Financial markets are at a crossroads. For several years, the global economy has been subjected to near-zero interest rates. This has sharply inhibited economic growth. One of the consequences of historically low interest rates has been complete immersion in equities markets. In a matter of weeks, the Dow Jones Industrial Average has hit record highs and is now trading at well over 19,000. Several important trends have been taking place in the US economy, not least of which is rising consumer sentiment. However, another measure has gained prominence in recent weeks and that is the CEO confidence index. This index has spiked sharply since the election of Donald Trump to the Oval Office. Executive-level confidence has been bolstered, thanks to multiple economic indicators including the job market and the housing market.
The volatility index – a measure of uncertainty in the financial markets is currently at 11.75, down 0.89 points or 7.04%. That volatility is sharply lower than its 52-week high (32.09) is extremely important as a gauge of market sentiment in the US economy. This index measures the implied volatility for stock options on the S&P 500 index. It focuses on the S&P 500 index over a 30-day period. Some of the indices and exchange traded funds included in the VIX are the Nasdaq 100, EUR currency trust, gold SPDR and the US oil fund. The correlation between the VIX and the performance of the S&P 500 is clear: As the index rises, so the VIX plunges. We are now seeing the lowest level of the VIX since the summer of 2016. The historic average of the VIX is 20, and the current figure of 11.75 is extremely low.
The Fed Rate Hike is Looming Large
On Wednesday, 14 December 2016, the Fed will announce its decision on interest rates. The current rate of interest is 0.25% – 0.50%. There is a 94.9% likelihood of rates rising 25-basis points to 0.50% – 0.75%. If we look at the futures price for rate hikes, it is at 99.4675, and this indicates tremendous bullishness for the 30-day Fed fund futures. The prospect of a rate hike has largely been priced into global markets, particularly Wall Street bourses. As this is the final opportunity for the Fed to raise rates in 2016, all signs are pointing in the direction of a rate hike. For 2017, various reserve bank governors are anticipating at least 2 rate hikes. There is significant interest in how the current economic climate will play out in the political arena. This is one of the first times in years that the GOP has controlled the Oval Office, the Senate, and the House. Many of Donald Trump’s election promises now have a real shot at being passed. The executive director of UBS securities US equity and derivatives, Julian Emanuel had this to say about the current political climate in the US:
‘When you look at both times that the Republicans controlled the executive and the legislative, you had very outsized returns in the equities markets…’
Trading Opportunity #1 – Exxon Mobile Under the Limelight
Exxon Mobil Corporation (XOM) stock is currently trading at $89 per share even. The stock is up 0.77% or $0.68. The company’s market capitalization is $369.06 billion with a heavily inflated price/earnings ratio 41.67. The stock’s earnings-per-share is $2.14. If we look at the above chart, there is clear bullish upside momentum with the stock. It has enjoyed multiple successive sessions of price gains, which is remarkable for the energy industry. The price of XOM is significantly higher than the 50-day moving average of the stock at $86.03, and the 200-day moving average of the stock at $86.14. The stock has hardly over-performed in 2016.
Recall that oil prices slumped to multiyear lows, trading well beneath the 2014 high of $114 + per barrel. Prices have stabilized in the $50 per barrel range of late, but there is now widespread concern that the OPEC deal may not hold. Nonetheless, earnings in 2016 have been checkered. Q1 earnings generated a positive earnings surprise with actual earnings coming in at $0.43 and estimates at $0.31. Q2 reflected a sharp reversal with estimates at $0.60 vs actual earnings at $0.41. For Q3 2016, actual earnings were marginally higher than estimated earnings – $0.63 versus $0.58. For Q4 2016, estimated earnings have been given a boost at $0.73.
If we turn our attention to the earnings surprise history of XOM, we can see exactly how the quarterly reports have played out in the financial markets. Besides successive sessions of gains for the stock, the Chief Executive Officer of Exxon Mobil has also been tapped by Donald Trump for the Secretary of State position. For these reasons, Exxon Mobil Corporation stock gets the green light.
Trading Opportunity #2 – Dow Jones Industrial Average Flying High
The performance of the Dow Jones Industrial Average has been remarkable. Since early-November, we are seeing history being made. The Dow Jones has rallied from around 18,000 to its current level of 19,756.85. This is unprecedented in the history of the Dow Jones. The index has surged ahead with multiple leaps in recent weeks, surpassing the 50-day moving average of 18,571.58, and the 200-day moving average of 18,100.71.
As we near President Trump’s inauguration in January, and financial markets coalesce around a Trump presidency, so bullish sentiment increases. Buy chatter is being matched with actual bullish sentiment in markets. People are buying up stocks, left, right and center. Record volumes of call options are now being purchased, and therefore the Dow has catapulted to historic highs. Day traders have not been slow to cash in on this, and it is evident in the above chart.
Trading Opportunity #3 – EUR/USD Pair Bearish
The EUR/USD currency pair is trading at 1.0558, down 0.50% or $0.0053. What this means is that the USD is strengthening relative to the EUR. Put options on the EUR/USD pair have been taking place at a furious rate recently. The election of Donald Trump has strengthened the greenback and this is clear in the successive declines we are seeing in the EUR/USD pair. Other factors weighing heavily on the EUR are the Italian referendum, the Brexit, the upcoming French elections, events in Austria and the Greek financial crisis. It is unlikely that the pair will hit parity before the year’s end, but it will certainly test various resistance levels along the way. Overall, the safe money is on bearish movement with the EUR/USD.
Trading Opportunity #4 – Gold Losing its Shine?
Gold is currently trading at $1,160.11 per ounce, up 0.06% or $0.71. Over the past 30-day period, the gold price has plunged by 8.90%, or $113.20 per ounce. Over the past 6 months, the gold price has dropped by 8.72% or $110.80 per ounce. What once looked like the commodity of the year, is anything but. For the period, December 9, 2015 to December 9, 2016, gold has returned 7.59% or $81.80 per ounce. The reversal in gold came about with a strengthening in the USD and a resurgence in equities markets. This can be attributed to the Trump phenomenon over the past 30-day period, and the recovery in oil prices that we are seeing. For all intents and purposes, it is advisable to stay away from gold over the short-term, but a 180° is possible if equities markets lose favour.
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