bond Market Bubble

The bond market is a massive market, larger than the equity market, and should the bond market crash we’re all in serious trouble. Why is that? Take the definition of a bond, it is a debt instrument that promises to repay the capital borrowed in annual or semi-annual installments and principal, the bond market is the debt market. Larger than the equity market and a debt market, a crash can do a lot more damage than other asset market crashes. Now guess who issues the most debt? It’s not companies, but the government, treasuries or gov-issued bonds. US treasuries are held by a lot of the worlds central bank and the USD being the worlds reserve currency, many nations have been able to maneuver this by selling US treasuries. The increased treasury dumping is increasing the size of the bond bubble which can turn into a huge problem.

The Real Estate Market Bubble

Remember what happened in 2007 that lead to the 08/09 crash? Mortgage-backed securities were in high demand and banks stuffed a lot of garbage subprime mortgages into the hands of the people which was sold through to the secondary market causing the crash and a massive recession thanks to banks which were then bailed out. Prices of homes did not manage to drop to a fair market value and are now back at crazy highs. Correction time? Well according to data and free market hypotheses, prices should have fallen at levels that are lower than these current levels so the damage could have been mitigated. Instead, artificial inflation has spiked the market and prices continue to rise.

 

Options Trade of the Week & Idea

Last week TRADEPRO Academy had a great equity options trade in the markets. Each week will we dissect the best trade and trade idea of the week. In addition, below another options trade idea will be discussed. The best trade this week was a long position on the Utilities ETF, XLU.

The following was our trade idea to TPA members:

Utilities have into a strong support level, which was prior resistance and this is a hedge trade idea. Should markets begin to slump we can see some upside in utilities and they show signs of holding here. On Friday at the slight turn to the downside that came out, XLU had a green day on strong volume. Announced on Sunday, June 30th.

The following is our options strike level idea.
-Long Idea $59.00-59.30
-Options trade of at least 90-180 days of time value
-Long Call strike at 59
-Short Call at 61-62 (skip this step if outright bullish)
-Stop below 58.60
The green box entry idea was based on the previous resistance that held time and time again and finally broke. On the way down, based on simple market structure we would expect the old resistance to turn into new support. This level comes into confluence with a trendline, another support level. On the way down, volume was weak and on the spike higher as equities hit all-time highs we got a lot of volume, cementing the upside.

July 8th to 12th Options Trade Idea

Potential AMD Options Long Idea. Long calls at the dark blue line area just under $30 could be appropriate in the direction of the trend. There is a word of warning as AMD did not manage to print a new high this week and is coming into all-time high resistance. Earnings come out July 26th so there could be an earnings continuation trade in our future. The $30 area support and entry idea comes from the previous broken high turned support and the weak volume to the downside. The 50-day moving average is also a strong support system for AMD.

Weekly Economic Calendar

A very Fed centered week up ahead, just after the non-farm numbers came out in the US, all eyes and ears will be on Fed Chair Powell and what he has to say about the upcoming meeting at the end of the month, the jobs numbers, economic data and the market. Rest assured the market will react justly.
Monday, no high impact news.
Tuesday, Fed chair Powell hits the wire pre-market, ensuring volatility even before the market opens. Watch the US equity indices during this time.
Wednesday, GDP and manufacturing production data out of the UK early in the morning. Canadian Central Bank announces overnight rate changes should there be any and addresses their monetary policy position which will move the Canadian dollar. Fed chair Powell testifies and hits the wire for the second time this week and the FOMC meeting minutes for the month are in the afternoon. What US equities this day.
Thursday, CPI data out of the US and it seems that Fed Chair Powell cannot keep away from the news as he is set to testify 30 minutes into the market’s open.
Friday, US PPI data.

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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.