March 19th, 2017

Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, M.S. and Jordan Young, CMT
March 19, 2017

With the start of Spring this Monday, many a market participant look forward to the green shoots of growth and economic expansion stimulating continued market advances. Clearly, the FOMC saw the same opportunity and took advantage of the market’s “high spirits” to ratchet up rates another quarter of a point. Frankly, rates are really low here in the USA and while this increased cost of borrowing will impact both business and spending power, it really isn’t that awful. The FOMC has kept rates artificially low for an exceedingly long period of time and this action, on their part, is not so much a validation of a strong economy, but rather an opportunity to attempt a return to normalcy.

The market rallied on the release of this anticipated rate hike, interpreting the FOMC’s actions as a validation of a strong economy. When listening to Fed Chairperson Yellen’s remarks, it was clear that the effort was toward normalization rather than an effort to slow down an overheating economy or as an inflation curb, neither of which currently exist.

So how does the rate increase effect your stock? Although many companies have taken advantage of the low interest rate environment, it is not the quarter point that is problem, but rather the perception of higher rates. Yes, as businesses need to borrow money and service loans, the costs of which will be somewhat higher. Perhaps this will curtail some companies from borrowing funds and repurchasing their own stock; however, we see this as minimal. Where we do see rate increases having a pronounced effect is in the real estate market. Here, small changes in borrowing costs can vastly impact monthly payments for retail consumers ultimately limiting the price that can be paid. So, we could expect to see the housing market here in the U.S. take a pause. This could also lead to a heating up in the rental market. The bottom line is that the amount of funds used hasn’t changed just the distribution of those funds. As a result more goes interest rates funding the loan and less to the purchase price of the home.

The international ramifications of higher rates here in the USA is an inflow of funds to our shores. Naturally, this is all dependent on the cost of hedging the native currency to remove and neutralize currency risk.

The S&P 500 June futures lost 3.75 handles (points) in the Friday session. The Bollinger Bands are narrow although they have stopped contracting. We would expect to see a violent move to the downside as these bands begin to expand again. All the indicators that we follow herein continue to point higher. The most frequently traded price, during the day session, was 2377.50 but the highest volume was seen at 2376 where 7.6% of the day-session volume traded. The market looks a bit tired and just might consolidate for a while.

The NASDAQ 100 retreated 5.75 handles in the Friday session. The retreat in this index looks much like backing and filling. Our concern with this index is the narrowing Bollinger Bands which warn us of impending volatility. The indicators remain at somewhat overbought levels and are not issuing anything of value at this time. The volume ran up a bit on the roll and expiration but has now retreated a bit.

The Russell 2000 actually gained some ground in the Friday session. The Bollinger Bands are steady and a somewhat expanded level. The RSI and the stochastic indicator are both pointing higher. It is still stuck in its range. The most frequently traded prices were 1383.75-1384.50. Clearly, the action of the day was in the morning session and then in the last half hour of trading.

The US Dollar index continues to lose ground and is approaching a major support level at 99.10, which is the bottom of the trading range. This market lost 0.04 handles (points) in the Friday session. The downward trending channel lines are 101.23 and 99.84.

Crude oil printed an inside day in the Friday session and seems to be forming a pennant. The market advanced 0.02 handles in the Friday session. Crude oil looks oversold at this time but is not indicating that it is ready to rally. We see a doji like candlestick inside day on the chart. The indicators are on the oversold side of neutral. Both the stochastic indicator and the RSI are not trending at the moment. The volume dropped off in the Friday session. For the bulls to take charge, they will have to close this market above 50.14. The other side of the coin is the downside 47.71 which is downside support.

Gold gained 1.80 handles (points) in the Friday session. All the indicators that we follow herein are pointing higher. Most of the rally in gold occurred on good volume in the overnight session. The day session compressed the gains as this market backed and filled, giving up much of the early overnight gains. Both the stochastic indicator and the RSI are positive, our own indicator will issue a sell signal likely I the Monday session. The volume was light.

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