Don't fight the Fed unless this time is different

One of my early Wall Street hero's was Marty Zweig, a hedge fund manager who successfully a week before called the 87 Crash on Wall Street Week. (It's a great clip if you haven't seen it including how Louis Rukheiser joked that it was all computer trading back then so why should all these people be paid so much - sounds familiar to today's algo trading) Marty wrote a book Winning on Wall Street, which I have lot's of folds and highlighting that I still read every so often. Sadly, he passed away a few years ago at a too young 70 years old. He was famous for saying "Don't fight the Fed." Yesterday, my friend Paul Tudor Jones was on CNBC and he seemed exasperated by the exceptionally low Fed Funds rate "They should be 150 basis points higher." Today the Fed will announce a hike of 25bp and further hikes are expected in the coming quarters. (See my chart below) Paul also said he foresees higher interest rates and potential for even higher stock prices... later in the year. The most important thing I got from his interview is that he said his exposure is very very low right now. One of my seasoned derivative traders told me he believes Paul is putting on a lot of levered risk reward bets on the downside... 10x1 type bets so he probably minimal overall risk but lots of convexity. Even if I asked Paul, he'd never tell me.

Back to Marty Zweig and what he meant by "Don't fight the Fed"

"Monetary conditions exert an enormous influence on stock prices," he wrote in Winning on Wall Street. "Indeed, the monetary climate—primarily the trend in interest rates and Federal Reserve policy—is the dominant factor in determining the stock market’s major direction."

"Generally a rising trend in rates is bearish for stocks; a falling trend is bullish," he continued.

Why? For two reasons. "First, falling interest rates reduce the competition on stocks from other investments, especially short-term instruments such as Treasury bills, certificates of deposit, or money market funds," he wrote. (Tom here - interest rates specifically the short end of the curve is starting to look appealing with the 2 year yield at 2.5%)

"Second, when interest rates fall, it costs corporations less to borrow. As expenses fall, profits rise...So, as interest rates drop, investors tend to bid prices higher, partly on the expectation of better earnings." (Tom here - with rates rising it will cost companies more to borrow and considering they have been borrowing to fund stock buybacks over the past few years, this could get more difficult)

I wish Marty Zweig could comment on the latest market where people seem to have ignored the hikes in interest rates as well the end of QE. There is a speculative momentum mania with the largest mega cap technology stocks who seem immune to higher rates but that won't last forever. This time is not different and those stocks that have attributed an incredible large percentage of the gains in the past 10 years, 2 years or even year to date.

Sentiment is back to extreme levels and upside DeMark exhaustion signals are nearing once again. I may be embarrassed with attempting to short Netflix nearly up 100% ytd or some of the others but I've seen this before and I promise this time is not different.

Notable:

US Markets - Sentiment getting back to extremes. Upside exhaustion near. NDX has only potential upside Countdown but I feel it will get choppy.
Hedge Fund Telemetry Trade Ideas - Added more short exposure.
Vanguard Global Indexes - Upside exhaustion
Currencies - Steady for now
Asian Markets - Nikkei could stall tomorrow
German DAX - Still the best looking European index
European Tech Indexes - Upside exhaustion on daily and weekly time frames
Fed Funds Rate Probabilities
Bitcoin Update - Still looks lower
FANG - Trying to make this time different
Consumer Discretionary - Upside exhaustion
Semiconductor Update
Coke or Pepsi? Or both!
Bond Update - High Yield HYG upside exhaustion today
DeMark Screens - Daily, Weekly, Monthly upside/downside exhaustion signals within the S&P 1500 and Euro Stoxx 600

Daily/Weekly DeMark upside/downside exhaustion signals (Sequential) weekly updated on Monday's and monthly on the first day of the new month. Price flips occur when a stock closes higher/lower than four previous closes and increases conviction of a price turn.

The upside 13's are sell signals and downside 13's are buy signals. Price flip's are confirmation signals that increases potential for a price trend change. For example, if you are long a stock and there is an upside 13, you will want to take cautious action by selling down or out of a position. If initiating a short sale with the upside 13's, we tend to start with a 1/2 size and add with the downside price flip. The opposite is true for when there are downside 13's. Take a 1/2 size position and add with the upside price flip.  The DeMark Indicators are designed to assist the user with buying into weakness and selling into strength to anticipate trend exhaustion. Selling into a rally and buying into a decline often afford the opportunity to exit a trade without too serious a loss if wrong.

S&P 1500 Universe:
DAILY UPSIDE 13: ARW, AZO, BGFV, CA, CLGX, CREE, CUZ, FNGN, GPI, MPW, NTCT, ROCK, SBRA, SRDX
DAILY DOWNSIDE 13: ITRI, SNCR

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN: ATI, BANR, BOFI, CNMD, EPAY, EVR, KMPR, MBFI, MLI, NSIT, PACW, RIG, SIVB, STRA, TSCO, TXT, VICR, WBS, WRB
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP: NONE

Updated: 6/11/18
WEEKLY UPSIDE 13: ABT, AKAM, AMGN, KMPR, RMD, SYK
WEEKLY DOWNSIDE 13: NONE

Updated: 6/4/18
MONTHLY UPSIDE 13:    BJRI, IDA, NSP, PFS, PVH, SCSC, SYY, TSCO, VDSI, VLO
MONTHLY DOWNSIDE 13:    CLW, LQDT

Euro Stoxx 600 Universe:

DAILY UPSIDE 13: DKSH SW, REL LN, UBI FP
DAILY DOWNSIDE 13: WRT1V FH

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN: BDEV LN, BKG LN, HWDN LN, IHG LN, JMAT LN, NHY NO, REL LN, RTO LN, SGRO LN, SPD LN
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP: HEIA NA, HEIO NA

Updated: 6/11/18
WEEKLY UPSIDE 13:  EKTAB SS, HLMA LN
WEEKLY DOWNSIDE 13: HMB SS, MAP SM

Updated: 6/4/18
MONTHLY UPSIDE 13: ADS GR, AMEAS FH, AV/ LN, BVS LN, DG FP, HELN SW, HLMA LN, ITRK LN, LEG GR, NESTE FH
MONTHLY DOWNSIDE 13: NONE

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