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The Battle of the Central Bank

Jeff BishopJeff Bishop ·

It’s pretty remarkable to think that just a few short weeks ago traders thought we were setting up for a market crash… we were losing the China trade war…and the bond market signaled the U.S. economy was headed for a recession.

But guess what?

The stock market is back to all-time high levels.

So what exactly changed over the last few weeks… and what can we expect next?

Europe making moves

Well, we’ve already seen the European Central Bank (ECB) cut its benchmark interest rate — pushing it further into negative territory to support the economy. Not only that, but it relaunched its bond-buying program.

With the U.S. Federal Reserve set to meet this week, many traders are wondering what the Fed will do.

Will they move in lock-step with the ECB and cut interest rates to satisfy traders and support the economy?

Or does Fed Chair Jerome Powell and gang still believe the economy is in “a good place”?

Riddle me this?

The Fed is expected to cut rates this week. And the U.S. stock market is near all-time highs.

Typically, rate cuts are done to stimulate a slumping market. 

Except this market is running hot.

The best thing to do now is to remain patient and wait to see what the Fed says…I do believe this meeting will be market-moving event.

Do we blast through all-time highs or do stocks take a dive like they did in August?

Either way… I’ll be diving into my grab-bag of trading strategies to pull profits from the options market.

This week’s edition of The Jump includes my favorite trade setups and charts, in-depth coverage on the upcoming Fed announcement, as well as economic catalysts, upcoming corporate earnings, and the IPO calendar.

Do We Have A Slowdown?

Since the end of The Great Recession — just about a decade ago — the market has continued to grow in both revenues and earnings.

Wall Street analysts are now forecasting revenue and earnings to grow at a rapid pace into 2020.

Sure, Wall Street analysts are eternal optimists because it’s bad business for them to indicate slowing revenue and earnings growth. Basically, they’re incentivized to stay overly bullish on the market…

… and if you just look back to 2008… they were forecasting growth, as they watched the market plummet.

But that all traces back to the central banks.

Do we actually trust the central banks to make the right decisions? They’re dogmatic in their mandates to a fault.

Think about when congress questioned Fed Chair Jerome Powell about returning to the gold standard, back in July…

“If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate, and we wouldn’t care” – Jerome Powell. July 10th, 2019.

It’s quite clear the Fed is very opinionated and shouldn’t get swayed by what the overall market is doing.

However, when traders are expecting the Fed to cut rates in its upcoming monetary policy meeting… you’ve got to think that Powell and company will try everything in their power so they don’t spook the market, as we saw in the Fed’s last rate cut decision.

Source: CME Group

What to Expect in the Fed’s Monetary Policy Meeting

Traders are pricing in around an 80% probability that the Fed will lower interest rates by another 0.25% — and leave the door open for further rate cuts.

However, the Fed is in a bit of a spin cycle right now that’s got them in a daze.

The Fed has been trying to figure out when to end the cycle of rate cuts…

… and that either ends when the Fed buoys economic growth by cutting interest rates further…

… or the economy actually falls into a recessionary period and the Fed slashes rates and moves towards a 0% interest rate policy.

There isn’t much else the Fed can do… and we’ll be getting some major clues in the Fed’s press conference on Wednesday.

So far, we’ve heard Powell note that the economy is still strong and in a good place… but there are still uncertainties stemming from slower global growth projections and trade wars.

It’s a zero-sum game for the Fed… and the only way to “win” might be to follow through with actual rate cuts… otherwise, it may unwind everything they’ve done to counteract all the growing risks on the table.

So, you have most major central banks outside the U.S. cutting rates to 0% or lower. The Fed is expected to cut rates. And the chart of the SPY looks like this:

Can the market keep going higher despite everything?

Sure.

You have money flying into equities right from the central banks. Even with central banks actively driving up bond prices, can we trust that’s where the smart money is going?

This chart doesn’t exactly look sustainable.

The interesting thing to note is that many traders are pricing in a rate cut… but we’ve seen the iShares 20+ Year Treasury Bond ETF (TLT) actually pull back, and it looks like it’s setting up for a bearish crossover… which can send shockwaves throughout the entire market.

