Based on this coming week's events, particularly surrounding the FOMC meeting, the Russell 2000 is strategically preferred above all others.
The USD has been on tear against most currencies except the Yen and the Swiss Franc this year. This has impacted US stocks to some degree and put a tailwind under other equity markets, notably Europe and Australia logging substantial year to date gains. The USD has continued to strengthen with traders looking ahead to the FOMC next week's press conference and outlook from Fed Chair Yellen.
There is an assumption that the FOMC will remove the word 'patient' from their statement keeping the possibility of a June hike open. The markets' general consensus along with our own is the expectation of volatile moves in equities, currencies, bonds and commodities, surrounding this coming FOMC meeting.
All the asset classes will react and traders and investors are showing through price action that short bonds, neutral to short equities and long the USD are the trades. The trends are clearly supportive of USD appreciation and traders may well add to USD positions in front of the FOMC on Wednesday.
Where will we be placed this week
Our macro view questions the consensus that the USA will continue to outperform economically. The performance gap between the major economies is likely to narrow, not widen and this will be a positive overall. It is more likely that the FOMC continues to note overseas developments and also notes the strength of the USD. Market consensus has taken the view that the FOMC ignores the currency and for the most part this is true.
However this is unlikely to be the case this time round given the rapid appreciation of the USD of late against a backdrop of weak global growth and rate cuts from virtually every other central bank around the globe.
Trading and investing is about favorable probability.
Therefore, we would go against the prevailing consensus and trade with the belief that Chair Yellen may be somewhat more dovish then expected. The Euro and other currencies may bounce, 10 year bonds yields may fall and WTI Crude may move higher as a result. The superior trade is to look for a reversal in negative sentiment in US stocks. This is best expressed through the Russell 2000, the best technically placed index for outperformance- and this is the position we would take based on considerations for risk and reward.
Summary this week: Long Russell 2000
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in IWM over the next 72 hours.