The Fed: 9 Things Traders Need to Know
Fun fact: the Fed’s job is not to make the stock market go up. Believe it or not, the Central Bank doesn’t care about your 401K balance. So what is the purpose of the Federal Reserve system in the U.S., and how did it come to be? We’re gonna talk about that and a whole lot more today: The Fed Was Born Out of a Fake Duck Hunt on Jekyll Island The U.S. Federal Reserve system was born out of a secret meeting disguised as a duck hunting trip on Jekyll Island off the Coast of Georgia. Seriously. No wonder there’s so many conspiracy theories about the Fed… Rhode Island Senator Nelson Aldrich invited five friends, mostly bankers, on a “duck hunting trip” at the private Jekyll Island Club in November 1910. But the trip wasn’t for hunting. The group was meeting to establish a framework to centralize the U.S. banking system. JP Morgan was a member of the club and is believed to have arranged for them to use the clubhouse. The meeting came in the wake of a series of U.S. financial crises, including The Panic of 1907, and was kept secret to avoid controversy over banking executives being involved in reforming the banking system. Aldrich took the group’s ideas back to the National Monetary Commission established by Congress to study reforms of the banking system. After three years of debate, Congress passed the Federal Reserve Act in late 1913. President Woodrow Wilson signed it into law on December 23, 1913, creating the Federal Reserve System simply referred to as “The Fed” or “The Central Bank” today. And the Jekyll Island meeting? Participants did not publicly admit it happened until the 1930’s. But it’s more than just one big bank. There Are 12 Federal Reserve Banks The Fed is more than just the central bank located in Washington, D.C. The system consists of regional Federal Reserve Banks in 12 districts: Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Each regional bank has its own nine-member board of directors who appoints a president, subject to the approval of the larger Federal Reserve Board of Governors. Each president serves on the Federal Open Market Committee which sets monetary policy, including interest rates. The New York Fed is the Most Important District The Federal Reserve Bank of New York is the most important district and is the only regional bank with a permanent voting position on the Federal Open Market Committee. New York is the bank that actually implements the policies decided by the FOMC. The New York Fed’s Open Market Trading Desk buys Treasury bonds and mortgage-backed securities from large commercial banks in order to manipulate the money supply in the U.S. economy. The Fed System Has a Board of Governors In addition to the regional Fed presidents, the U.S. Federal Reserve system has a seven member Board of Governors. All seven members are nominated by the U.S. President and confirmed by the Senate for a 14-year term. Their terms are staggered, with one of the seven expiring every two years on January 31. This stagger is meant to create political independence at the Fed by ensuring one President cannot “stack” the board with members of a particular political persuasion. A Fed Governor cannot be reappointed after serving a full 14-year term. The President chooses the Federal Reserve Chair and Vice Chair for four-year terms out of the members of the board. The Chair and Vice Chair can serve multiple terms throughout their 14-year board term. The FOMC Was Not Established Until 1935 The Banking Act of 1935 established the Federal Open Market Committee (FOMC) as the policy decision body of the Federal Reserve. Before this, the 12 Fed regional banks worked together to decide monetary policy each year. The FOMC consists of all seven members of the Board of Governors and the 12 regional Fed presidents. But the 12 presidents don’t all have a voting seat at every meeting. The seven Fed Governors and the New York Fed all have permanent voting positions. The other 11 regional presidents serve on a rotating schedule in the other 4 voting seats on the FOMC. The rotation schedule is as follows: One from Boston, Philadelphia, or Richmond One from Cleveland or Chicago One from Atlanta, St. Louis, or Dallas One from Minneapolis, Kansas City, or San Francisco Each voting member serves a one-year term in the seat before it rotates to the next one in line for their seat. By tradition, the Fed Chair is elected by the FOMC as its chair and the New York Fed president is elected the FOMC vice chair. The Fed Has a Dual Mandate You might be surprised to learn the Fed’s job isn’t to make the stock market go up. In 1977, the Fed was given a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.” Although that’s actually three goals, this is often referred to as the bank’s “dual mandate”. In plain