It’s been an interesting week with stocks, commodities and currencies having a knee-jerk reaction to the FOMC minutes released Tuesday afternoon. In short, the Fed clearly said there must be more quantitative easing before things will get better. It was this news that triggered a rally in stocks and commodities.
Quantitative easing is a fast way to devalue the U.S. dollar, and the Fed is doing a great job of that. As long as the dollar continues to decline, the stock market will keep rising.
This week kicked off earning season with Intel Corporation (NASDAQ: INTC) and JPMorgan Chase & Co. (NYSE: JPM) beating analyst estimates. We usually see the market trade up the first week of earnings and then start to sell off by the end of earnings season. Both INTC and JPM sold off on strong volume Wednesday, despite the good earnings and broad market rally. It was a classic case of buy the rumor, sell the news, as the smart money sold into the morning gaps, exiting at a premium price. Is this foreshadowing for what is to come?
Take a look at the chart below which shows the falling dollar and how it’s helping to boost stocks and commodities.
While earnings season is trying to steal the spotlight in the market, the fact is everything for the past two months has been about the U.S. dollar. If you put a chart of the dollar and the S&P 500 together, they trade almost tick for tick in reverse directions.
The amount of money getting pumped into the market cannot last, and it will lead to a huge-volume reversal day in due time. Until this happens the market will trade higher.
Taking a look at the SPDR S&P 500 (NYSE: SPY) daily chart, the 5-, 10- and 14-day simple moving averages tend to act as buy zones. The market was choppy from April until about two months ago. Now we are seeing the market smooth out and traders are switching to more of a trend trading strategy and not so much looking for extreme sentiment levels, which typically signal short-term tops and bottoms. Focusing on buying at these moving averages has been providing good support thus far.
Stops should be set on a closing basis, meaning if the market is to close below the moving average, then exiting the position is a safe play. It’s always best to layer your stops (scale out) in trending market. So stops below the 5-, 10- 14- and even the 20-day moving average will provide you with enough wiggle room to ride a trend.
In short, we are in a strong uptrend, and until we get a major reversal day, buying the market is the way to go. The market as we all know is extremely overbought, so if you decide to take a position here, be sure to keep it small.
