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Thomas H. Kee Jr., is President and CEO of Stock Traders Daily. The Stock of the Week Strategy offered by Stock Traders Daily may be the best performing strategy on the market since December, 2007 (before the credit crisis), and "The Investment Rate" is arguably the best measure of the... More
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  • FOMC Decision

    Before anything else...

    STAY FOCUSED!

    I will not be surprised to see the FOMC raise rates.  I think it would be extremely healthy.  I think they need to do it.  It will also send a clear message to the Market, something that Obama wants to convey.  It will tell everyone that the FOMC thinks the economy is stable enough to handle higher rates.  Now, that opens a huge can of worms.  Is it stable enough?

    Even though I would not be surprised to see rates increase tomorrow, I do not expect it.  I think almost all of the voting members will express their concern over the current levels, some may even warn of future inflation, but nervous pressures are likely to keep Bernake at bay for one more period.  Then, next time, rates are almost sure to rise.  Instead of happening this time, we are likely to get jargon expressing their recognition of recent positive results, and telling us that they are willing to move as needed when the time is right.

    Either way, I expect economists to read between the lines.  I do not expect any worries about inflation to be included in the text, I do not expect any major concerns to be vocalized, and I expect past concerns to be tempered.  With that, I expect economists to interpret it positively, after the dust settles. 

    There is always a knee jerk reaction to Policy decisions, so be aware of the volatility potential after they release their decision.  In fact, should they raise rates, I expect severe volatility.  If that were to happen, I would expect a snap lower, and then a 180 degree reversal higher.  However, that is less likely than a subtle decline on the heels of already expected news.  If Wall Street gets what they expect, and nothing more (no positive surprise), the first move will likely be down too.

    My past experiences tell me that the first move is not always the ultimate direction.  In fact, about 75% of the time, the first move ends up giving way to a reversal and momentum moves in the opposite direction.  We call this an emotional reaction.  We can expect it after the FOMC releases rates on Wednesday.  Either way, emotions will be running higher, because this is an important release.

    That lays the groundwork for post-release.  What about before?

    The Market should start the day looking rather confused.  In my analysis for Wednesday below I talk about a converging near term channel, and the importance of support.  This should be taken to heart.  The Market may flounder around initial support, secondary support, and initial resistance for the first part of the day.  These are all close to each other.  If the FOMC decision comes and the Market is still stable, I expect the end result to be positive. 

    Everything rests on support levels.

    However, given the FOMC decision scheduled for Wednesday, I have known buyers (and sellers sometimes) to step away during the first part of the day, and let the Market trade haphazardly until the result comes from the FOMC.  If that happens early on Wednesday, slight breaks of initial support could occur, and tests of secondary support levels could occur too.  Do not worry too much about this.  These are relatively close together.  After the fact, after the release, is what matters most.

    From here, we stick to the disciplines we have endured, and we let them work.  We do not assume added risks.  We do not make bets.  We do not diverge.  This is time for structure, not for shots in the dark.  Stay focused.

    Aug 11 7:10 PM | Link | Comment!
  • Inflation and the FOMC

    August 10, 2009

    The Investment Rate:

    The Investment Rate is the Most Accurate Leading Economic and Stock Market Indicator available.  Please make sure to read it carefully.  Click the link above to learn more.

    If you have been following my broader market observations you know that I expect inflation to become a problem as we enter 2010.  That makes this FOMC policy decision extremely important.  Their decision to, or not to raise rates will determine the severity of the inflation pressure in my opinion.  Unfortunately, I do not think they will act.  I think many on the committee will want to, but I think political pressures will prevent them from taking action.  Not Good!

    As we enter 2010 companies will try to show positive results that are not related to cost cutting measures.  However, that will be extremely tough.  In fact, for many companies new volume levels will stagnate.  Sales volumes will not grow because there will not be a substantial number of new consumers in the Market.  This is a big problem when the objective is to show real growth. 

    However, the consumers who are still in the Market, most of whom still have jobs, will probably become more confident with the economy at the same time.  I expect the Market to continue to increase through Q1/10, and that will be their rationalization.  Even though I would not be surprised to see a pullback after we test 9642 in the Dow, I expect the Market to be much higher by the end of the first quarter of 2010.  This will create a false sense of reality for many people.

    Investors and consumers will think that the Economy will recover swiftly as it has for the past 26 years.  Unfortunately, that will not happen this time (Investment Rate).

    My points on that topic are left to another conversation though.  Instead, this one is focused on inflation.  When 2010 comes, and companies find real growth almost impossible due to the lack of net new buyers, they will turn to their existing customers for growth.  They can sell new products of course, but a much easier method is to just raise prices.  After all, those customers will see that the Market is increasing, they will have that false sense of security, and they will be more willing to pay more for goods and services as a result.  It is a logical course of action for any corporate executive.  Raising prices is a great way to show better numbers.

    As we enter 2010, I expect inflationary pressures to be strong.  Corporate greed and the demands of Wall Street will be the driving force.  However, extremely low interest rates now will allow that to become a reality too.  Sure, real rates are higher than the Target Rate, but they are still priced to move.  That means, companies can borrow more cheaply now than they will be able to in the future.  Everyone knows this.  In fact, that may be one of the political reasons for leaving interest rates at their current levels right now.  If the FOMC raises rates, the US Government will also have to pay more interest on the Treasury Bonds it issues.  I think we are having a tough time affording a rationale budget, much less higher bond prices.