English, that means the Fed’s purpose is to ensure economic conditions in the U.S. are conducive to a fully-employed labor market with stable inflation. They accomplish these goals by changing interest rates and manipulating how much cash is circulating through the economy. The Fed Doesn’t Set the Interest Rate on Your Car Loan The Fed’s most widely used tool is interest rates. But we’re not talking about the rate on your mortgage or car loan. The interest rate set by the Fed is the federal funds rate, which directly impacts banks, and then consumers down the line. Commercial banks lend each other money for short periods in order to meet the cash reserve requirements from the Fed. These are typically one-night loans. But when one bank sends another money, the recipient bank must send the cash back the next day with interest. The rate on that interest is the federal funds rate, which
Continue Reading -->The Bearish Breaking Point
Figuring out the bias of the market this week should be pretty clear, at least according to Sami. What level is he watching for, and how does that tell him whether or not the market is bearish? In this video, Sami explains: – What an hourly chart shows for ADGI – How many ideas he’s planning on taking this week – Which group of stocks is very bullish – Why DAC may be headed towards all-time highs – What kind of breakout can be found in MDRX
Continue Reading -->Traders Are Starting to Like Bitcoin Again
What’s the big story in today’s sentiment report? The Bitcoin bulls are returning. So let’s get to it. SPX Mood Is Semi-Sour SPX sentiment is off the lows, but in semi-sour territory at 58%. This is slightly below the long-term average of 63%, and basically flat from last week. Bitcoin Sentiment Rising Bitcoin sentiment is up for a second week in a row, which is no surprise given Bitcoin’s big pop over the weekend. Apple Mood Unchanged Apple (AAPL) delivered a monster earnings report after the close two weeks ago, which improved the mood in short order. But the mood is basically flat from last week: Tesla Looks Like Apple Tesla (TSLA) is not much different from Apple – up from the lows but largely unchanged. Gold Still All Over the Place Gold sentiment has been largely all over the place from week-to-week, which is no surprise given that it’s so hard to get a read on the metal itself. Traders Still Love Oil Sentiment on oil has been bizarrely stable for the past 5 weeks in the 70% range. And that’s no surprise given how strong oil and related stocks have been in 2022. What Happens Now? Traders have gone from very bearish 3 weeks ago to relative neutral now. We would likely need more upside to get traders outright positive on the action. So this feels like a bit of a no man’s land. What are your thoughts? Let us know in the comments below!
Continue Reading -->Scott Redler’s Dog Bytes: Bears vs. Tech
Last week, the markets had a nice calculated bounce to bring the Oscillator from -100 to +20. The question is now did we just see the 2022 low or will we digest and rebuild for new highs? Now I’m using SPX 4451 as active support and 4539 as resistance. Some stocks can be held with care which I’m doing, along with range trades for cash flow. I did put on a bit more risk Friday.AAPL will be interesting. The bears can’t growl too loudly if it holds the $170 area. If we have a positive week, there’s room to $176. MSFT is sloppy at times. We can’t be too bearish if it stays above $299.97, but it needs time to rebuild and be trusted. GOOGL will be good for clues and a potential swing long. Some will try to be long vs. $2810. And if tech gets better, this should help lead the way. Getting back above $2900 would help sentiment. AMZN worked well for us. I netted 100+ points in my call spread. Now I’ll see if it can create a new pattern to tactically approach but I’m not in a rush. $3012 is new active support. Pivot resistance is $3224. NFLX gave a decent tactical move from $395 to $458. On Friday, I focused on the pullback. Some bought it with the Red Dog Reversal at $404. I sold puts for last Friday (which worked) and this Friday.Positions Disclosure as of 2/7/2022 at 8:40 a.m. ET
Continue Reading -->Which Stocks Are Working in 2022? Not a lot…
