Stocks firm ahead of Fed meeting

Market Review

Despite many voices shouting for yesterday’s bank stress test results actually taking risk off the table by finally highlighting exactly where the shortfall in the financial sector lies. Although we agree with this argument we also saw most room for downside in the first trading session, which was highlighted by the very prudent long entry in the S&P 500, which was not obtained. Our bullish view on the USD against the Euro continued as the Ifo business climate in the morning saw a bearish sentiment take hold in mainland Europe. The entry on crude oil was not obtained as there was not enough of a rebound before the market edged through the key $80 handle. Although there has been enough buyers at this point to alleviate some selling pressure, investors such as Dennis Gartman sees prices potentially going as low as $10, well below the break even point of most of the production facilities. We believe that targets like this is a bit far fetched, but it perfectly illustrates that there is potential for downside than what we saw yesterday.

Today's Fundamental View

Twitter earnings were reported last night, and although not the most market moving piece of news it is interesting to see the reaction within the share itself; overall in line, but due to the user base not growing at the rate at which investors were expecting; the share price is down 10% in pre-market trading. This morning started on a positive note in terms of equity indices, with the Dax having a gap open, and the S&P now up testing the October highs with sight of the all time high at 2014.50. With the current pace we expect this to be achieved within a month, as the dramatic upside is tough to keep up and is likely to range and consolidate before continuing higher. As we have written earlier, the Federal Reserve will keep reinvesting the assets it has accrued through its quantitative easing program, and we believe this is where the difference between easing, neutral, and tightening policy will become clear. As long as the balance sheet remains at its current size, taking decent earnings into account, we shall head higher in the foreseeable future. Future interest rate hikes will disrupt this move higher and lead us in to the tightening part of the cycle where inevitably stocks will sell off. Data this afternoon is focused on the consumer sector with Durable Goods and Consumer Confidence due. We see these numbers being tightly knit to unemployment claims, and with Christmas just around the corner it should be a decent set we have coming this afternoon. The strategy will for these reasons continue along the same path as yesterday with long trades lining up in equities and short all other assets.

Alternative View

Traders should remain wary and informed of any geo-political risk events that may develop as the day progresses. If the positive European sentiment continues it may invalidate our short EURUSD strategy.