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Sunday, June 20, 2004
Good evening friends,
Market Recap
Who turned up the volume on the Dow on Friday? The Dow was only up +38 points at the end of the day but traded 450 million shares. This is a significant increase in volume considering the average lately has been about 300 million shares. This 50% increase in volume should get our attention, but with the less than stellar volume this summer, average volume has been trending lower. In the end, this disparity between Friday's big volume and the average volume is not as significant as one may think.
Nevertheless, this heavy volume was a good sign on an up day, and it was contagious as it spread to the other indices as well. The S&P was up only +2 points but volume was well above average. The NASDAQ was up +3 points and with average volume. Average volume on the NASDAQ may not seem significant, but considering it has traded below average volume for the last 16 trading days in a row, just getting back up to the average is a good sign. Tonight I have charts of the Dow and NASDAQ to update where they stand and where they may be headed.
The Fed and Interest Rates
The Fed meets on June 30th to decide on interest rates again. It is my opinion that they will raise rates this time, and I think most market participants have come to that conclusion as well. The question is, how much will the increase be? Will it be the normal ¼ point, or will they go right for the throat and raise the interest rate by ½ point? Perhaps the more important question to ask is, how will the market react to the either raise? Stocks do not like it when interest rates are raised, so will we see a sell off, and what magnitude will the sell off be if interest rates increase by the unexpected ½ point?
I mentioned a few weeks ago that I believed the market could very well rally on the decision to raise interest rates. This would go against the conventional wisdom that markets decline when rates go up. I am taking the contrarian approach this time because this market has been trading for so long on uncertainty.
We all know that rates will not stay this low forever and that they will eventually go up. The problem is, the market knows this as well and the increased interest rate may already be priced in. If that is the case, then we can expect a rally on the news.
If stocks normally sell off when interest rates rise, everyone is expecting rates to increase, and markets move ahead of news, then would not it make sense that stock prices have already priced in this raise? The question that needs to be answered is which interest rate hike is priced in, ¼ point or ½ point.
React to the Reaction
It is hard to tell how the market will react; we will react to the reaction of the herd. In any case, the following weekend is a long 4th of July weekend. This leads me to believe that any reaction rally to the decision should be on low volume because of the long weekend ahead. Most professional traders will not want to be long before the holiday. The real rally (if we get one) should start on Tuesday July 6th. However, if the market reacts negatively to the news and a sell off ensues then that volume could be a bit heavier going into the holiday.
Looking Ahead
There are two weeks left of market action to hopefully build up some chart patterns so that we may have a clue as to which direction the market will take. These next two weeks could be very slow trading leading up to the fed meeting. It may be a good time for you to get out and enjoy some of the summer. Cash remains king and continues to be king until market direction can be determined. Hopefully, with the uncertainly of interest rates behind us on June 30th, the market will finally find direction and start a nice rally that leads to the election and into the end-of-year holiday season.
Sectors to Watch
If the market rallies on the news, there will still be some interest rate sensitive stocks that will decline over time as rates rise. With this in mind, I will be looking at selective financial and housing stocks to short. During the next couple of weeks leading up to the Fed meeting, we may see some professionals moving into these stocks to position themselves ahead of the announcement.
As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all Tomorrow evening.
OTC BB Watch List
- NEOP
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