Yesterday’s trading session witness to a new low for the VIX of 9.0 as Small Caps led with solid gains. Volume jumped across the board, but our close was not all that impressive. Earnings continue to pour in and for the most part the results are better than expected. CAT and MCD reported better than expected earnings prior to the bell on Tuesday and both jumped into new high territory. Both helped propel the Dow yesterday. The focus will shift away from earnings during Wednesday’s session with the release of the statement from the most recent meeting of the Federal Reserve Open Market Committee. Odds put another rate hike in March of 2018 and it will be interesting to see the market react to the statement. We will certainly react accordingly. However, we will not try and guess what the market will do after the release. It is a fool’s game not worth losing money over. We will sit tight and work our process.
On the downside of earnings GOOGL dropped below its 50-day moving average after it reported earnings Monday night. Many will try to justify the move in some way, but all we care about is how it moved. GOOGL rebounded nicely heading into its earnings report after a rough June. Big volume on the downside was a tell and the rebound was all done on lighter trade. It is why it is important to know when your holdings report. Without any cushion in a stock earnings can wipe away gains and in some if not most cases turn the position into a loss.
Two groups performing well on the session were small caps as well as financials. Financials suffered from late day sellers, but could hold onto the open and remain at multi-year highs. Small Caps ended at its highs and survived a late day onslaught of sellers. This market has seen its fair share of weak closes as algos fight one another to rebalance ETFs at the end of the day. Keep an eye on these two groups as IWM looks like it is just getting started. Of course, for you bears out there we reversed hard on volume will certainly be a negative. We are not in the guessing game. We follow price and react. No guess work needed.
The low volatility certainly has made things less interesting. No wild swings to grab your attention. Slow and steady wins the race. Volatility does help us produce huge outsized gains, but for now we can only trade what is in front of us rather than what we want. We are still in a world where QE dominates and central banks hold all the cards. On the horizon, if the Fed shrinks its balance sheet and continues to raise rates we may see the yield curve invert. There are no guarantees, but if the yield curve inverts it will likely signal the end of this economic cycle. If it does come to fruition we will be ready. Until then, no need to rush it and push too hard for the turn churning our capital.
Stay focused and patient.
