Stocks finished mixed on Monday after recovering from widespread weakness at the open. One gets the impression that traders are loath to make any big moves ahead of the Federal Reserve policy announcement on Wednesday.
In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 lost 0.1%, the Nasdaq Composite gained a fraction and the Russell 2000 lost 0.1%. Crude oil and gold both moved lower. Breadth was negative with declining issues outpacing advancers by 363 on the New York Stock Exchange.
Tech stocks were the day’s highlights, with Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) up 0.9% and Amazon.com, Inc. (NASDAQ:AMZN) up 1%. Materials and energy stocks were among the laggards, with Schlumberger Limited. (NYSE:SLB) down 1.7%.
The bulls are now contending with massive overhead technical resistance from an epic, two-year topping pattern.
Long story short: Some backfilling is way overdue here. Whether it’s the start of a retest of support near Dow 16,000 or even Dow 15,500 remains to be seen. But after over a month of nearly uninterrupted gains, some selling pressure should be expected here.
As a result, I recommended clients sell their remaining long exposure — mainly, gold and silver stocks — in anticipation of a bout of weakness and volatility surrounding the Fed’s policy announcement on Wednesday. A number of the positions have posted impressive gains for Edge subscribers, including an 82% rise in Barrick Gold Corporation (USA) (NYSE:ABX) and a 78.5% rise in First Majestic Silver Corp (NYSE:AG).
While I believe gold and silver should continue to rise in the months to come, the risk of a gut-wrenching profit-taking slide suggests now’s the time to simply move to cash.
Barring a surprise outcome from Federal Reserve Board Chair Janet Yellen — unlikely with markets still shaky — any rate hike will be pushed back until April at the earliest despite recent evidence of a warm up in inflation and ongoing strength in the labor market. This is the consensus expectation.
While this should be a positive, trying to predict how markets react to Fed days is an exercise in futility. The “no hike” decision in January was supposed to be a positive, but markets fell on fears of an economic slowdown before surging two days later (on a Bank of Japan interest rate cut into negative territory) and then spending the next two weeks falling back to the mid-January low.
What we do know:
- Much of the rally out of the Feb. 11 low has been predicated on a recovery on crude oil prices driven by hopes of an OPEC/non-OPEC supply freeze deal, which in turn, depends on Iran ramping back up to pre-sanctions output levels. The latest chatter is that any deal, if it happens, won’t be signed until April.
- The rapid, short-covering fueled surge out of the February low has created a severe short-term overbought technical condition in stocks.
- A rapid expansion in market breadth means there are very few quick-turn value trades left.
- Professionals seem to be piling into the CBOE Volatility Index (INDEXCBOE:VIX), which is a precursor to periods of market weakness. The iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX), which tracks the VIX and has enjoyed a surge of inflows totaling $500 million over the past week according to SentimenTrader, a level of activity that has historically preceded rises in market volatility and the VIX.
As a result, I have recommended a new VXX call option position to Edge Pro subscribers in anticipation of a surge back into the high $20s as the smooth easy market gains of the past month are likely to give way to a choppier trading environment.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
