Kicking off the day the market was hit with weak retail sales for the month of April. Bond yields headed lower as many thought the Federal Reserve rate hike would be pushed back. The NASDAQ was the initial beneficiary of buying at the start of the session, but would succumb to selling pressure. Buyers were not interested in following-through on the progress made after hitting yesterday’s lows. Volume certainly was not overwhelming by any stretch as institutions were not heavily involved with today’s action. While it was a boring day overall we continue to see weakness in interest rate sensitive names: XLU and TLT. Even with a weak retail sales figure the plan to hike rates is still a go? Our consolidation period in this market remains in place and we continue to wait patiently for this market to break out with conviction.
The prevailing thought around rate hikes is simply: stocks will go down. We continue to see XLU and TLT trade to the downside and today’s action is especially bearish. Gapping above yesterday’s high only to sell off in above average volume is a pretty decent sign the ETF is weak especially when you are already in a downtrend. Other interest rates sensitive ETFs like HYG and JNK continue to trade weak signaling the possibility of a rate hike coming sooner rather than later are becoming more likely. Our stance is the Fed is pretty much boxed into keeping rates where they are. Our opinion matters little when it comes to the market. We will simply obey the price action and at the moment XLU, TLT, HYG, and JNK are trading like the Fed is about to emerge from ZIRP.
What we are seeing from the stock market certainly is not what many think will happen in a rising interest rate environment. Most believe the market will crater under rising rates. At the moment, the market is not trading like we are about to get a rate hike. In 2004 when the Fed did start hiking rates the market did undergo a bit of a selling fit into the summer months. There was certainly an opportunity from late summer 2004 into the year-end where the NASDAQ rose more than 23%. This time may be different, but we would not throw in the towel just yet.
Sticking to our process we have avoided over trading and heavy losses in a range bound market. Many will try to overtrade and end up costing themselves in a big way. Stick with Big Wave Trading.
