HAWKISH YELLEN
Rate hike confirmed as expected
3 hikes this year instead of 2 --> Faster yield curve steepening than expected
SOME EXPECTED THEORETICAL OUTCOMES
Stronger USD --> Bad for exporting companies (negative for equities)
Higher rates --> Bad for equity valuations (negative for equities)
Higher inflation anticipation --> Good for inflation hedges (positive for gold)
THEMES TO PLAY THE US STRENGTH
1. Reinforce defensive equity positions
2. Maintain positions in Financials/Banks which are set to gain from higher rates
3. Go long volatility (VIX has picked up marginally yesterday from very low levels --> More to come?)
4. Sell short-dated OTM puts on Gold to take advantage of extreme volatility spike
5. Short EUR/USD to play widening Europe/US cycle divergence, after the breach of key 1.05 support
5. Monitor SPX for further (expected) weakness
The index looks ready to turn from overbought condition
Started turning negative yesterday after the Fed news
This conveniently happens after reaching the target from the rounding-top breakout
Rate hike confirmed as expected
3 hikes this year instead of 2 --> Faster yield curve steepening than expected
SOME EXPECTED THEORETICAL OUTCOMES
Stronger USD --> Bad for exporting companies (negative for equities)
Higher rates --> Bad for equity valuations (negative for equities)
Higher inflation anticipation --> Good for inflation hedges (positive for gold)
THEMES TO PLAY THE US STRENGTH
1. Reinforce defensive equity positions
2. Maintain positions in Financials/Banks which are set to gain from higher rates
3. Go long volatility (VIX has picked up marginally yesterday from very low levels --> More to come?)
4. Sell short-dated OTM puts on Gold to take advantage of extreme volatility spike
5. Short EUR/USD to play widening Europe/US cycle divergence, after the breach of key 1.05 support
5. Monitor SPX for further (expected) weakness
The index looks ready to turn from overbought condition
Started turning negative yesterday after the Fed news
This conveniently happens after reaching the target from the rounding-top breakout
Comment:
While the overall trend remains firmly upwards, the index is pausing for consolidation from overbought conditions, as expected. There is a probability that the SPX will "time consolidate" in a high flag formation until it breaks upwards again. However, signs of exhaustion/divergence remain, which suggest a proper drawdown could take place. Maintaining a neutral/down bias for now.
Comment:
Trade closed: target reached:
Most of the themes highlighted above have played out, or have started to do so. Equity index consolidation from elevated levels has been confirmed, as further SPX breakout from high flag has failed. Caution on Equities is encouraged at these high valuation levels. Stopping this thread and starting a new one on SPX.