2022 has been a crazy year for stocks. After 3 years of eye-popping gains, the S&P 500 is down 5% with major weakness in tech stocks and small caps. We’ve seen the collapse of the Ark Innovation ETF (ARKK) amid a larger crash in growth stocks. And earnings season has been total chaos with plenty of winners (SNAP, AMZN) and losers (FB, SPOT). We even had “Ugly Chart Time” on January 21. But let’s shift our tone and ask a more optimistic question: what has been working in 2022? The answer overall is… energy, banks… and not much else. The Energy Stock Craze Is Real In April 2020, oil prices went negative when demand collapsed because of the COVID-19 pandemic. Fast forward to February 2022, and oil is above $90 at 8-year highs. So as you might expect, energy stocks are BOOMING. The Energy Select Sector SPDR Fund (XLE) fund is up 27% in 2022 after a 46% run in 2021. OIH is also doing well, up about 25%. What else is working? Banks Are Doing Okay With the rising rate environment, banks are up in 2022, with the Financial Select Sector SPDR Fund (XLF) rising about 4%: But like everything aside from energy, XLF is off the highs and peaked back in January. And outside of energy and banks, there are very few stocks up in 2022, period. We just saw big post-earnings pops in Amazon (AMZN), Snap (SNAP), and Pinterest (PINS)… but they are all down YTD. And what’s not working in 2022? While the embattled ARKK recently came off the lows, it’s still down 23% year-to-date. Time will tell if the Jim Cramer “drowning” incident on January 27 marked a long-term bottom: I’ve disagreed with most of Cathie’s investment theses since last year (been in $SARK since its inception), but this is just brutal after today’s price action… @jimcramer $ARKK $TSLA $COIN $HOOD pic.twitter.com/oJ3YynrGfP — sᴇɴᴛɪɴᴇʟ 🎲 (@KryptoSentinel) January 27, 2022 Small caps remain a sore spot, with IWM down 11% YTD, more than double the SPX’ loss: Social media has been in rough shape, with Meta Platforms (FB) down 30% YTD after its weak earnings report: Meme stocks are also feeling the pain, with AMC (AMC) down a crazy 42% YTD. The cannabis sector had a horrible 2021 and things aren’t looking much better this year, with MSOS off 14% so far: But overall, traders appear to have destressed a bit, because the VIX is well off the highs: The Big Picture: Derisking The big picture in 2022 remains the same: traders fear rish. Yes, we are off the lows and sentiment has improved, but traders are looking for confirmation that the recent bounce can extend. Where can that confirmation come from? Growth stocks picking up (ARKK is the easy way to watch them) Small caps and tech showing relative outperformance Traders buying the dip in risky sectors like biotech and cannabis)
Continue Reading -->The Top 11 Economic Indicators Traders Need to Know
Traders are obsessed with economic indicators and data. Why? Because economic numbers move stock prices, commodities prices, options prices, interest rates, and just about everything else you can think of. So it’s a good thing the government is always giving us a fix! But which ones should you pay most attention to as a trader? Here’s a breakdown of the top 11 indicators that traders like you need to know about. 11. Homebuilder Sentiment From the National Association of Homebuilders Released at 8:30 a.m. ET in the third week of the month Measures builder confidence about current and future market conditions To judge Homebuilder Sentiment, The National Association of Homebuilders conducts a monthly survey of its members in partnership with Wells Fargo. The survey asks NAHB members to rate market conditions based on their personal experience. The questions are centered around the current state of the market, conditions 6 months from now, and the traffic of prospective buyers. Builders are asked to rank current and future sales conditions as “good”, “fair”, or “poor”. Prospective buyers are rated as “high to very high”, “average”, or “low to very low”. NAHB seasonally adjusted the number of responses in each category, “Good/High” or “Poor/Low” They then use this formula: (Good/High – Poor/Low + 100), to calculate the monthly index on a scale from 0 to 100. If every response was Good/High then the index will be 100. If all responses were Poor/Low it would be 0. Readings above 50 are considered positive. This index is a leading indicator for future home construction, since it is based on future expectations. The market uses this report to gauge how builders themselves are feeling about their future. NAHB has conducted the monthly survey since January 1985. 10. New Home Sales, Starts & Building Permits From the U.S. Census Bureau Housing Starts and Building Permits report released on the 12th workday of the month at 8:30 a.m. ET New Residential Sales report released on the 17th workday of the month at 10:00 a.m. ET Measures pace of new home construction and sales of newly built homes Housing starts measure how many new homes builders broke ground on each month. It’s a lagging indicator because it measures past activity. Building permits measure how many new permits were approved to build homes in the months ahead, making it a leading indicator. The numbers are reported together by the Census Bureau to measure the health of new home construction. Housing starts and permits include both single-family homes and multi-family buildings. The Census Bureau also reports new residential sales each month. This is a measure of how many newly constructed homes were sold the previous month and is a lagging indicator. The report includes sales data on both single-family homes and multi-family units. The data is reported at a seasonally adjusted annualized rate in order to avoid large swings based on season. The new residential sales report includes data on supply (how many units were for sale at the end of the month) as well as prices. It also breaks down new homes by construction status: not started, under construction, or complete. This group of reports gives the stock market a measure of the overall health of the new home market. 