Rate Hike Relief Paves the Way for A Stronger Dollar And A December Bottom for Stocks - ONE-TWENTY TWO: Trading Financial Markets

(This is an excerpt from an article I originally published on Seeking Alpha on December 17, 2015. Click here to read the entire piece.)

The Federal Reserve could not have asked for a better response to its first rate hike in 9 years and first move off zero interest rates in 7 years. The Fed worked hard to guide the market to a December rate hike, the market responded, and the Fed delivered. The Fed demonstrated for the European Central Bank (ECB) how to properly manage market expectations. Where the ECB over-promised and under-delivered, the Fed followed through on a very simple calculus: guide the market’s expectations, monitor those expectations, and deliver according to those expectations. During the Q&A of the press conference, Yellen even lauded the execution of her crew at the Fed by noting she did not expect the market to have an immediate and strong reaction to a rate hike given her perception that market “structure” had already priced in a rate hike.

{snip}

The S&P 500 makes bullish surge to challenge the last topping pattern.

The volatility index, the VIX, is plunging almost as quickly as it popped.

Only time will tell how the market follows through on these outcomes. The odds favor a bullish tone to end the month and the year. Last year, I wrote “The Numbers And Setup Behind This Year’s Potential Santa Claus Rally” to quantify the remarkable tendency for the S&P 500 to perform strongly in the second half of December no matter what happens in the first half. {snip}

2014's October drawdown made up for below average drawdowns in the S&P 500's two other "most dangerous" months — 2014’s October drawdown made up for below average drawdowns in the S&P 500’s two other “most dangerous” months

{snip}

With the first rate hike out the way, it is now all bout the timing of the next rate hikes. The market has currently spaced out the second rate hike out to April.

For now, dial up the Fed's second rate hike in April. — For now, dial up the Fed’s second rate hike in April.

Source: CME Group FedWatch

I am most interested in the implications for the U.S. dollar. {snip}

The U.S. dollar index holds 50DMA support and looks poised to resume its climb.

Given the market expects the next rate hike four months from now, I do not expect the dollar to rally like a rocket ship from current levels. {snip}

I still like going long the dollar against the euro. {snip}

The U.S. dollar strengthened against the euro in the wake of the Fed rate hike but EUR/USD still has plenty of room left before a complete reversal of the Draghi Drubbing.

Source: FreeStockCharts.com

Shorts against the euro were surprisingly little deterred by the Draghi Drubbing. {snip}

Speculators have only slightly backed off net short positions in the wake of the Draaghi Drubbing

Source: Oanda’s CFTC’s Commitments of Traders

Be careful out there!

Full disclosure: net long the U.S. dollar, net short the euro, long FXE call options

(This is an excerpt from an article I originally published on Seeking Alpha on December 17, 2015. Click here to read the entire piece.)

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