Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
How Trump Can Win the U.S. Presidential Election After 1st Debate Meltdown - 1st Oct 16
Stocks, Bonds, Gold and Commodites - It’s January 2013, With a Twist - 1st Oct 16
Why Nervous Pensioners Are Running for the Exit - 1st Oct 16
Donald Trump Post Debate Meltdown, Betfair Betting Market Points to Collapse in Odds of Winning - 30th Sept 16
Silver Way Undervalued - 30th Sept 16
Why Krugman, Roubini, Rogoff And Buffett Dislike Gold - 30th Sept 16
After the Debate, the Deluge? - 30th Sept 16
Has Dow Theory Lost its Relevance: Stock Market Ignored it and Rallied to New Highs - 30th Sept 16
Donald Trump Failing to Recover After 1st Debate Hillary Shimmy Loss - Betfair Betting Market - 30th Sept 16
BEA Revises Q2 2016 US GDP Growth Upward to 1.42% - 29th Sept 16
Could the OPEC deal set stage for the Next Stock Market Risk Rally? - 29th Sept 16
Why Trump Lost, Hillary Won the 1st U.S. Presidential Debate - 29th Sept 16
Is a Dollar Crash Imminent After the Senate Overrides Obama Veto on Saudi 9/11 Bill? - 29th Sept 16
2017: Gold and Silver's Year of "Public Recognition" - 29th Sept 16
Did Trump Win the 1st US Presidential Election Debate? - There's Something Happening Here... - 29th Sept 16
FED Goes from ZIRP to NIRP! - 29th Sept 16 - Chris_Vermeulen
Here’s Why You Should Be in Cash Right Now - 28th Sept 16
The Fed Put a 50% Tax on Your Retirement Plan - 28th Sept 16
Massive Chinese Debt And Why They Are On A Gold Buying Binge! - 28th Sept 16
Stocks Commodities and FX Markets Waiting Technically While Fundamental Data Neutral Poised - 28th Sept 16
This Commodity Has Perked Up its Investors' Portfolios - 27th Sept 16
Charting the Continuing Gold Market Correction - 27th Sept 16
Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - 27th Sept 16
Financial Markets and FX Setups 27th Sept - 27th Sept 16
Crude Oil, Forex and Stock Market Trend Forecasts - 27th Sept 16
Why There is Trump - 27th Sept 16
Save Up to 70% in Shopping Expenses for Daily Items - 27th Sept 16
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

FOMC Dovish: Gold to Go Higher and Stocks to Bounce

Commodities / Gold and Silver 2016 Jan 28, 2016 - 12:03 PM GMT

By: Bob_Kirtley

Commodities

The worsening of financial conditions this year led markets to price in rates to remain unchanged at the January FOMC meeting, with many speculating the Fed to deliver a dovish statement. This has now been realised. Language used described that the FOMC recognised that economic activity had slowed and that inflationary pressures and expectations had “decline further”. As a result, it will now take an improvement in financial market conditions for the Fed to hike again at their next meeting, which is in March.


Markets are currently only pricing in a 25% probability of a hike in March. Yet, the Fed has indicated that their March meeting will hold a rate increase if conditions recover. This means that markets believe there is only a quarter chance of the market and economic situation improving. We agree with this for the key reason that there is unlikely to be a catalyst to improve conditions enough over the next two months.

Potential Positive Catalysts

The payrolls print at the beginning of January was particularly strong, showing upward revisions for the previous two months and brining the three months average up to 284,000 new jobs a month. However, markets failed to react positively to this data. The continued risk off tone despite employment strength indicates that markets believe other factors are much more important in the current economic climate. This means that future payrolls prints are also unlikely to have a positive effect.


Although employment data may not have the potential to be a catalyst for better conditions, growth may. However, the next GDP report, released this Friday, is expected to show soft economic performance. Meaning that growth as a whole is unlikely to have a positive effect over the coming months.

Considering inflation, there is little to be optimistic about. Oil continues to stay close to the lows while other commodities, such as copper, also show weakness. These factors unlikely to drive costs higher, and the lack of expansion in the oil industry flows over to other support sectors, such as the industrials. Collectively the inflationary pressures from these factors are unlikely to improve.

