There's a battle going on at the top of the market.
Four Fed speakers this week pulled out their pins and took a poke at the market bubble:
- Williams said "There seems to be a priced-to-perfection attitude out there.” and that the stock market rally "still seems to be running very much on fumes." Speaking to Australian TV, Williams added that "We are seeing some reach for yield, and some, maybe, excess risk-taking in the financial system with very low rates. As we move interest rates back to more-normal, I think that that will, people will pull back on that."
- Fischer said "The increase in prices of risky assets in most asset markets over the past six months points to a notable uptick in risk appetites…. Measures of earnings strength, such as the return on assets, continue to approach pre-crisis levels at most banks, although with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels–and that fact is also a cause for concern." Fischer then also said that the corporate sector is "notably leveraged", that it would be foolish to think that all risks have been eliminated, and called for "close monitoring" of rising risk appetites.
- Dudley said rates will keep rising as long as financial conditions remain loose: "When financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease—as has been the case recently—this can provide additional impetus for the decision to continue to remove monetary policy accommodation."
- And Chairwoman Janet Yellen said yesterday that some asset prices had become “somewhat rich" although like Fischer, she hedged that prices are fine… if one assumes record low rates in perpetuity… “Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates,” she said. Yellen then said (already being taken out of context by bulls): "Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will."
In fact, here's the video of Yellen's statement:
Unless Yellen is very ill, I don't think her prediction is likely to hold up for her lifetime – let alone ours! Of course, no one ever thinks there is going to be a crisis, certainly not those in power or they'd do something about it, right? Far from reassuring the markets yesterday, they continued selling into the close as it seemed like the Fed have their heads in the sand and are running their models on some sort of fantasy economy that doesn't reflect the reality those of us on the ground are trying to deal with.
The Fed sees a bubble but they aren't eager to rein it in, like Bernanke before them, they are trying desperately to have it both ways because, as we know, we have a President who judges his performance by how high the Dow goes and no one who wants to be the next Chairman wants to burst Trump's bubble.
As I noted yesterday, it is possible for the economy and Consumer Wages and Corporate Profits to catch up with the bubble values we currently have but there are also so many potential danger points – we have to have a whole lotta luck to bounce past the danger without at least some sort of correction.
That being said, we have PLENTY of hedges and they were stress-tested yesterday so we went bargain shopping and found 4 long trades that we added to both the Long-Term Portfolio and our Options Opportunity Portfolio. The stocks we liked were Cisco (CSCO) at $31.76, Finisar (FNSR) at $26.58, GE (GE) at $27.21 and Target (TGT) at $52.07 and, of course, we sent out a Top Trade Alert with some options plays that leverage the gains for our Members.
In our June 23rd Top Trade Alert we also picked GE as well as Sprouts Farmers Market (SFM), which had fallen all the way to $20 (now $22, up 10%), Quicklogic (QUICK), which was languishing at $1.20 (now $1.50, up 25%) and Chicago Bridge and Iron (CBI), which just blasted 39% higher yesterday and is on the way back to $30 for a nice double on the stock alone (way more with options).
In yesterday's morning report we were liking the Russell Futures (/TF) short at 1,415 and we hit 1,400 for a $1,500 per contract gain there and the Nikkei (/NKD) shorts topped out at $500 per contract gain but the Dollar (/DX) was as dangerous as we thought it was into the Fed and is now at 96.15, which is down $300 per contract – can't win them all but I still like those contracts down here.
Today we're keeping a close watch on the Nasdaq to see how bouncy it is. We had a big discussion about those levels in our Live Member Chat Room, so I won't rehash it here but suffice to say that 5,690 on /NQ is the strong bounce line so bullish if we pop over and bearish if we don't – simple enough?
We've already bet a bit more bullish – having faith that the low-volume pre-holiday trading will make it very easy to dress the end-of-quarter windows and next week will be completely pointless with Monday a half-day and Tuesday closed, which means a lot of people (including me) will stretch it out to a week's vacation.
And, of course, we have our hedges – don't leave home without them!