9. Existing & Pending Home Sales From the National Association of Realtors Existing Sales report released in the 3rd week of the month at 8:30 a.m. ET Pending Sales report printed in the 4th week of the month at 8:30 a.m. ET Measure of existing home sales closed in the previous month and number of contracts signed to purchase a home The National Association of Realtors reports existing home sales around the 20th of each month. This report measures the total number of closed sales in the previous month, making it a lagging indicator. Sales are reported at a seasonally adjusted annualized rate, which means the numbers are smoothed out to eliminate the impact of seasonal changes. Home sales are typically faster in summer and slower in winter. The existing sales report also includes data on supply levels and home prices. NAR reports pending home sales in the week after existing sales. This report is a measurement of the number of contracts signed to purchase a home in the previous month. Pending Home Sales are a leading indicator for the housing market. This report typically impacts home building stocks directly. 8. Retail Sales From the U.S. Census Bureau Released mid-monthly at 8:30 a.m. Measure of consumer spending in the U.S. The retail sales report measures the total amount U.S. consumers spend on goods and services per month in 13 categories: Motor vehicle & parts dealers Furniture & home furnishing retailers Electronics and appliances Building materials and gardening Food and beverage stores Health & personal care Gasoline Clothing and accessories Sporting goods, hobby, musical instruments, book store General merchandise Miscellaneous retailers Nonstore retailers (online) Food services and drinking places (restaurants and bars) The monthly report includes a headline number, and retail sales excluding auto and gasoline sales. Auto and gas numbers are considered volatile because prices rise and fall more often than other categories. Each monthly report also includes revisions for the two months prior. Retail sales is a lagging indicator, reporting data from the previous month. The market will typically rise on a good retail sales report and fall with a bad one as it signals the strength of the consumer side of the economy. 7. GDP From the Bureau of Economic Analysis Released at 8:30 a.m. ET, typically on the last Thursday of the month Measures U.S. economic growth by quarter GDP stands for Gross Domestic Product. The Bureau of Economic Analysis reports GDP on a quarterly basis. The advanced estimate for each quarter is typically released on the last Thursday of the first month following the conclusion of the quarter. The first revision is then printed the following month and the final revision the month after that. So for the first calendar quarter ending in March, you
Continue Reading -->Scott Redler’s Dog Bytes: Earnings Action in F.A.A.N.G. Stocks
The SPX hit a low of 4222 and held 4287 Friday, giving a relief rally. It feels like this can continue for a bit. But I think things would be hard if it sees the 4495-4505 area, with 4530-4569 above. If we get an oversold bounce it might form a right shoulder to complete a macro head & shoulders pattern, but we’ll measure it daily.AAPL responded well to earnings on Friday. Can money hide here and buy dips? We shall see. I’m long and will see if it can hold the $167 area to start a better active sequence. Below that, it gets sloppy. NFLX: Reed Hastings buying stock (after Ackman last week) has it trading better. It’s hard to chase. But if it holds the $295 area, it can test the earnings gap pivot up near $408. FB has earnings on Wednesday. I’m not doing an options strategy but it will be interesting. See if it holds today and goes green for a trade. $293 is the low. AMZN broke $3300 and hit a low of $2709. There is a defined lower pivot ahead of earnings Thursday. There’s room to $3125-$3150 before the report. GOOGL has earnings on Tuesday. It will be important for sentiment. I’m not playing it. Big resistance is at $2786ish.Positions Disclosure as of 1/31/2022 at 9:01 a.m. ET
Continue Reading -->Do You Still Hate the Market?
