Japan’s Interest Rate Cut, Weak 4th Quarter U.S. GDP, and End of Month Push U.S. Equity Markets Higher

U.S. Equity Markets

If the Dow Jones Industrial Average pushes up into the 16,750-17,150 range I would be looking to short the U.S. equity markets. On this push up I would be looking to short the exchange traded funds which mirror the U.S. equity markets. SPY mirrors the S&P 500, DIA mirrors the Dow Jones Industrial Average, IWM mirrors the Russell 2000, and QQQ mirrors the NASDAQ-100. If the Dow Jones Industrial Average pulls back into the 15,500-16,000 I would be looking to buy the U.S. equity markets. On this pullback I would be looking to buy those same exchange traded funds which mirror the U.S. equity markets.

We saw an explosive rally today in the U.S. equity markets. The Dow Jones Industrial Average was up 393.66 points (2.47%), closing at 16,466.30. The Dow Jones Industrial Average was down 5.5% for the month of January, coming way off the low for the month of 15,450.56. With today’s close I do believe that we have seen the lows for at least the next 3-5 weeks. There were three big factors leading to the explosive rally we saw today.

Overnight the Bank of Japan adopted negative interest rates. With negative interest rates depositors have to pay the banks to hold their money. In theory a negative interest rates should push banks to lend more to companies which would then spend and hire. The hope is that the increasing in spending and hiring will help boost Japan’s economy which has been in a deflationary period for over 20 years. This is one of the reasons the U.S. equity markets were up today. Switzerland, Sweden, and Denmark are currently the only other countries with negative interest rates. A couple weeks ago one Federal Reserve official even said that if the economy weakened they would consider negative rates. This has never been done in the history of the U.S.

At 8:30am fourth quarter U.S. GDP was released, coming in at a mere 0.7%. A GDP number this weak would prompt me to immediately lower interest rates back to 0%. The Federal Reserve is still talking about gradually raising interest rates. I do not know what the Federal Reserve is thinking here. This number was so bad that it fueled the rally in the U.S. equity markets with the thought that there was no way the Federal Reserve will raise interest rates. As I have stated I do not believe the Federal Reserve will raise interest rates in the first 6 months of 2016.

The third reason for the rally we saw in the U.S. equity market was that it was the end of the month. The U.S. equity markets got a big push up at the end of the day with the end of month markup.

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Crude Oil

I would be looking to buy crude oil if it gets into the 24-28 range using a 22 stop. If crude oil gets into this range I believe we will see a short term bottom as it would most likely push OPEC to reduce crude oil production, pushing crude oil prices back up. I would be looking to short crude oil if it gets into the 37.50-40.50 range using a 42.50 stop.

Crude oil was all over the place today, trading from a low of 32.65 up to a high of 34.40 before closing at 33.62. It was reported today that Iran would not participate in the potential deal between OPEC and other crude oil producing countries to reduce output. The big players Iraq, Saudi Arabia, and Russia are talking about a reduction in output by 5%.Russia and Saudi Arabia together produce 20-30 million barrels of crude oil a day. The potential of a cut in crude oil output is what is holding up crude oil prices.

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Gold

I have a buy signal on the daily chart in gold. If gold pulls into the 1078-1090 range I would be looking to buy gold using a 1068 stop.

Today gold traded up to a high of 1118.90 before trading down to a low of 1108.50, closing at 1116.40. I have stated that I am bullish gold and I caught two good long trades in gold. Gold is telling us that the Federal Reserve is not going to raise interest rates.

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Thank you,

Stephen Kalayjian
@stevekalayjian

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