Fed Inspired Risk On Trading

Market Summary

The rebound in stock prices and the new record highs set by the S&P 500 and the Dow Jones Industrials have had a positive impact on money managers. Other investors are encouraged by the sustained economic growth. A view that there is no viable alternative to stocks is contributing to the optimism. Giving reason for caution or pessimism is global economic uncertainty, the prevailing level of valuations and concern about corporate earnings growth. The presidential election and monetary policy are also impacting investor sentiment. Last week we reported "…The equity market is telling you the second quarter economy looks better than the first quarter," said Art Hogan, chief market strategist at Wunderlich Securities in New York. He said if earnings season, which begins in earnest next week, provides investors with a strong outlook; the S&P will likely break the record and has a chance at rallying from there. "The old high has been resistance and if you break it and see earnings growth and relatively good guidance, people will probably try to get in front of that," said Hogan…” In the 3^rd quarter graph below investors are trading “risk-on”, reversing the trend of buying safe-haven assets like gold and bonds and aggressively investing in all types of equities.

  

Trading Strategy

"The Fed is playing a huge part in this rally," says Sheraz Mian, head of research at Zacks Investment Research. Fears of a Brexit driven economic slowdown, which would put further pressure on earnings, have nevertheless (paradoxically) given investors a reason to buy stocks, Mian says. Investors would much rather buy high dividend paying stocks instead of continuing to hold U.S. government bonds paying historically-low interest rates. Over the next few weeks we will find out whether last week’s forecast comes to fruition when we stated “…According to the Stock Trader’s Almanac the average price tendency is for a summer sell-off that usually begins in mid-July and lasts until mid-October…Mid-July is also when we typically kick off earnings season, where a strong early month rally can fade…If this analysis plays out that might be another opportune time to bid on shares…” “We have had a really, really good week, and the market is getting tired,” said Mark Kepner, managing director of sales and trading at Themis Trading. “But bonds sold off a fair amount and the rally in stocks seems a bit long in the tooth. A pullback from here would not be surprising.”

By Gregory Clay

Trading Strategist