For the past two weeks, traders have hated the market. And they were right, because stocks dropped and the VIX hit a 13-month high. But with the market rallying off the January 24 SPX low at 4222, the mood has brightened a bit this week. SPX Bulls Coming Back to the Party Our survey has not had more bulls than bears since January 2, 20221. So we can say our community has been pretty accurate in terms of calling the action.Now, 59% of surveyed traders are bullish, which is just slightly below the long-term average of 63%. Bitcoin Sentiment Split Bitcoin has bounced a bit from the January 23 lows, when sentiment bottomed out at 34%. Now, the crowd is split 50-50 between bulls and bears. Apple Bulls Return After Earnings Apple (AAPL) delivered a monster earnings report after the close Thursday and the stock popped nicely. So the mood has gotten much more positive, with 67% of surveyed traders saying they are bullish for the next 30 days. Feeling About Tesla Perk Up Tesla (TSLA) is down almost 20% year-to-date, and that appears to be attracting some traders. 55% of surveyed traders are now bullish, up from just 32% two weeks ago. Gold Bulls Step Away Gold struggled last week, so sentiment on gold soured once again. Now just 53% of surveyed traders are bullish on gold. Traders Still Love Oil Oil has been the place to be in 2022, with XLE up 18.3% and OIH up 23.0%. What Happens Now? For two weeks, we asked the question “Does Negative Sentiment Mean We Are Bottoming Out?” For now, the answer is yes. Now with sentiment in more neutral territory, it will be interesting to see if the market can creep crawling higher.
Continue Reading -->The ARKK ETF Bloodbath: 7 Things You Need to Know
The ARK Innovation ETF (ARKK) was poster child for the post-Pandemic stock boom with its blistering 149% in 2021. Cathie Wood, CEO and CIO of Ark Invest, became a bonafide rockstar in the industry, and some folks thought she could be the next Peter Lynch or Warren Buffett. In February 2020, Bloomberg called her “the best investor you’ve never heard of.” But ARKK has fallen on hard times as expensive growth stocks came back down to Earth. So let’s go through 7 things you need to know about the ARKK ETF. 1) ARKK Invests in “Disruptive Innovation” Few people will ever read the prospectus for an ETF — but we just did. So what is the ARKK ETF all about? ARKK specializes in what it calls “disruptive innovation.” In their words: The Adviser defines “disruptive innovation” as the introduction of a technologically enabled new product or service that potentially changes the way the world works. The Adviser believes that companies relevant to this theme are those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to the areas of genomics* (“Genomic Revolution Companies”); innovation in automation and manufacturing (“Automation Transformation Companies”), transportation, energy (“Energy Transformation Companies”), artificial intelligence (“Artificial Intelligence Companies”) and materials; the increased use of shared technology, infrastructure and services (“Next Generation Internet Companies”); and technologies that make financial services more efficient (“Fintech Innovation Companies”). In plain English, this means that ARKK invests in expensive, high-beta tech stocks. And according to the prospectus, ARKK has to invest at least 65% of its assets in companies that follow the “disruptive innovation” theme. This is why ARKK can’t just go to cash like an individual trader might. The fund was launched on October 30, 2014, and currently has $16.1 billion in assets. 2) ARKK Is in Some WILD Stocks You know an ETF is wild when the most stable stock in its top 10 holdings is Tesla (TSLA)! All of ARKK’s top 10 holdings are expensive, high-beta stocks that move really far, really fast: Tesla (TSLA) Zoom (ZM) Teledoc (TDOC) Roku (ROKU) Coinbase (COIN) Exact Sciences (EXAS) Unity Software (U) Spotify (SPOT) Intellia Therapeutics (NTLA) Uipath (PATH) ARKK has a beta of 1.54, meaning for every 1% the S&P 500 moves, ARKK moves 1.54%. That means ARKK moves about 50% faster than the S&P. Unfortunately, since ARKK peaked, those fast moves have been mostly to the downside. 