How Are Contrarian Trading Practices Impacted by Markets?

by Gordon on Thursday 23rd February, 2017

Traditional stock market trading activity can be a little disconcerting to the novice. For example, where does one begin? With a wide range of stocks, indices, commodities, and currency pairs available, it’s certainly overwhelming for traders to get their bearings in the institutional arena. Major brokerages like TD Ameritrade and Fidelity try to simplify the process by creating user-friendly platforms, but these are still an anathema to many traders. Conventional wisdom dictates that investments require the underlying asset to appreciate over time for profits to be realized.

However, futures traders and speculators know different. US financial markets are rallying at all-time highs, notably the Dow Jones Industrial Average which is trading above 20,500. On Friday, 17 February 2017, the Dow Jones was trading at 20,567.09, the NASDAQ Composite Index at 5,814.21, and the S&P 500 index at 2,343.79. What is particularly notable about the performance of these indices is their 1-year gains are all well above 20%. The NASDAQ is soaring at 28.23% over the past 1 year, while the Dow is up 25% even, and the S&P 500 index is 21.64% higher.

  • Is Trump the main driver of economic strength for US stock markets

The surprise election of Donald Trump as president of the United States has helped financial markets to soar. Prior to his election, voters were in a state of comatose, not knowing which was the lesser of two evils – Hillary R. Clinton or Donald J. Trump. Ultimately, it was the Rust Belt states that voted to put Donald J. Trump into office, along with his radical agenda of making America great again. The reason markets have been so responsive to Trump is fiscal stimulus. While Trump has not yet revealed his plans for infrastructure growth and development, he ran his entire election campaign on rebuilding America from the ground up. This includes reversing the urban rot in America’s cities, rooting out crime and corruption, and securing the southern border between Mexico and the United States. All these ambitious objectives require massive amounts of money – and that translates into economic opportunity.

  • The USD is rallying, despite short-term pullbacks

The US dollar is one of the better performing currencies of the past 1 year. If we take the DXY (dollar index) as a case in point, we can see that the greenback is performing strongly. According to the latest stats, the US dollar index (DXY) is trading at 100.76, up 0.25% or 0.25 points. The 52-week low of the DXY is 91.92 and the 52-week high is 103.82. Clearly, the dollar is in bullish territory and this reflects positively on the US economy. Recent economic data releases such as NFP data for January were positive, although wage growth did not excite analysts quite as much.

  • The Fed is keen to gradually raise interest rates

The Federal Reserve Bank is the most important monetary institution in the world. The last time the Fed raised interest rates was on December 14, 2016, when it hiked the Federal Funds Rate by 25-basis points to 0.50% – 0.75%. At the start of 2017, Fed FOMC officials were eager to get through 3 rate hikes in the year, although almost 3 months in we have yet to see another rate hike. Recently, Fed chair Janet Yellen testified before a Congressional Committee, and she made it clear that the Fed would be raising interest rates sooner rather than later. Fed policymakers are concerned that if rates don’t rise, the US economy will overheat.

As such, traders employing binary options strategy  are going long on the USD, because all that’s needed is a marginal movement for guaranteed profits. We are seeing net call options on the greenback, despite short-term reversals in recent days. The impact of a stronger USD on gold prices is known: gold demand will decline and prices will drop. The impact of gradual rate hikes on US bourses is actually positive. It’s the volatile movements in dollar strength or weakness that impact equities markets. Nonetheless, the theory holds true: Higher interest rates do not bode well for equities because companies listed on these exchanges will have to pay more for borrowed capital, thereby diluting profits and shareholder value.

 

The Final Word

These are but some of the many factors that are impacting financial markets and trading opportunities today. Traders will want to keep their eyes on inflation rate data (currently moving towards the 2% target), NFP data, unemployment data and real wage growth. Provided the economic indicators are bullish, we can expect a risk-on approach to equities to be maintained and call options will be the order of the day on top performing stocks.

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