No Rate Hike and Non-Dovish Language Leads to Decline in U.S. Equity Markets

U.S. Equity Markets

I am on the sidelines in the U.S. equity markets. I have a sell signal on the weekly charts for the U.S. equity markets and I am looking for a bounce to provide an opportunity where I would look to get short.

At 10:00 new home sales showed an increase of over 10% from November to December. The consensus was expecting 500 thousand new home sales and the number came in much higher than expected at 544 thousand. Although this was a good economic number, the U.S. equity markets got spooked as it could increase the likelihood of future interest rate hikes.

Following the Federal Reserve’s announcement the S&P 500 futures briefly rallied before selling off heavily down to a low of 1864.50 and closing at 1875. The Dow Jones Industrial Average closed down 222.77 points at 15944.46. The NASDAQ-100 closed down 104.99 points at 4,128.86 with AAPL (Apple), AMZN (Amazon), and NFLX (Netflix) down heavily today. These stocks are components of the NASDAQ-100.

I do not think the U.S. equity markets are out of the woods yet. The S&P 500 futures must close above 2021 on the weekly chart before I would get a buy signal on the U.S. equity markets. I have been looking for a rally in the U.S. equity markets for an opportunity where I would look to get short. Right now the Dow Jones Industrial Average is stuck in a range between 15400 and 16200. I think there is a good chance the Dow Jones Industrial Average could push down to new lows, potentially breaking the low of 15370 we saw in 2015. If the U.S. equity markets push down and get to an extreme oversold I will be looking for an opportunity for a trade on the long side.

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Federal Reserve Leaves Rates Unchanged in January FOMC Meeting

As I expected the Federal Reserve did not raise interest rates in their January meeting, leaving interest rates at 0.25%. I do not expect the Federal Reserve to raise interest rates in the first six months of the year, if at all in 2016.The Federal Reserve maintained that they are still looking to raise interest rates but at a more gradual pace. They also stated that they are closely monitoring global economic and financial developments. In my opinion they should have been doing this many months ago. The Chinese markets are down substantially and we are seeing deflationary pressures in crude oil, heating oil, gasoline, and in agricultural commodities such as coffee, wheat, and corn. The Federal Reserve is still expecting for their 2% inflation target to be met sometime in 2016. I do not see this happening. The Federal Reserve is fearful of inflation; however it is a nightmare when you have a deflationary environment as we are seeing in Japan.

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Invest in the U.S. Equity Markets Using Exchange Traded Funds

As I have stated I am not a believer in the buy and hold mentality. I believe one should not invest their money in mutual funds but instead use exchange traded funds (ETFs) to enter and exit the U.S. equity markets. On the long side one can purchase ETFs such as SPY (mirrors S&P 500), DIA (mirrors Dow Jones Industrial Average), IWM (mirrors Russell 2000), and QQQ (mirrors NASDAQ-100). On the short side one can purchase inverse ETFs such as SDS (inverse of S&P 500), DXD (inverse of Dow Jones Industrial Average), TZA (Inverse of Russell 2000), and QID (Inverse of NASDAQ-100). By investing on your own using exchange traded funds one will pay minimal execution fees compared to the management fees charged by mutual funds. One will also have the freedom to enter and exit the markets on both the long and short side, giving one the potential to compound their returns.

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Gold

I have a buy signal on the daily chart in gold. I would be looking to buy gold in the 1085-1095 range using a 1077 stop. In addition I have a buy signal on the daily charts for GDX (gold miners ETF) and GLD (gold ETF). I am looking for a nice pattern to set up in these names for a long term trade. I will be providing ranges of where I would look to buy GDX and GLD in the near future.

Gold traded up to a high of 1128 today before closing at 1115.8. If gold closes above the 1132 level on Friday I will get a buy signal in gold on the weekly chart. If I get this buy signal the next pullback in gold should provide a great buying opportunity. I am seeing a clear divergence between gold and the gold stocks such as ABX (Barrick Gold), AUY (Yamana Gold), and KGC (Kinross Gold). When gold is getting these moves up, these gold stocks are not participating.

A couple weeks ago I started seeing a significant bid in gold and I caught a couple trades on the long side. Gold started to catch a bid because the gold traders did not think the Federal Reserve would raise interest rates anytime soon. When the Federal Reserve does not raise interest rates it is bullish for gold.

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Crude Oil

I am on the sidelines in crude oil, waiting for a clearer pattern to setup.

At 4:30pm yesterday the American Petroleum Institute (API) report showed much high inventory levels than expected. The report was expecting inventories of 3.5 million barrels and the number came in at a massive 11.4 million barrels, the biggest weekly build since May 1996. Today the EIA Petroleum status report showed a large increase in crude oil inventories of 8.4 million barrels from the prior week.

At around 11:00am this morning it was reported that Russia decided they would talk to OPEC about possibly cuts in crude oil output. Crude oil rallied sharply off of this news, bringing the U.S. equity markets up with it. Crude oil traded up to a high of 32.84 before closing at 32.30.

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Thank you,

Stephen Kalayjian
@stevekalayjian

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