Yesterday we told readers it’s “risk on”.

But then again, with respect to equities, hasn’t it been “risk on” since April last year when the S&P 500 traded at not much more than 2,000 points?

From my lens the answer is yes – as that’s when our weekly intermediate trend turned bullish.

For 68 straight weeks it has not deviated.

And this week – we kicked another leg higher thanks to both (a) stronger economic data; and more importantly (b) a patient (and dovish) Fed.

Janet Yellen isn’t about to raise rates too far too fast.

The team at the Fed are taking what I consider a very measured cautious approach to hiking rates. And whilst I think it’s great they are on the path to normalisation – they are also mindful of the risks by being too aggressive.

What’s more they are communicating quite clearly about what they plan to do (eg reducing their balance sheet in a gradual fashion).

This is important as it gives the market plenty of time to adjust.

FedEx: Proxy for (US) Economic Health

Like or hate Trump (most hate him) — it’s clear that business confidence continues to grow in the US since his election win.

And when business confidence gains traction – consumer confidence is generally not far behind.

Bellwether transport stock Fedex (FDX) is a great proxy as to the ‘health’ of the broader economy. Take a look at the weekly chart below:

FDX Weekly – July 14 2017

The parallels between FDX and the S&P 500 are strong.

For example, as we will show in a moment, it was April last year when we also saw the broader market shift greats.

Both FDX and the S&P 500 have tested the 35-week EMA as support over the past 12+ month – and both have continue to find new highs.

Recently we have watched FDX kick higher as the broader market stalled… however now it would appear the S&P 500 is looking to play catchup.

S&P 500 – Strong Week – Strong Data

After three ‘sluggish’ weeks for the market – as it found resistance at the 61.8% zone of our 21-week distribution – it caught a strong bid following dovish Fed language.

Let’s update the chart:

S&P 500 – Weekly – July 14 2017

Really not a lot to add to this week…

We are still bumping against an expected zone of overhead resistance. That’s not to say it’s what we will see (it’s held true for 7 weeks) – and things could burst higher from here.

Remember: whilst the weekly intermediate trend is bullish (as is the case today) – we should expect higher prices in the near-term.

Now as I was saying in my preface, we continue to see several strong ‘data points’ which tells me things are getting better (slowly).

For example, take manufacturer’s new orders this week:

Over the past 6 months or so – this has been forming a nice little up-trend (reversing the slide post 2014)

Second, take a look at payrolls data:

Estimated weekly hours worked (total non-farm payroll * average weekly hours) is growing steadily – and has picked up steam post the election result last November.

And whilst things are improving… fiscal reform could see this chart accelerate.

A little ideological rant for a minute…

For example, as I was saying during the weeks, corporate income taxes need to be reduced.

What’s funny is both sides of congress agree on this point.

So why not get it done?

It’s low-hanging fruit which help drive real economic traction – and yet they ‘fart about’ with things like health-care reform (an impossible ask) amongst other stuff.

For example, the healthcare industry responds poorly to politician’s ministrations, but it would likely respond productively if the excessive heavy hand of government were removed altogether.

Radical?

Maybe… leftists (and centrists) will be squirming in their chair (then again they are not likely reading this blog either!)

However, my view (until someone can show be evidence to the contrary) — free markets always beat administered markets.

Idealogical rant over…

Let’s update the weekly chart for our market (where our politicians are no better)

XJO: 35-Week EMA Strong Support

It was a bullish week for our market – set to continue those gains on Monday given Wall Street’s overnight lead.

XJO – Weekly – July 14 2017

What’s interesting (to me) is how for 8 straight weeks – the 35-week EMA has acted like a “wall” of support.

Not one of these weeks has the market been able to close below this level.

For now, our weekly trend remains bullish therefore it’s still premature to short this market. The strong buying behaviour this week will give the bulls encouragement.

Perhaps look for a move back to the top of the structure as we grind through this (small) distribution.

Putting it All Together…

Over the past few weeks – the bears regaining their voice.

However, I still feel they are premature with their enthusiasm.

Markets look pretty good with little sign of recession on the horizon. And with the Fed likely to keep rates extremely accommodative in the near-term – this is a boost for risk assets.

Furthermore, with the US dollar continuing its weekly slide, this is also acting as a tailwind for oil, most commodities and precious metals.

We remain bullish on equities…

… trade the tape

When investing in shares, you can lose you some or all of your money. The potential gains on my blog are based on investing in Australian and US markets and don’t include taxes, brokerage commissions, or other fees. It’s important you seek independent financial advice regarding your particular situation. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt – always seek independent financial advice.

6 thoughts on “Stocks Surge on Fed Language”

  1. Hi Adrian,

    You highlight that the XJO is at the 35 week EMA for 8 weeks. If you were to sell 1 month Put options, is it better to do this when it first hits the 35 week EMA, or could you still do it now 8 weeks later?
    And how do you decide how many Puts to sell? What do you have to consider?

    Also, any thoughts on WAM chart?

    Cheers

    1. Hi there Steve

      Selling puts at the 35-week EMA in a bullish trend will improve your probability of success.

      Put another way, if you sell Puts when a chart is excessively above the 35-week EMA (eg mroe than 5% higher) – odds are the chart will pull-back. And that’s not what you want if you are short puts.

      Second, on how many puts to sell?

      Simple: use my “2 & 20” rule. In other words, never risk more than 20% of your total equity on one trade.

      For example, if your portfolio is $100K, don’t expose yourself to being short more than $20K of Index options.

      If you are exercised, you will need to cash cover this position (nb: that assumes you don’t roll the position prior to be exercised).

      The other consideration I make is what’s the annualised return on this trade?

      That is, what are you being paid to take the risk?

      For example, if it’s less than 10%, I would decline.

      Options are priced on many things (time, volatility etc). As such, their prices will vary from time to time.

      If you are selling an option with 1-months expiry – what’s the annualised return you will receive for taking that trade?

      Typically I am looking for between 12% and 20% if taking the risk.

      cheers!

      1. ps: I have never traded WAM (Wam Capital)?

        Looks to be extremely illiquid – therefore subject to large price spikes.

        Not the sort of thing I would trade / own.

    1. Yes – trade volumes and market cap.

      Both are very small (eg opposite say the likes of say a Telstra, BHP, NAB, CBA, AGL, RIO etc)

      As another proxy – look at its derivative markets. I am not sure options even exist for this stock?

  2. Being keeping an eye on the Options market over the ASX Options 30, and I have to say, I can’t find the premium returns to justify the risk at this stage. I guess the US is where its at at the moment for this trade style? I’ll have a play with the annualised return system again and see if I’m missing any.

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