Expect huge price swings next month
The week ending Feb. 12, 2016 was not for the "faint of heart."
All of the asset classes witnessed wildly volatile moves, which culminated in an 11% move of crude oil. The U.S. equity markets survived a scare on Friday, Feb. 12, and moved up sharply. Gold returned as a safe haven for investments. The uncertainty of further rate hikes by the Fed has turned the U.S. dollar into a range-bound trade.
Crude oil surges by 11% on Feb. 12
Crude oil, after dropping to a new 52-week low on Feb. 12, saw the energy markets move up by 11%. This was brought about by the expectations of a production cut by the OPEC nations. If we witness follow-up buying in the coming week, it will be the first indication of a “bottoming process,” although it is still in its early stages. When the models confirm a "bottom," I will enter into long positions and enjoy the bull ride.
SPX confirming a short-term double bottom
The SPX clearly shows an attempt to form a double bottom at 1810 levels with three critical cycles bottoming at the same time. The RSI is also showing positive divergence which is similar to that of the energy markets. When the SPY goes above 188.70, its’ next target is 195.00.
The stock markets also took comfort from Federal Reserve Chairperson Dr. Janet Yellen’s, testimony when she did not rule out a rate cut if the situation were to worsen further, but she stated that it is a “not so likely scenario.” She also agreed that the risks to the economy have increased with the sharp fall in crude oil prices, a strong dollar, a weakening Chinese economy and the junk bond defaults.
Although she maintained that a gradual rate hike plan be implemented, she was also quick to state that it was not ‘pre-set.’ It will change, as and when the situation demands. She also kept the option open of using the negative interest rates, seen as a few developed countries have been using it with success.
The initial fear of the Fed experts is that negative rates will lead to cash hoarding by individuals, which will in turn weaken the financial system. The experiment in Denmark, Japan, Sweden, Switzerland and the eurozone has elevated their fears. These events have led to a strong surge in safe-haven assets, led by gold, while the U.S. dollar gave up some of its gains.