Stocks shot higher on Monday by as much as 1.3% despite a lack of a clear-cut catalyst, other than optimism that the Federal Reserve will react to recent soft economic data by extending its zero interest rate policy for at least a few more months.
Weakness in the U.S. dollar provided a tailwind, at least, as did another dramatic drop in crude oil prices upon discovery that supplies are higher than ever.
Investors’ main point of interest is monetary policy ahead of the Fed’s monthly meeting and policy statement, due Wednesday. Most observers seem to expect that the central bank will remove its pledge to be “patient” before raising rates. It’s also expected to add language noting that rate lift-off may soon be justified if the recovery continues.
Some observers have discussed in the media that markets do not seem prepared for a June rate hike. Personally, I don’t know how people could be any more ready. This is the most telegraphed move in history, if it occurs. I tend to think that even if the Fed removes the “patient” language, the first rate hike won’t come until at least September, or even December.
As for the economic data, February industrial production was weaker than expected, and January was revised lower. This was the third consecutive monthly decline. Capacity utilization declined and remains below average. In addition, builder confidence fell and missed expectations. The index fell month-over-month and was likewise the third consecutive monthly decline.
The bottom line is that the U.S. economy remains anemic, even though we are technically five years into the recovery. I’m not sure what purpose raising rates would serve if the economy is not exactly booming, and inflation is a wet noodle. There is truly no rush to lift rates just because the number of low-wage jobs at bars and restaurants is growing.
Think about this from the Fed members’ perspectives for a minute. They have been tasked in part with helping to revive the economy. They want to declare victory. They want to be heroes. But will they declare themselves a success before the story has had its climax, much less its denouement? I kind of doubt it, but stranger things have happened.
Either way, the most important piece for stocks at this point is that sentiment remains mostly subdued and inflation remains low enough to permit price/earnings multiples to rise. If sentiment remains restrained, inflation is low and P/Es rise, then stocks will advance even if earnings growth is anemic.
In this environment, it is important to remain fixated on the best parts of the economy, which at this time are retailers, biotech, tech, aerospace/defense and home construction and remodeling. Today’s trade relates to the latter category.
Lowe’s Companies, Inc. (LOW) is a major hardware chain, right behind Home Depot Inc (HD). They are both in good shape, but LOW is cheaper, so let’s go that route.
Buy the LOW April $75 calls (LOW150417C00075000) at current levels, around $2.10, for target $3.75. Set a protective stop at $1.15 limit, good till canceled.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
