Editor’s note: Beat the Bell editor Serge Berger will be filling in for Sam Collins until May 26.
In the seemingly non-stop ping-pong match between global central banks, it was the European Central Bank (ECB) that scored points Tuesday.
Currency burning be damned, ECB board member Benoit Coeure announced that the bank will front load its bond-buying program in May and June, so as not to get caught in lower liquidity markets in July and August. My interpretation is that considering the lack of inflation in Europe, the ECB is doing this out of necessity as opposed to voluntarily doing so.
Naturally, this led to a rally in European stocks. Germany’s DAX was up more than 2% on the day. Bond yields contracted, and the euro saw one of its sharper declines within recent months.
In the ever more financially interconnected world that we live in, this meant a sharp rally in the U.S. dollar, which spilled over into equities, weighing on the energy sector. It was also at least partially to blame for the rally in bond yields. Indeed, the currency war was in full fashion on Tuesday.
On the economic data front, both housing starts (up 20.2%) and building permits (up 10.1%) came in much stronger than expected. This caught many housing bears by surprise, particularly the ones just pointing to the slide in lumber prices. To me, however, the data confirmed the better hiring numbers we have seen in the housing sector all year.
After bottoming in late April/early May, SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB) is now back up to its horizontal resistance line.
At the bottom of the chart, I added the relative strength of XHB versus SPDR S&P 500 ETF Trust (NYSEARCA:SPY), which is also curling back up. As such, I still like this sector, both in absolute and relative terms. I am looking to buy housing stocks on any pullbacks.
For the broader equity indices, it was yet another quiet day for the most part ahead of Wednesday’s FOMC minutes. The S&P 500 closed just below its all-time closing high from Monday. The Dow Jones Industrial Average made a new all-time closing high, but volume was unimpressive.
As far as trading activity is concerned, a less-is-more approach continues to work best. It is very easy to get chopped around in this environment.
For my part, I tightened my net long exposure a little more Tuesday by selling down some energy-related positions. This also had the benefit of raising cash to more than 50% of my portfolio. I often find that a healthy cash position is my best hedge in choppy markets. It allows me to watch the game from the sidelines in a less biased way so I can pounce on qualified opportunities as they arise.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.