Stocks Hit New Highs After Earnings, Bernanke
Bernanke Congressional testimony vague, but opens the door to continued stimulus. Most earnings reports show strength, tech stocks show negative exceptions. Summer volatility likely to start setting in, central bank comments continue to garner market attention.
The S&P 500 posted another record close on Friday, propelled largely by Congressional testimony from US Federal Reserve Chairman Ben Bernanke. Macro data has taken a back seat in recent weeks, as most investor attention is focused squarely on assessing the next direction from various central banks around the world. The European Central Bank (ECB) has hinted at the possibility of reducing interest rates as a means for supporting a regional economy in recession. The Reserve Bank of Australia (RBA) removed some of the expectation for one more rate cut before the end of this year as manufacturing activity slows for its major trading countries. Recent elections in Japan show that the Bank of Japan (BoJ) will be able to enact activities to further weaken the Yen.
The main event last week, however, came from the US Federal Reserve, with official commentaries suggesting that all policy options are still on the table. What this really means is that the Fed is open to the possibility of maintaining its current monthly asset purchase rate of $85 billion, which could even be increased if economic data remains sluggish. This reverses some of the market’s recent expectations, as investors have recently positioned themselves for a reduced stimulus environment. On the whole, this is supportive for stocks (both in the US and globally) and negative for the US Dollar.
The Week Ahead
In the week ahead, the economic calendar is full of second-tier releases. But it is still important to remember that we are in the early phases of earnings season and we have already seen some interesting developments when looking at things on a sector-by-sector basis. Specifically, tech stocks have been disappointing, with big misses seen at AMD, Google, Microsoft and Intel. This diverges with what is seen in the market as a whole, as roughly 3/4 of reporting companies have beaten consensus estimates. Keep an eye on these developments, as well as new commentary from voting members at central banks.
My Trade Ideas (Trade on CommuniTraders):
1. The Swiss Franc saw some buying activity last week, with prices in the USD/CHF and EUR/CHF moving away from my yearly price target in both cases. I am viewing these moves as a buying opportunity in both pairs, but given the relative weakness in the EUR/CHF, I will be looking for new long positions. Arguments here can go either way, as the EUR/USD looks to be in the early stages of a head-and-shoulders pattern (USD bullish), but I am a contrarian by nature and would rather use the EUR/CHF as a vehicle for playing the expected trend. This week, look to buy weekly CALL options in EUR/CHF at the week’s open on Monday, which should come in near the 1.2350 area.
2. For stock trades, I will be looking to capitalize on the disappointing numbers posted by the large-cap tech names that have already put a dark cloud over the prospects of the current earnings season. Cost-per-click numbers at Google (GOOG) showed declines of 6%, as the company continues to have difficulty capitalizing on consumer transitions to mobile devices. And with broad weakness seen in the secctor as a whole, I will be looking at any bounces as a monthly selling opportunity. Buy one month PUT options in GOOG on any rallies into resistance at 905.