General Market Update
The equity market finished significantly higher yesterday with S&P500 rising 0.97% and Nasdaq composite 1.39%. Breadth was very bullish with advancing issues beating declining issues 2.5:1 on the NYSE and 2.4:1 on the NASDAQ. The market opened with a gap up after ECB President Mario Draghi’s dovish statement that the ECB would be ready with additional stimulus if needed. The real boost came from President Trump’s tweet that there would be an extended meeting with Chinese Premier Xi at next week’s G20 summit.
Why the Fed will (should) wait
President Trump had warned last week that he would raise tariffs on $300 billion Chinese goods, if President Xi would not show up at the G20 summit. That sounded like coercion. But later in the week Trump contradicted himself by saying that negotiations would continue and eventually the US would have a deal with China. That was a 180-degree turnaround. Finally his tweet yesterday was really music to the market’s ears. Once the FOMC meeting is out of the way, the market will be fixated on the G20 summit.
At this juncture it should be wise for the Fed to hold off the rate cut, and wait to see what transpires at the Trump-Xi meeting. If there is a breakthrough at the meeting, then there would be no need for a rate cut, because the global economy and the markets would begin to rise again. However, by cutting the rate now the Fed will have wasted its ammunition which is running low. As depicted in the chart below, the Fed funds rate is now less than half of what it was at the beginning of last three recessions since 1980. The Fed should reserve its firepower, in case there is a severe economic downturn in 2020.
Fed funds rate. Chart @macrotrends.net
Ratcheting up the stop loss
QuanTimer market stance is bullish at present. Please review our market outlook in an earlier post here -
While we remain bullish in S&P500 and Nasdaq broad indices, we also try to protect ourselves with stop loss and tailing stop loss orders. In one of our base models that is based on QQQ, the current stop loss is set at 179.48. The position was opened on June 4th at 171.98, and QQQ closed yesterday at 186.41.
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