The Fed May Give Trump Exactly What He Wants By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - A week of rolling shocks…
- The healthiest 1.5% drop of all time…
- How empty are Trump’s tariff threats?
- Jeff Clark sees a potential shake-up from the Fed today…
Roller coasters are short for a reason… They’re intense experiences. Your heart’s racing, you’re screaming at the top of your lungs, and you’re jostled around a metal box moving quite a bit faster than your typical interstate speed limit. This moment of intense discomfort is the thrill… the point of the ride. It makes you feel alive. But, very importantly, the ride ends after just a couple minutes. You would typically not want to ride a roller coaster for an hour straight. Nor would you want back-to-back rides without first planting your feet on the ground. This week feels like being on a roller coaster that never ends. And we might have to get used to that feeling. Chinese tech startup DeepSeek threw the AI trade into disarray on Monday… Tariff talk dominated on Tuesday, with a clear message that President Donald Trump wants to hit Taiwan next – home of a vast majority of the world’s computer chips – for as much as 100%. And today, with the Federal Reserve’s rate decision and press conference, may be the roller coaster’s biggest loop-de-loop. But another important point is that roller coasters end right about where they start. And that’s true of the market too… | Recommended Link | | | | As new allies, Trump and Musk could reshape America’s AI future. Elon Musk’s AI startup, xAI, might gain the edge it needs to dominate the industry. A shift in government support, fewer barriers, and a potential “backdoor” into the AI race are just the beginning. Is xAI set to become Elon’s most powerful venture yet? Click here to uncover this opportunity before it's too late. |  | | All we need to do is look at breadth… Something unusual happened during the Big Tech sell-off on Monday. Market breadth actually improved across the board. Take a look. The chart below shows the S&P 500 ETF (SPY, blue line), along with the percentage of S&P 500 stocks above their 50-day moving average (S5FI, purple line) and the 200-day moving average (S5TH, red line). 
These lines show something pretty strange: Monday’s volatility, with a 1.5% drop in the most important stock market index in the world, was broadly healthy. The number of stocks above their short- and longer-term moving averages expanded. That doesn’t happen often. (It may even be the first time ever.) And this highly isolated incident reveals: - How absolutely concentrated the stock market is in the biggest tech names.
- How leveraged traders of those names are.
You could make an argument that markets are efficient, and investors really believed Nvidia (NVDA) was worth $600 billion less on Monday than it was on Friday. (Disclosure, I own NVDA at time of writing.) But that would ignore that eternal truth of leverage. Investors, especially large investors, like to borrow money to trade. This helps them take on bigger position sizes than they normally could, which is a great thing if they’re right… Because the leverage makes their profits much bigger. But if they’re wrong on a trade – or worse, a freak technological breakthrough spurs some profit-taking – they’re in a deep hole. They have to pay back what they borrowed with a losing position. They’re forced to sell to pay their obligations… driving prices lower, causing more panic, and so on until the roller coaster stops. And that’s on top of things like the GraniteShares 2x Long NVDA Daily ETF (NVDL), which regularly trades about 16.3 million shares (or about $900 million) in volume per day, also sucking the air out of the room. On Monday, it traded roughly twice as much volume. And that’s just the largest of many such leveraged NVDA ETFs, amid a family of other leveraged single-stock ETFs trading what else but other large tech stocks. But this isn’t our first rodeo… A few months back, you might remember that a little thing called the “yen carry” trade was spooking markets in a similar way. That was a lot more complicated in nature, but it was ultimately a leverage event just like this was. One that we recommended buying. The S&P 500 is up about 16.4% since then… And both the Health Care Select Sector SPDR Fund (XLV) and UnitedHealth Group (UNH) posted market-beating gains in the 29-day aftermath we highlighted. 
