Fed Uncertainty and Trump’s Provocations: A Recipe for Market Whiplash

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Our View

There are seven trading sessions remaining (ending Monday, January 20) until Trump’s inauguration, and I expect some highly volatile sessions ahead. I’m not sure why he can’t keep his mouth shut, saying he will rename the Gulf of Mexico and take over Greenland and the Panama Canal, all while stirring up tensions with several NATO allies. Meanwhile, China and Russia are reportedly tampering with the Philippines’ and Taiwan’s undersea infrastructure cables, just adding more uncertainty.

Trump’s recent comment, “Have we entered into an era that sees the return of the survival of the fittest? The answer is yes.” I say, before you start threatening NATO countries, start working on the agenda at home, but he can’t help himself.

The Federal government was closed yesterday for President Carter’s funeral but there were five Fed speakers. No bounds but lots of fed speak. Personally, I don’t think the Fed knows which way to go. That said I expect more two-way price action. There are two ways to go, buy the 40 to-60 point drop and sell the 50 to 70-point rips, that has been the money trade, let everyone get long and start selling after 1:00. This crap is crap and the PitBull agrees.

MiM and Daily Recap

The ES traded mostly sideways-to-up during the Globex session until about 5:45 Wednesday AM, where it printed its high of 5975, which ultimately held as the high of the day. From there, overnight sellers pushed it down to a pre-market low of 5926.50 about two hours before the open. This level held as the Globex low.

The regular session opened at 5954, and the ES initially traded below this level in choppy, two-way action. A test of the low resulted in a false breakdown, with the ES printing 5925.50 at 10:22 AM. From here, the market staged a rally, reclaiming the range and pushing back through the open. This led to a morning session high of 5965.25 at 11:42 AM. However, the move quickly faded as a lower high formed after 20 minutes, followed by a sell program that steadily took out stops and printed the day’s low of 5917 at 12:30 PM.

Another V-bottom reversal brought the ES back into its range, solidifying the day as a sideways digestion session. The market climbed back up and through the open to print 5961.75 at 1:26 PM. Afterwards, another hard dip to 5935.50 was met with buyers, and the ES ripped higher from 2:00 PM to a new regular session high of 5971.75 at 2:26 PM. Here it failed again, and the market slipped back toward the opening price, chopping through the remainder of the day.

At 3:50 PM, the MiM released a buy imbalance of 2.1 Billion, triggering an 8-point pop in the ES, and another little one as the imbalance grew to 2.9 million, but the move was absorbed, with the cash close settling at 5959.25. In post-market trading, the ES slipped slightly, printing an exchange close of 5954.75, perfectly unchanged for the day. This formed a noticeable doji candle on the daily chart ahead of Thursday’s market closure and the release of the jobs number on Friday morning.

The NQ closed similarly at 21,325.50, down 50 points or -0.23%, effectively unchanged. Volume remained steady, with the ES trading 1.7 million contracts and the NQ trading 627,000 contracts.

In the end, it was a two-way session driven largely by bond yields, which finished higher for the day. The overall tone for both the ES and NQ was influenced by these rising yields.

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Guest Posts:

Dan @ GTC Traders

A Must-Have Income Asset As many know, our GTC Sample Portfolio features three programs. The first program is Equity Fixed Income, which bases its performance on the stability of yield and income rather than that of value and growth. The second is classical Long-Short Valuation Investing with our own quantitative twists and mandate, and the third is Short-Term Trading that features a variety of discretionary and quantitative trading programs. This week we’d like to focus on our Equity Fixed Income Hybrid Core Program, and an essential ‘must have’ asset for that program.

A Quantitative Basket of Income Assets

Our Equity Fixed Income Hybrid Core program has the objective of building an account whose purpose is to pay a stable, monthly income. We will spare you many of the details of how we built this program – we could lecture on the topic for hours.

Regardless, there is a basket of eighteen assets that are used (occasionally hedged against market downturns). Suffice it to say, these eighteen assets are more than simply ‘well-diversified stocks.’ In a market downturn, ‘well-diversified stocks’ do not offer much protection.”

During a severe market downturn, market indices begin to sell off, and quite frankly, ‘diversification’ means jack-all as the correlation of all sectors moves toward 1.0; all sectors suffer the same drawdowns. Indeed, during such downturns, all assets—whether stocks, Gold, or Oil— tend to lose value. It is nearly impossible to build a basket of assets that completely shrug off severe market downturns. Even the famed ‘Stock-Bond’ mix suffered its worst drawdown during the inflationary flareup of 2022.

However, we can focus on income-producing assets that are truly different from one another in their makeup and general thesis. All the assets pay a yield (obviously, or it wouldn’t be much of an income account). We have a collection of stocks in different sectors, value plays that pay an attractive yield with an envious ‘moat,’ and ETFs that provide more ‘stability in terms of return volatility’ with a smaller yield … and …

A Must Have Equity Income Asset

… we also have an ETF that provides stability in terms of return volatility with a higher yield. At times, we are asked, “What is the best income asset a retail investor can buy?” We avoid that question completely because, as outlined above, all 18 of our income assets work together as a cohesive whole—different assets balancing against the features of others. Besides, we don’t like ‘what is the best’ type questions. The complex nature of reality makes such questions (and answers) somewhat superfluous.

However, we do consider one asset a ‘must-have’ in this basket of assets.

Invesco’s Emerging Market Sovereign Debt ETF (PCY).

An ETF that is comprised by taking 80% of it’s total assets into outright holdings of an Emerging Market Debt Index. No holding of the ETF as a Bond from said governments represents more than 3.5% of exposure to the Fund. Whether it is an 8.25% Kenyan Bond, or an 8.75% issuance from Egypt.

It’s current yield is currently a respectable 6.74%, well above the U.S. Inflation rate. It’s volatility? It has only varied between a low of $12.51 and $31.58 in the last twenty years.

Meaning you have a stable asset, that doesn’t move a whole lot even during downturns, that pays a great yield, and has spread out it’s outright holds quite well to pay that dividend.

At the moment?

The PCY ETF is clearly in a downtrend. Our firm has been bearish on Emerging Market Debt Prices, bullish on yield for some time …

So at the moment? We let price fall and the yield rise as long as it will do so as long as lower lows are continually being made. The 6.75% yield at the moment can increase higher.

But when such bottoms occur?

We view this as one income ETF that is a ‘must-have’ as the larger complex of our income related assets and program.

Until then? Stay safe … and trade well.

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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!!