Stocks crept higher on Monday in quiet trading, sidestepping another major smackdown in the Treasury market. There was no clear catalyst for the move higher in equities, so their resilience in the face of further Treasuries weakness was notable.
A dovish article on Fed policy from the Jon Hilsenrath at The Wall Street Journal received a lot of attention, however, and stocks are struggling to hold gains in Tuesday trading.
In that article, Hilsenrath said that first-quarter data have focused Fed officials on issues like sluggish growth backdrop and the vulnerability of the economy to small disturbances. This has messed up their rate lift-off forecasts. Hilsenrath is considered to be the financial journalist to whom Fed officials prefer to leak information, so his articles carry a lot of weight among large investors.
A June lift-off now seems to be no longer in consideration, and there is increasing uncertainty regarding September. The article noted that some Fed officials are concerned that consumer spending is only increasing modestly despite rising incomes and wealth.
Pushing the same theme, Chicago Fed President Charles Evans stated that the Fed should seek to push inflation above its 2% target by keeping its zero-interest-rate policy in place until early 2016. He added that tightening should only be gradual after the first hike.
Over in Europe, Greek funding remained a major uncertainty. Media reports citing European officials suggest that Greece has not made enough progress in talks to reach a deal by the May 21 summit in Latvia. The two sides are obviously going to go down to the wire, and that is going to upset markets. I strongly doubt the eurozone is going to let Greece sink into the Ionian Sea, but it may not throw the final life preserver until the very last moment, or even after it looks like drowning is in progress.
Back here in the United States, homebuilder confidence fell in May — a reading that was below consensus. Builders’ stocks shrugged it off, however, with Toll Brothers Inc (TOL) and Lennar Corporation (LEN) up strongly on both Monday and early in Tuesday trading. When news and stocks diverge, typically it means the bad news is already fully discounted.
Given the current situation in the bond market, my trade recommendation today is for a regional bank.
BancorpSouth, Inc. (BXS) is a $2.4 billion bank based in Mississippi. There are a slew of regional-bank charts that look like this. The rise in bond yields leads to higher net interest margins for these banks, which is a proxy for their profitability.
Be aware that the last two weeks of May are not typically good for most regional banks, and for BancorpSouth in particular, but they may buck the trend this time — and the seasonality picks up strongly for them in June.
Buy BXS at $24.50 limit, good till canceled, for a target of $26.00. Set a stop at $23.85 limit, good after 11 a.m. ET only.
InvestorPlace advisor Jon Markman 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.