Longer Term Macro Risks

There is also the longer term effects of China’s currency devaluation to consider. This has kept the US dollar at the highs, making exports less competitive. Therefore there is the potential for this to have a yet to be seen negative effect on the US economy that would see data weaken and thus drag markets lower again.

Therefore we do not believe there is a major catalyst that can improve the situation enough in the coming months to justify a rate hike. This means the Fed will likely have to delay hiking at the March meeting and continue to deliver a dovish message, as they did this week.

There is the possibility for a hike at the April FOMC meeting. However, it is unlikely that the Fed would hike at a meeting without a press conference after delaying hiking for two meetings. A statement lacks the depth to assure markets of the reasoning behind market conditions being too poor to hike for two meetings, and then suddenly improving enough in a month to require a hike. Accordingly, we believe the Fed will be unlikely to raise rates again until their meeting in June.

Dovish Fed Will Support Risk Assets

A dovish Fed over the coming months is likely to have a number of effects on the financial markets. Already, the statement has caused gold to rally and this is likely to continue. Just as continued, highly dovish policy from the Fed fuelled the last long term bull market in gold, the current stance is likely to push the yellow metal higher in the near term.

We believe gold is likely to continue rallying from here, challenging resistance at $1150 and from the medium term downtrend line this week. Following this we believe the yellow metal has the potential to test strong resistance at $1180 and the long term downtrend. If this level breaks, we will look to initiate aggressive longs on gold.


However, gold is not the only market offering trades with positive risk reward dynamics. Equity markets are likely to benefit from a dovish Fed also. Stocks performed exceptionally well throughout the Fed’s QE programs, with volatility also remaining low during that time. Although the Fed’s stance is not going back to that which drove stocks continually higher, we believe that it is likely to cause equities to maintain their current levels and even give them the potential to bounce back.

A bounce will be largely technically driven at this point. The S&P has found a base at the support level of 1880 and the RSI has begun to rebound from oversold levels, but still shows stocks to be oversold overall. This means that stocks have the potential to rally and a base to do so from.

The key indicate that a bounce is likely is that the MACD is poised for a sub-zero bullish crossover. This has historically been a key indicator that a rally is imminent. The dovish statement from the Fed coincides with this to allow a bounce to take place from a fundamental perspective also. Therefore we will look to initiate a long trade once the crossover takes place.

Trading A Dovish Yellen

The exact details of our trades are available only to the subscribers of our premium service, SK OptionTrader. However, we can provide an overview of the type of trades we are considering.

We believe a bounce in stocks is likely to take place in the near term, and the most aggressive rallies in stocks follow selloffs. However, without a clear catalyst to cause conditions to improve it is much less likely that the ground gained on a bounce will be maintained. This means that holding an aggressive long term strategy has poor risk reward dynamics.

However, a quick play does have the potential to offer considerable returns with much less expected downside. Buying calls, or call spreads to reduce time premium costs, on SPY with strikes around $205 currently offer favourable risk reward dynamics. If stocks rally as we expect, then this type of trade is could outperform equities by ten times.

Regarding gold, we are considering aggressive long trades, such as buying calls on GLD, if the yellow metal breaks through major resistance at the long term downtrend line. However, there is still opportunity ahead of this. If gold fails to break higher through $1180, it is still likely to challenge the metal and remain high over the coming months. This means that selling downside protection offers favourable risk reward dynamics, which we discussed in much more depth in an article earlier this week.

If you wish to know the exact details of our trades and when they are executed, please visit www.skoptionstrading.com. For those considering subscribing to SK OptionTrader, please be aware that we are closing to new clients on February 20th to ensure that the quality of our service is not diluted. Therefore if you wish to become a subscriber, we recommend doing so sooner rather than later.

Sam Kirtley

Email:bob@gold-prices.biz

URL: www.silver-prices.net
URL: www.skoptionstrading.com

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

Disclaimer:  www.gold-prices.biz   makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is neither a guide nor guarantee of future success.

Sam Kirtley Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife