What could go wrong?

As the DOW, S&P 500, Nasdaq and Russell 2000 hurtle back to all-time highs, it raises the question of what could go wrong.

bg_us stocks new 4
Source: Bloomberg

The first notable point is the fact last night’s price action did not break the Wednesday high made prior to FOMC’s Janet Yellen announcing a 0.25% rate hike.

Tonight is triple witching for the US markets, a time when index futures, along with index and equity options expire or are rolled over to a forward month. December is always a big month as positions are wound up for the year.

With such a strong Trump-induced rally of over 5% during the past 4 weeks, it would be realistic to expect many of the long call options will be deep in the money at tonight’s expiry.


The three charts above show the past 10 days of price movement up to the FOMC raising rates, and the following trading period that has failed to take out the high made in each of the indices.

What is quite concerning is the RUS2000 had made a high five trading days ago. From a trading viewpoint, it is showing early signs of rolling over.

From a technician’s point of view, each of the indices have traded to form an “inside period”, indicating the market has lost direction, so a break either way will be important. The markets really should take out the high within 5 or 6 trading periods.

A break lower from yesterday’s low could see a retreat of the markets back to the respective breakout points – in some cases this can be 5%. 

The second issue concerning the markets is the FOMC rate rise itself. Ten-year bond yields are sitting at 2.58% and have risen faster than index yield, with the differential being 3.18%.

The ten-year bond yield had briefly moved over 3% in the past week, and the fear is bond vigilantes will run up yields far enough to nullify market returns. This is a negative for equities.

In summary:

The markets are consolidating under their respective headline round numbers for the DOW at 20,000, the S&P 500 at 2300 and the RUS2000 at 1400.

An average 5% move is a melt up in the market, on the back of expected global growth starting in the USA. Look for the trading signal and don’t second guess this BULL market currently underway.

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