Why Is The Fed Cutting Now?
On Wednesday the Fed met and decided it was not going to cut rates at this meeting, but the Futures market has a built in 100% chance that there will be a quarter point cut in July. This doesn’t make much sense to me. U.S. equities are at record levels, there is still jobs growth and unemployment is at 50-year lows.
The logic is that there are still clouds on the horizon with the chance of a trade war with China, and the cut would be a defensive measure. The Fed is worrying that the last half of 2019 is going to see a slowdown and they want to try for a “soft landing”. On Friday, the ten-year note traded under 2%. How much room is there to go if we actually do get a softer economy?
When Mr. Trump was elected one his campaign promises was that he would do away with the 20 trillion dollar debt. He said it would be done over a period of 10 years. Unfortunately, that has not been the case as the debt just keeps getting bigger. The new school of economists no longer think the debt matters and it will never be paid off or even reduced.
Their logic is that as long as the economy grows they can just keep lowering interest rates until they are back to zero forcing investors to put money into riskier assets such as real estate and the equity markets. Since they have no intention of ever paying off the debt, there is no cost to the economy. As long as someone will buy our paper we can just keep printing it. I hope they are right, but it seems to me other countries who have tried this course and it always ends in disaster. We will see if this time is different!
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week I will answer one of those questions with a short paragraph which will cover the trading subject.
What is the VIX index and how is it calculated?
VIX is the ticker symbol for the CBOE’s volatility index. It shows the market’s expectation of 30-day volatility. It is constructed by using the implied volatilities of a wide range of S&P 500 index options This volatility is meant to be forward looking and is calculated from both calls and puts. It is a widely used as a measure of market risk as the “investor fear gauge”. The CBOE designed the VIX to create various volatility products. The VIX, however, was the first successful attempt at creating and implementing a volatility index.
Introduced in 1993, it was originally a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, in 2004, it was expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors’ expectations on future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility because of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent times in the markets.
The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option’s expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.
While there is not a way to directly trade the VIX, the CBOE does offer VIX options, which have a value based on VIX futures and not the VIX itself. Additionally, there are 24 other volatility exchange-traded products (ETPs) for the VIX, bringing the total number to 25.
The Wise Guy Report: The View From The Floor
Each week I talk about what I think the Wise Guys (floor traders) are up to with the Big Three commodity contracts: Gold (GC), Crude Oil (CL) and Long-Term Interest Rates (ZB). I also track the Market Edge (www.marketedge.com) ‘Market Posture’ which has a twenty-six year record of forecasting the intermediate-term direction of the stock market as measure by the DJIA with around 70% accuracy.
T-Notes
Even though the equity market had its best two weeks of the year it did not dent the ten year market. The Fed is determined to cut rates at its next meeting in July. There doesn’t seem to be much left in this market until the FED makes a decision. I am still long but will take profit if the near term support doesn’t hold.
Crude Oil
Crude continues to struggle but I think the yearly lows are in. I took a long position on the close Friday at 56.65. US Frackers continue to shut down rigs and at some point, this bullish indicator will cause the price of oil to rise. I will use the yearly low as my stop out.
Gold
On Friday, a flight to quality early in the day allowed Gold to make 2019 highs for the second consecutive week. I think the market is now in a blow off phase and I closed out the trade we have been in since the spring. I will now be looking for a spot to get short this market, or if it goes back to support, I will get long again. Right now, I will be on the sidelines.
| The Big Three Commodities Contracts
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| The Market Edge – ‘Market Posture’
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The Market Edge ‘Market Posture’, which has been Bullish since the week ending 04/18/2019 (DJIA 26559.54) remains Bullish at this time.
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