This week’s event was more concentrated in tech. And to be clear, DeepSeek is rewriting the AI rulebook to some extent. (More from TradeSmith CEO Keith Kaplan on this later today.) But the fact of the matter is, leverage events are dips to buy in a young and strong bull market like this one. Look for stocks to be much higher in six months, just as they are now compared to last August when the yen carry trade blew a hole in the market. And it’s especially a buying opportunity in the sectors that showed strong relative strength in that time. Health care, consumer staples, discretionaries, and other areas of the market showed remarkable strength Monday. We call that a rotation trade, and it’s one to take part in. Tariff threats are on the rise… The new U.S. president spent the last week showing people just how serious he is about threatening trade tariffs, and how effective those threats can be. Colombia was a real shot-across-the-bow moment. The South American country initially rejected dozens of deported illegal immigrants that the Trump admin had returned to Colombia on a military plane. But a threat from the U.S. of a 25% tariff on major Colombian exports like coffee, oil, avocados, and more quickly overcame the objection. This incident showed us in practice for the first time what tariffs are really about. They’re a threat… And while not an empty one, they may be quickly rescinded so long as the country in question complies with the U.S.’s wishes. You can see how this might prove effective. Countries want to do business with the United States, as it’s far and away the most important economy in the world. Anything that strains that economic relationship is an existential threat to virtually every other economy, even developed ones. That’s why the next tariff threat, this time directed at Taiwan, is all the more interesting. In a speech Monday night, Trump announced his intent to levy a tariff of up to 100% on Taiwanese semiconductors. Anyone who’s been around the block in the tech trade knows that the majority of the world’s semiconductors are made in Taiwan, and a lot of those are made by the just-shy-of-a-trillion market cap Taiwan Semiconductor (TSM). Large tariffs on Taiwan directly correlate to higher prices for electronics of all kinds for U.S. consumers. That would not only be highly unpopular, but would be an aberration – electronics are some of the most disinflationary products on the market. It would also impact none other than Nvidia, one of Taiwan Semiconductor’s largest customers, along with Oracle, Apple, and plenty of other tech giants that make consumer and enterprise hardware products. I read this as, once again, a threat closer to empty than full. What Trump wants is more domestic semiconductor manufacturing. He’s using ample leverage against the current powers that be to make that a reality. The question becomes whether that industrial strength can spring up quickly enough to satisfy the president. My bet is that we’ll hear about plenty of accommodating moves in the not-so-far future, in addition to the $65 billion Taiwan Semiconductor has already pledged for fabrication plants in Arizona. Jeff Clark has an interesting prediction for Fed Day… Before we get off the roller coaster, we should turn to master market technician and 40-year trading veteran Jeff Clark for his take on what might prove to be the most significant day this week. The Fed is set to announce its interest rate decision, and folks are unanimous that there will be no move. The FedWatch chart holds the odds of a cut at a mere 0.5%, down from 10% just a month ago: 
Jeff, though, had an interesting take on what’s to come today in his Market Minute e-letter. Here’s Jeff: Last week, in a speech to the crowd of elites at Davos, President Trump “demanded” lower interest rates. The President bragged that he knew more about interest rates than “the guy currently in charge of the policy.” Those comments put Mr. Powell in a bit of a bind. If he talks about lowering rates, then the Chairman looks weak. He’s complying with the President’s “demand.” He risks being seen as a puppet. On the other hand, Mr. Powell might express the normal human reaction to being called out. He might wave to the President – without using all five fingers – and then say something along the lines of… “Really? You ‘demand’ lower rates, do you? You think you know more than me? Well… After looking at all the data, the evidence suggests there is a greater risk of inflation heating up again. The committee is reconsidering its preference toward lowering rates later this year. We may instead need to raise rates.” He goes on… If we dig a bit deeper, though, this might be the reaction the President really wants. Let me explain… The FOMC only controls the target for the Fed Funds rate. That’s the short-term rate of interest that banks charge each other on overnight loans. Long-term interest rates are a function of the market – the supply and demand – for Treasury bonds. The Fed does NOT have direct influence over long-term rates. The FOMC shifted to an easy money policy and began lowering its Fed Funds target last September. Since then, long-term rates have gone up. The 10-year Treasury yield is 4.63%, up from 3.65% in September. The 30-year yield is 4.86%, up from 3.95%. In other words, the cost of long-term money – the kinds of loans that you and I and businesses use – has gone up since the FOMC began lowering its Fed Funds target. Lowering the Fed Funds rate has actually been restrictive for business. […] The normal human reaction would be for Mr. Powell to push back a bit. He might say some version of, “You can’t bully me. I’ll do what the data suggest I do. If the data suggest I should raise rates, then we’re going to raise rates.” The market would likely react to that by starting to reverse the action we’ve seen in the Treasury bond market since September. Bond prices will rise. Long-term rates will fall. And the President will get what he wants. There’s an old meme that Trump plays “four-dimensional chess” with his particular brand of narrative control. If Jeff is reading the situation right, that’s exactly what’s happening here. Not only that, a short-term rate raise today would be one of the more bullish things that could happen… and exactly what Trump wants to see. I’m really not surprised to see Jeff’s thinking on this track. It’s exactly what he’s been talking about to his subscribers, as well as in his First 100 Days Playbook. This trading blueprint is all about knowing how to trade the rampant volatility Jeff predicts over the rest of Trump’s first 100 days. And Jeff’s no stranger to this kind of volatility… In 2017, Trump’s first batch of executive orders set up a really great trade for Jeff’s readers on United States Steel (X). Using Jeff’s divergence system, traders could’ve tripled their money betting on X starting on Jan. 25, 2017… Then tripled their money again on the downside move by spotting bearish patterns instead. That’s just one past example – but Jeff is expecting weekly opportunities to swing trade for profits much like that. Watch Jeff’s free presentation on the strategy here… But do it soon. Due to the timely nature of his briefing, they’re taking the recording down after today. To your health and wealth, 
Michael Salvatore
Editor, TradeSmith Daily | 
No comments:
Post a Comment