Fed Chair Powell Testimony and Trump Trade Tariffs Roil Markets

(March 2, 2018) We had another dramatic week in the market after the previous week lacked conviction. Last Friday and this Monday the markets closed on their highs of the day for the first time since the correction rebound. This boded well for future gains in the market but with the caveat that the move was on light volume.

Fed Chairman Powell’s testimony before the House on Tuesday left a bad taste in the mouths of investors as they divined that there might be four rate hikes this year rather than three. Yields on 10-year Treasuries rose and as a result, the market took a big hit. Two more days of selling on high volume followed. Trump’s surprise announcement on Thursday of tariffs on steel and aluminum gave the markets a reason to continue the bearish mindset that prevailed for the middle of the week.

The Dow tucked below its 50-day moving average on Wednesday and tested its 100-day moving average on Thursday.

Today the Dow closed down but was able to bounce substantially off its lows. The S&P and NASDAQ 100 ended the day in positive territory. This could augur well for bullish trades next week.

We expect continued volatility, a positive for swing trading. Swings in the Dow of 300 to 500 points have become the new normal. This contrasts with the quiet markets of 2017.

Indices

Here is a look at the charts of the major indices at close of trading Friday:

NASDAQ

Last week the NASDAQ 100 had rebounded to come close to regaining its pre-correction levels. This week, however, the NASDAQ sold off and retested its 50 day moving average. After three down days on heavy volume, it reversed today successfully holding it 50 day moving average and regaining its 21 day average.

The NASDAQ 100 has demonstrated stronger market action than the S&P or the Dow.

SPY

After closing on either side of the 50-day moving average last week, the S&P dropped back below its 100 day moving average and retested the white uptrend line that goes back to the election of the fall of 2016. Once again it bounced at the uptrend line and closed above its 100 day moving average on solid volume.

Volatility VXX

Volatility had retreated at the end of last week and continued lower on the strong Monday that we had this week. But interest rate jitters from Fed Chair Powell’s congressional testimony, and concerns about a potential trade war cause volatility to spike up mid-week to levels we had not since since the heavy selling that marked the beginning of the correction. However, in today’s action we can see that we have a red engulfing candlestick that suggests by candlestick charting theory that volatility is likely to recede from these levels.

The chart below shows how volatility has spiked in recent years on events like Brexit,  the Presidential Election, and the increase in bond yields.

Source: Bloomberg

FSS Swing Performance Update: 17 of last 20 trades profitable

Since the onset of the recent market meltdown, we have closed 20 trades, 17 of them profitable. Our three losing trades lost 1%, 1.4% and 2.8%. We had 9 bearish positions and 11 bullish positions.

FSS Swing Trading Strategy Update

We will continue to track the 10-year Treasury yield closely, as that is a driving force for equities at the present time.

The FOMC kerfuffles of the last few weeks should subside as the following are now in our rearview mirror: the FOMC meeting, the minutes released two weeks later, and the two sessions of semi-annual updates to Congress by the Fed Chair.

Of course, a steady stream of surprises from Washington on fiscal policy is likely to continue. This week’s concern is with the possibility of a trade war with the new tariffs on steel and aluminum that Trump has announced.

Accordingly, we will continue to be nimble in identify both bullish and bearish trade opportunities as conditions warrant.

We would like to increase the holding period for our positions. But with the volatility in today’s markets gains are often rapid and evanescent. We will continue to abide by our policy of minimizing day trades. We have had just one day trade in the past 10 trading days, easily avoiding any classification as pattern day traders.

This week’s activity in our positions

Full Swing Stocks has one open position which we entered this afternoon as the market stabilized:

  • HD -.3% (Home Depot)

We closed the following 6 positions this week, 5 of them profitable:

  • SKX +3.5% (Skechers)
  • HPE +1.4% (Hewlett Packard Enterprise)
  • PANW +1.1% (Palo Alto Networks)
  • CNCR +.5% (Loncar Cancer Immunotherapy ETF)
  • PLNT +.2% (Planet Fitness)
  • AMBA -2.8% (Ambarella), Short

One position was a day trade when our SmartStop took us out on the day of entry.

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