Report That Deutsche Bank May Buy Back Several Billion Euros of Its Debt Erases Heavy Losses in U.S. Equity Markets

U.S. Equity Markets

I am currently on the sidelines in the U.S. equity markets.

I am waiting for the U.S. equity markets to get to an extreme oversold condition and make a short term bottom. At this extreme oversold condition I would look to buy the exchange traded funds which mirror the U.S. equity markets and then take advantage of a snapback rally for a trade only. These exchange traded funds include SPY (mirrors the S&P 500), DIA (mirrors the Dow Jones Industrial Average), IWM (mirrors the Russell 2000), and QQQ (mirrors the NASDAQ-Composite).

Once again we saw extreme volatility in the U.S. equity markets. At one point early this morning the Dow Jones Industrial Average was down about 145 points. This decline was led by the heavy selling in the financial sector. There is a rumor that investors are worried about Deutsche Bank’s credit default swap exposure. DB (Deutsche Bank) is down 57% from its 52 week high. At one point today DB (Deutsche Bank) was down almost 4.9%. At around 2:00pm the U.S. equity markets rallied sharply and erased the losses with the Dow Jones Industrial Average up about 90 points and DB (Deutsche Bank) up slightly. This rally was led by a report that Deutsche Bank is considering buying back several billion euros of its debt. This eased concerns and provided confidence to the U.S. equity markets as it showed that Deutsche Bank has the capital available to buy back this debt. At the end of the day the U.S. equity markets sold off and DB (Deutsche Bank) closed down 0.16 (1.03%) at 15.38. The Dow Jones Industrial Average closed down 12.67 (0.08%) at 16,014.38, the NASDAQ Composite closed down 14.99 (0.35%) at 4,268.76, the S&P 500 closed down 1.23 (0.07%) at 1,852.21, and the Russell-2000 closed down 5.44 (0.56%) at 963.90.

I do not think the U.S. equity markets are out of the woods yet. Federal Reserve Chair Janet Yellen will be speaking in front of congress tomorrow and Thursday. I expect very dovish comments which should help fuel some type of a rally in the U.S. equity markets. One of the big member firms is still expecting the Federal Reserve to raise interest rates three times this year. We are seeing a slowdown in emerging markets, struggles in the financial sector, and the U.S. economy barely growing with a 0.7% GDP. The Bank of Japan has gone to negative interest rates and a Federal Reserve official stated that if the U.S. economy weakened the Federal Reserve would consider negative rates. I do not see how the Federal Reserve is going to be looking to raise interest rates. Federal funds futures going out to December are only showing a 30% chance of one interest rate hike. I do not expect the Federal Reserve to raise interest rates at all in 2016. If anything I could see the Federal Reserve cutting interest rates back to 0% if there is a significant slowdown in the economy. I do not expect a recession in 2016, however 50% of those surveyed are expecting a recession.

Follow Steve on Twitter at @stevekalayjian

Crude Oil

I am currently on the sidelines in crude oil.

The low in crude oil for 2016 is 27.56. I think there is a good chance crude oil will make a new low and I am waiting for crude oil to get to a significant oversold condition. Many are calling for crude oil to trade down to the low 20 range. I am looking for crude oil to make a new low in the 19-22 range. If crude oil trades down to this range I expect OPEC to call an emergency meeting and possibly cut production by 10%, pushing back up crude oil prices. I would expect this push up to be short lived as there is a significant supply of crude oil.

Crude oil was down 1.77 (5.88%) today, closing at 28.35. Crude oil approached its 2016 low of 27.56, trading down to a low of 27.74 today. Last week we saw APA (Apache) cut its dividends and after the close today APC (Anadarko Petroleum) cut its dividends. It is not a good sign for the oil sector that these two oil giants have cut their dividends.

Follow Steve on Twitter at @stevekalayjian

Gold

I am currently on the sidelines in gold.

I have a buy signal on gold on both the daily and weekly charts. I am waiting for gold and the gold stocks to pull in and get to an extreme oversold condition on the daily charts where I would be looking to reenter the gold market. The gold stocks I am looking at include ABX (Barrick Gold), NEM (Newmont Mining), GLD (Gold ETF), AUY (Yamana Gold), and KGC (Kinross Gold).

Gold was down 0.20 (0.02%) today, closing at 1189.40. When gold made new highs yesterday ABX (Barrick Gold) and NEM (Newmont Mining) did not make new highs. I stated that this negative divergence between the gold stocks and gold was a sign that those stocks would pull in. With gold essentially unchanged today ABX (Barrick Gold) closed down 0.69 (5.79%) at 11.23 and NEM (Newmont Mining) closed down .89 (3.53%) at 24.30.

Follow Steve on Twitter at @stevekalayjian

Thank you,

Stephen Kalayjian
@stevekalayjian

Market Maker with Steve Kalayjian Sneak Preview

About The Author