    In any case, the FOMC's decision this week will be critical.  If they raise rates by 50 basis points, I think it will be a move in the right direction.  However, I do not think they will.  I think they sit on their hands, at the request of Capitol Hill.  We will find out how right I am when the minutes are released. 

    Initially, if interest rates stay where they are, I expect the Market to react positively.  However, I also expect a positive result if interest rates are increased.  The first would be a relief, but an increase would be followed by a knee jerk lower and then a recovery on the rationalization that the Economy is improving and allowing the FOMC to act.  Either way, I expect a positive result when the dust settles.

    This should be enough to get the Market close to 9642. 

    The problem is, what happens when the decision to raise rates shifts from one focused on economic strength or weakness, to inflation.  That is the dilemma I expect in 2010.  That will break the correlating trend between Market levels and Interest Rates that has existed for more than 10 years.  If you have not been paying attention, the Market increases when rates are being increased (since '98), and it has declined throughout the easing cycles.  That has only been true because every move has been due to economic strength or weakness.  When that stops, when the decision is based on inflation again, the correlation will stop.  If rates are increased due to inflation, I expect the Market to get hammered.  That's sets the stage for 2010.

    Free Report:

    You may obtain a free trading report on any stock you are interested in by clicking here:

    http://www.stocktradersdaily.com/Main/monthly_pdf.php

    Sincerely,

    Thomas H. Kee Jr.

    Thomas H. Kee Jr.

    President and CEO

    Stock Traders Daily

    http://www.stocktradersdaily.com

     

     

    Disclaimer: All Target levels are dynamic and subject to change over time.  Changes are supplied to monthly subscribers only.  Changes may or may not be provided to third party vendors such as Reuters, Yahoo Finance, The Wall Street Journal Online, or the like.

     

     

    Aug 10 10:01 AM | Link | Comment!
  • The Poor mans Flash Quote: (GS), (AAPL), (CSCO), (QLD)

    Investors are quickly realizing how double weighted ETFs like DDM, DXD, QLD, QID, SSO, and SDS diverge from the Market over time.  They are usually good at following the market proportionally throughout a single trading day, but because they reset every day, they also diverge over time.  This could present problems for persons interested in holding these over time as well.

    However, a similar problem exists on occasion intraday.  This is especially true when important news events cause the Market to become sporadic, like Cisco Systems (CSCO) did on Thursday.  In turn, that causes volatility levels to rise, and that causes abnormal fluctuations in the underlying entities carried by the double – weighted ETFs.  In addition to core holdings in individual stocks (shown below), these ETFs also hold substantial positions in leveraged options.  That is where the abnormal volatility comes from.

    For example, on Thursday, August 06, 2009 the NASDAQ was lower by 0.66% at 10:20 AM.  QLD, which tracks the NASDAQ intraday, was down 1.66%.  That is a 25% discrepancy.  Why would this happen?  There are a few reasons:

    • Bid and Ask for the ETF.

    • VOL increases.

    • One of the core positions fluctuates wildly.

    First, the Bid and Ask is an issue.  Remember, these are openly traded instruments, just like stocks, and the more buyers out there, the higher the price will go, and vice versa.  So, if there are more people on the Ask, and wanting to sell, the underlying entity will decline more.  In this case, QLD did exactly that.

    Also, VOL, or volatility, is extremely important.  That affects options prices.  It the Market becomes more active, the option prices will usually increase in relation to that.  This can cause the underlying value of the ETF to fluctuate even though the Market itself may not.  However, this is also what causes these ETFs to act as leading indicators quite often.

    The Poor Man’s Flash Quote.

    In fact, that is a key benefit of these ETFs to active traders.  They allow us to determine direction a little bit in advance.  Call them a “Poor Man’s Flash Quote.”  We get a glimpse at where the Market is going a few seconds before the Market actually goes there. 

    I guess the real question is, has Goldman Sachs (GS) created a master program that will catch this discrepancy in advance too?  Maybe that is why these ETFs carry so much volume.  Is it all based on Flash Trading?  Only time will tell, but my guess is that Flash Trading has a lot to do with the volume in these ETFs.

    In relation to my third point, If AAPL were to fluctuate wildly, so would QLD.  The list below shows the major holdings as of 8.5.09.  AAPL was at the top, with over 14% exposure.  It would obviously cause more volatility in the portfolio if it started to gyrate.  AAPL, by the way, is usually at the top of this list.

    In the end, all we can be sure of is that these ETFs are designed to track the intraday moves, and after the Market has settled down, they usually do.  Depending on the basis of the ETF, short or long, these usually perform in line with their purpose intraday after the news has settled into the Market.  However, they will move more aggressively than the Market from time to time, and that can be used to our advantage.  They are leading indicators, and they could be used to anticipate direction.

    Practice using them by watching them closely, and compare them to the Markets to see how they work.  Active Traders can use this effectively.

    List of holdings in QLD as of 8.5.09:

     

    AAPL APPLE INC COM STK NPV

    14.13%

    QCOM QUALCOMM USD0.0001

    6.29%

    MSFT MICROSOFT USD0.000125

    5.02%

    GOOG GOOGLE INC COM STK

    4.55%

    CSCO CISCO SYSTEMS INC COM STK

    3.14%

    RIMM RESEARCH IN MOTION COM

    3.11%

    ORCL ORACLE CORP COM STK

    3.06%

    GILD GILEAD SCIENCES USD0.001

    2.87%

    TEVA TEVA PHARMACEUTICAL ADR

    2.60%

    INTC INTEL CORP COM STK

    2.54%


    Author has no conflicts to disclose.
    Aug 06 11:32 AM | Link | Comment!
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