Gearing Up for a Super Start to 2017

Dow Jones Industrial Average 1-Year Performance

2016 kicked off with concerns about the performance of the Chinese economy. For the first time in many years, the Chinese economic growth engine was slowing. The key 7% GDP growth rate per annum was being challenged and a massive decline in commodities demand was apparent. Steel, copper, and iron ore demand contracted sharply and this had a domino effect on commodities markets around the world. The rumour mill was rife with concerns that China’s economy was about to collapse.

Years of finger-pointing about China’s currency manipulation, protectionist measures, and unfavorable trading conditions towards Western countries finally had an outlet: the Chinese economy was overheating. Despite a sharp downturn on the Shenzhen Composite Index and the Shanghai Composite Index, the Chinese economy was saved. Intervention by the People’s Bank of China, and strict controls on share trading on executives helped to prop up Chinese markets. The CNY was allowed to float a little against the USD and this helped to power Chinese exports. Nonetheless, trillions of dollars were wiped off global markets and equities were persona non-grata.

USDCNY Pair 1-Year Performance

Fast-forward to June 2016. The Brexit referendum came as a complete and utter shock to the global community. Pundits were calling for a resounding rejection of a Brexit (British exit from the European Union). As fate would have it, Britons voted 52%-48% in favour of a Brexit. This sent colossal shockwaves through the global economy. The GBP/USD pair plunged to a 31-year low in double-quick time. Currency traders profited handsomely off the sterling’s decline and continued to short the currency throughout 2016. The same trends appear to be holding true for 2017. The GBP remains in the ‘Damaged Goods’ basket, and was the worst performing G10 currency in 2016.

From a trading perspective, it’s a bear maul for the GBP and this is likely to worsen in coming months. Fast-forward 5 months to November 8, 2016 and another geopolitical shock rocked the global economy. Donald J. Trump was elected president of the United States of America. In the lead up to the historic vote, economists, analysts and day traders were calling for doom and gloom if Trump were elected. However, in much the same fashion as the Brexit – stock markets rallied. We have seen unprecedented gains being made on Wall Street. The Dow Jones Industrial Average, the NASDAQ Composite Index, the S&P 500 Index, and the New York Stock Exchange are hitting their straps.

Notable Economic Performances in 2016

• The Dow Jones Industrial Average gained 13.42% in 2016
• The S&P 500 Index gained 9.54% in 2016
• The Nasdaq Composite Index gained 7.50% in 2016.
• Gold appreciated by 8.48%, or $89.90 in 2016.
• Silver appreciated by 15.36%, or $2.12 in 2016.
• WTI crude oil ended 2016 on $53.72 per barrel.
• Brent crude oil ended 2016 on $56.82 per barrel.

Trading Opportunity #1 – Add Gold to Your Financial Portfolio

Gold is a traditional safe-haven asset. It flourishes when uncertainty prevails in the financial markets. Looking at Wall Street indices right now, one may be remiss to believe that gold is to be avoided. However, the bubbles we are seeing developing on the Dow Jones, Nasdaq and S&P 500 are troubling. With equities markets at record highs in the US, investors have reason to be concerned. The higher equities markets climb, the further they can fall. A 20% correction could wipe trillions of dollars off equity markets, and the domino effect will fuel further selloffs in stocks.

Now is a good time to pad up financial portfolios with gold stocks, ETFs or physical bullion. As one year closes out and the new year begins, rebalancing becomes an integral component of a portfolio. Gold is priced relatively low at $1,152.06 per ounce, considering that it had hit $1,350 per ounce between July and September 2016. Stocks like Goldcorp (GG) are cheap right now, and will likely pay dividends in the future.

Trading Opportunity #2 – Long-Term Call Options on the GBP/USD Pair

The GBP/USD currency pair is trading at 1.2342, up 0.6467% or $0.0079. The 52-week range of the pair is 1.21 on the low end and 1.49 on the high-end. The steep selloff that began post-Brexit continued throughout 2016 and will likely continue into 2017. We know that the Fed is going to be hiking interest rates this year, perhaps 3 times. The current federal funds rate is 0.50% – 0.75%, and we could be looking at a rate of 1.5% by the end of 2017. This automatically strengthens demand for the USD and will weaken the GBP/USD pair. Negative sentiment will continue if the Bank of England cut interest rates further, or if Brexit concerns drive investment out of the UK. Overall, the picture looks grim for the GBP/USD pair.

Trading Opportunity #3 – Alcoa Stock is Bearish

Alcoa Corporation (AA) stock is currently trading at $28.08 per share. Day traders have been shorting the stock for several weeks, but the price declines are marginal. Nonetheless, the trend is bearish. The stock is down 2.80% or $0.81 as at Friday, December 30, 2016. Analysts have issued a buy/hold rating on the stock. On a scale of 1.0 (strong buy) to 5.0 (sell), Alcoa Corporation ranks at 2.7. The company has a market capitalization of $5.13 billion with a -4.72 price/earnings ratio and a $-5.94 earnings-per-share. On the flip side, the 1-year target estimate price for the stock is $32.13 per share. For 2017, there are certain bearish drivers that traders need to be aware of. First, this is one of the most-shorted equities on the market, especially before the split.

If Chinese production of aluminum increases, companies like Alcoa Corporation could suffer. The main concern now is overcapacity in China. This has a detrimental effect on the price of aluminum stocks like Alcoa Corporation.

Trading Opportunity #4 – FTSE 100 index Bullish

Britain’s all-share index – the FTSE 100 index, is enjoying a purple patch. The index is trading at 7,142.83, up 13.85% over the past 1 year. On Friday, 30 December 2016, some 326.49 million shares were traded. It is important to note that the 52-week high of the FTSE 100 index was also the level of the index on the last day of 2016. The index constituents that gained sharply in 2016 include Anglo American PLC (+284.36%), Ashtead Group PLC (AHT)(+40.44%), 3i Group PLC (+45.70%) and BP PLC (BP) (+43.49%). The index is rallying while the GBP is faltering. We can expect more of the same to continue if the GBP/USD pair remains weak as a result of Brexit -related volatility.