US Market pulled back today with the Dow down 94 points (0.27%), S&P down 8.56 points (0.20%) and Nasdaq down 101.29 points (0.71%).
The energy sector provided some support to the broader market and the technology and real estates sectors are the worst performers of the night.
Financial sector showed some signs of a rebound after continuous sessions of negative performance.
The PPI advanced 6.6% for the 12 months ended in May, the largest increase since 12-month data were first calculated in November 2010. On a monthly basis, the producer price index for final demand rose 0.8%, ahead of the Dow Jones estimate of 0.6%.
May retail sales numbers fell 1.3% vs an estimates of 0.7% by economists polled by Dow Jones.
It remains to be seen whether the FED will start pulling back on its monthly 1.2 billion bond purchase program. I believed that prior to this week, market is expecting that FED to continue their stand on inflation and thus, caused the nasdaq to ascend into new highs. This expectation was also reflected in the recent financial stocks’ weakness. Other observations include the rally in commodity prices and weakness in the USD.
However, since the start of this week, gold prices have started to ease. In fact i shorted the price of gold at 1,900. Click here for the report. The USD is displaying some strength as well. These are definitely telltale signs that the market is slowly moving into assets or sectors that will benefit from an increasing interest rate environment.
BAC survey shows that currently, respondents see commodities, which are closely related to inflation, as being the most-crowded trade. Personally, i think it is not a good thing when a particular trade idea has lots of market participants. Any selloff might be potentially hefty.
Going forward, I think that the market may see a rotation into financial stocks. An interest rate hike is positive for banks as it improves banks’ NIM, which in turn improves their profitability. Recently, i read that Jamie Dimon (CEO of JPM) commented that they are hoarding cash and not buying much fixed income instruments nor lending them out as demand for loans has decreased, as consumers too, are flushed with liquidity. He commented that he wanted to wait for the opportunity when the yield starts rising again (lower cost and higher yield), which in my opinion is a strategic decision. This also shows that he is expecting the rates to rise sooner than expected.
This week happens to be the triple witching week for the 2nd quarter and volatility is expected. Thus, i will wait for more information from the FED meeting on Wednesday to prepare for my next move.
Based on risk reward, i will position into the financial sector and buy into BAC or JPM for US banks. Reopening play like hotels, airlines and cruise lines have retreated recently as well which is another sector which i see opportunity to buy on the dip. With the global vaccination underway and consumers flooded with cash, this is one sector that will play catch-up as most of them have not returned to pre-covid level. Do be very selective in this sector as some of the companies have issued equity or debt during the crisis to keep their company afloat. These corporate actions would have changed the capital structure of these companies and therefore, might encompass higher risks investing in them. Defensive sectors like utilities or telcos may be another sector to position capital.
I will avoid the technology sector at this moment as rate hikes will mean that future cashflow of these companies will be discounted at a higher rate, which in turn will bring down the valuation of these tech companies. On top of that, nasdaq has shown quite a strong performance lately and from a risk reward perspective, it does not make sense to embark now. I am still positive in the sector in the mid to longer term, but I do expect some form of pullback from the 14,000 level. Oh yes, large short positions on the nasdaq at 14,000 was reported earlier on the day too, but these position are established through derivatives. This is a good thing as institutions are only hedging their portfolio positions rather than a selling the stocks in the open market. In a nutshell, it will also means that they are expecting market corrections but bullish in the longer term ahead.
Nasdaq Daily Chart
Let us see what FED will have for us tomorrow after their meeting. I am expecting Jerome Powell to maybe hint of a tapering in their monthly bond purchases. As this purchase will have to ultimately comes down to zero before they can start increasing interest rates.
Have a great day ahead!
As usual, please read disclaimer. This article is purely for informational and educational purposes and does not constitute an offer to purchase securities. Investing comes with risks and these instruments may not be suitable for you.