3) ARKK Was In the Right Stocks at the Right Time When COVID-19 hit in early 2020, people began spending way more time at home, particularly for work. That was bad for some sectors like airlines and restaurants. But it benefited some of ARKK’s biggest holdings like Zoom (ZM), Teledoc (TDOC), and Roku (ROKU), all companies which benefited from more people being at home. Plus, ARKK’s biggest holding was Tesla (TSLA), which had a monster 2020. . You can call it luck or skill — but Cathie Wood got in the right names at the right time. 4) The Right Names Became the Wrong Names This chart compares the S&P 500 (on top) with ARKK (on bottom). ARKK peaked at $160 on February 16, 2021… and then started sliding. That was 11 months before the S&P 500 topped out at on January 4, 2022. What happened? Why did ARKK flame out so much earlier? Simple — because as the economy reopened ,“stay at home” names like Zoom (ZM) and Teledoc (TDOC) began dropping. For example, Teledoc has falled 82% off its highs: Traders’ declining tolerance for risky stocks also seemed to be a factor. With the Fed pulling away the punchbowl to fight inflation, traders started shying away from the wild names. So small caps underperformed in 2021, as did the ultra high-valuation tech stocks Cathie Wood favored. New IPO names were also messy. For example, ARKK has been a repeated buyer of Robinhood (HOOD), which has been in a hideous downtrend since its post-IPO peak. Meanwhile, traders were shoveling cash into traditional tech stocks like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA). Plus, energy, housing, and financials were big outperformers in 2021. You don’t see those types of stocks in ARKK. And in 2022, energy is the only sector that’s shining. OIH is up 24.3% and XLE is up 19.4%, while the S&P 500 is down -9.8%. Meanwhile, ARKK is down 31%. And if we’re considering all-time highs, ARKK is -59.1% off its high, while the SPX is off 10.8%. 5) ARKK’s Long-Term Performance Is Still Pretty Amazing Even with ARKK’s underperformance in 2021 and 2022, the fund is a staggering long-term success According to Morningstar, ARKK has an 5-year average return of 28%, almost doubling its category average. In this chart, ARKK is the blue line, and you can see it’s still way above its category (red line): As of this article, Morningstar rates ARKK as 4 out of 5 stars, putting in the top 32.5% of funds relative to category peers. However, Morningstar ratings are backward looking so they’re not helpful in judging future performance. 6) People Are Waiting for Cathie Wood to Give Up If you follow social media chatter, particularly on Twitter, you’ll know that Cathie Wood has received a lot of criticism for her bold predictions, For example, she recently said Bitcoin could hit $1 million by $2020. Bitcoin would multiply in price 27 fold for that to happen. In late December, she said she expected her strategy to deliver a compound return of 40% over the next five years. That equates to a 460% return. And many traders are desperate to see Wood capitulate and turn bearish, the idea being that if she gives up, high-growth stocks wilh have bottomed. Interestingly, CNBC’s Jim Cramer “drowned” ARKK on his Mad Money show: I’ve disagreed with most of Cathie’s investment theses since last year (been in $SARK since its inception), but this is just brutal after today’s price action… @jimcramer $ARKK $TSLA $COIN $HOOD pic.twitter.com/oJ3YynrGfP —
Continue Reading -->Where is QQQ Going Next?
Last week Sami mentioned that support for QQQ would be at 350. At the start of this week, QQQ is already at support, but that doesn’t mean that it’s going to hold. Find out where he thinks the market is heading next and when it might get there. In this video, Sami explains: – What’s so difficult about Bitcoin – Why this week is harder to predict – Where to place targets for DOGZ – Which pattern can be found in GFI – How OVV compares to USO
Continue Reading -->