Stocks ripped out of the opening bell on Monday to new record levels but apparently became scared of heights, as they turned lower midday and ended in the red. The dollar was mostly lower, precious metals were the upside stars of the session and crude oil took a break by finishing flat.
I would love to say there was something amazing driving the action…but, in fact, there was very little on the news wires and nothing special among the earnings reports. The rally in Chinese equities was kind of interesting, however, and there were renewed fears that Greece would disappear, financially at least, into the Adriatic Sea.
Possibly the most important non-event of the session was the lack of discussion of what might happen at the Federal Reserve meeting scheduled for Wednesday. There will be no update to the Fed officials’ “dot plot,” which reveals their expectations for future interest rate hikes, and there will be no press conference by Janet Yellen. Basically, you’re on your own for the interpretation, kids.
The Fed is expected to positively adjust its economic assessment in the first paragraph and will likely note that headwinds like bad weather, dollar strength and that the ports slowdown were just transitory. Language addressing labor market momentum and inflation may also be tweaked.
Overseas the big deal was a rally in Chinese stocks, led by the large state-owned enterprises (SOEs). The government is reportedly looking to radically reduce to the number of SOEs through mergers to 40 from 112. The goal of consolidation would be to streamline the businesses and improve competitiveness. The prospect for policy easing amid weak progress in the economy also got people fired up. The Shanghai Composite has now rallied for seven consecutive weeks and is up 35% during that period. Hong Kong stocks, as measured by the iShares MSCI Hong Kong Index Fund (ETF) (EWH), have also jammed higher in response.
Over in Athens, the news was that Greek finance minister Yanis Varoufakis has been isolated and will have a more limited role in negotiations. So much for his rock star status, I guess. Greek Prime Minister Alexis Tsipras is expected to take a more hands on role. Tsipras did express support for Varoufakis, however, as Athens reshuffled its negotiating team.
On the U.S. economic front, there was more bad news. The Dallas Fed reported that Texas’ factory activity declined in April. Not exactly sure what they are manufacturing in Texas — longhorn plaques, barbecues and bass fishing gear, maybe? It’s actually not that complicated. Oil and gas field service equipment was cited as the cause of the distress, and orders from energy producers have dropped dramatically. The production index was negative for the second consecutive month.
Speaking of energy, today’s recommendation is for a bearish play on the Energy Select Sector SPDR (ETF) (XLE) as a sector-specific volatility trade brought to you by the CounterPoint Options system.
Buy the XLE June 19th $84 puts at $3.50 limit, good till canceled, for target $7.00. The ticker symbol is XLE150619P00084000. These are monthly puts that expire on June 19, 2015.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insights. He also 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.