How to Trade in This Wacky Environment

Here’s the rub… there are way too signs that the market can pull back and potentially crash from these levels. Consider all of the following:

  1. Gold prices have been soaring
  2. Bonds are still trending higher
  3. Central banks continue to cut rates
  4. The dollar keeps inching higher despite Fed rate cuts
  5. The S&P P/E multiple sits at 22.4x
  6. Tariff wars continue to ratchet up
  7. Most major market outside the U.S. is in bear market territory

I can’t look at all these facts with a straight face and say, the market deserves new highs.

It may not happen tomorrow… but one has to believe the market can’t continue making highs without corrections along the way.

However, right now, I’m remaining patient with my market plays and focused primarily on stock-specific setups.

For the most part, I’m placing strategic options bets and focused on my charts.

For example, I opened a call spread position in Amazon.com Inc (AMZN) as a quick trade against the chart resistance.

Some other trades I’m looking to play include:

Call spreads


NFLX, FB, DE, IWM, ROKU, AMZN, NKE, FDX, TLT


Put spreads

FIVE, TWLO, BYND, TWTR, DIS, NOW, YETI, STNE, WYNN, RACE, WWE, W, CVNA, PLNT

Now, let’s take a look at some economic catalysts on the calendar.

Economic Calendar

Monday, September 16

  • 8:30 AM EST               Empire Manufacturing

 

Tuesday, September 17

  • 7:45 AM EST               ICSC Weekly Retail Sales
  • 8:55 AM EST               Johnson/Redbook Weekly Sales
  • 9:15 AM EST               Industrial Production
  • 9:15 AM EST               Capacity Utilization
  • 10:00 AM EST             NAHB Housing Market Index
  • 4:00 PM EST               Net Long-term TIC flows
  • 4:30 PM EST               API Weekly Inventory Data

 

Wednesday, September 18

  • 7:00 AM EST               MBA Mortgage Applications Data
  • 8:30 AM EST               Building Permits
  • 8:30 AM EST               Housing Starts
  • 10:30 AM EST             Weekly DOE Inventory Data
  • 2:00 PM EST               FOMC Rate Decision on Interest Rates
  • FOMC Rate Decision on Interest Rates at 2:00 PM EST with press conference at 2:30 PM
  • Facebook, Twitter and Google to testify before the Senate

 

Thursday, September 19

  • 8:30 AM EST               Weekly Jobless Claims
  • 8:30 AM EST               Continuing Claims
  • 8:30 AM EST               Philly Fed Survey Outlook
  • 10:00 AM EST             Existing Home Sales
  • 10:00 AM EST             Leading Index for August
  • 10:30 AM EST             Weekly EIA Natural Gas Inventory Data

 

Friday, September 20

  • 11:20 AM EST             Fed’s Rosengren speaks in New York
  • 12:00 PM EST             Household Change in Net Worth for Q2
  • 1:00 PM EST               Baker Hughes Weekly Rig Count

 

We’ve got a relatively light earnings calendar this week, but earnings season is right around the corner… and it makes sense to gear up for it by watching some of these stocks.

Now, on the IPO front… we’ve got a couple of stocks set to go public this week.

IPO Calendar

  • Datadog (DDOG) 24M share IPO expected to price between $19-$22
  • Envista Holding (NVST) 26.768M share IPO expected to price between $21-$24
  • Exagen Inc. (XGN) 3.33M share IPO expected to price between $14-$16
  • IGM Biosciences (IGMS) 7.812M share IPO expected to price between $15-$17
  • Ping Identity Holding (PING) 12.5M share IPO expected to price between $14-$16

Trading IPOs is one of the ways to avoid getting roped into trading the market… and they can provide some lucrative opportunities… if you have the right system.

That’s why Jason Bond and I sat down with IPO expert — Ben Sturgill — to discuss the life cycle of an IPO and how to spot three simple patterns to uncover massive opportunities.

If you missed it, make sure to watch the replay before Monday so you know how to prepare for all the stocks set to go public this week.

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