The Fed Is The Proverbial Man Behind The Curtain And We Better Pay Attention

The big story of the trading day is a decline in crude oil that did not create a correlative decline in U.S. equities prices. In the last few days we have seen oil and equities trade in tandem but the equities charged off in their own direction.

Oil switched partners and joined gold in dipping in price. That is a more traditional pairing.

It ought to be noted that a stronger U.S. dollar affected both of those commodities. The stronger dollar is a bit of a corrective trade based on yesterday’s overreaction that was based on the Federal Open Market Committee’s decision not to raise interest rates.

The accompanying news release (statement) essentially said the American economy is earning a B to B+ grade and has to be watched carefully for signs of recessionary backsliding. (That would mostly be due to influences beyond the U.S. border, namely in Europe, Japan and China.)

The euro was down about 0.40% against the greenback at 4PM in New York. On that bit of strength, gold is down $2.60, all of which is due to regular trading.

Yet gold has had a winning week, and, as we will see in today’s video, we are waiting for a proper entry point for our next upside trade. Gold should be drawing more optimism from the Federal Reserve action or, more accurately, lack of action.

One rose does not a summer make, and the addition of one U.S. rig does not an oil glut guarantee. There is a big, important, perhaps crucial “but” lurking in that observation.

The price of West Texas crude snuck above $40 per barrel this week. (Today it has slipped below that level, but that is due to defensive selling going into the weekend.) $40 per barrel is the first threshold at which the most economical rig operators who were thrown off the job due to rock-bottom prices will jump back in.

Yes, it is only one, but someone has to dip the little toe in the pool first, and apparently someone has.

That quick reaction does not bode well for a spectacular recovery in oil’s pricing. There are now thousands of less efficient producers champing at the bit to get back into the game.

It is no secret that equities love low interest rates. We were reminded of this once again after the Fed news release.

This is, naturally, good news for our S&P 500 trade. We also observed that the Bank of Japan held its rates steady this week and late last week the European Central bank put into effect a solid stimulus package.

Part of the rally in the S&P is being generated by catch-up ball being played by the financial sector and the healthcare sector, both of which had been experiencing softer pricing since the New Year.

The weekend will be an excellent time to re-read the Federal Open Market Committee’s news release.

We think it’s very straightforward, but its logic lies behind everything affecting the markets we trade. Wishing you as always, good trading,