All Clear Ahead – Bernanke Gives the Market a Green Light
In his semiannual testimony before Congress which began this morning (Wed) at 10am EST Fed Chairman Ben Bernanke said that he is comfortable with current interest rate levels and that the factors contributing to inflationary risk appear to be waning (subscription required).
“There was a concern that he might sound more hawkish on inflation,” especially after some hawkish statements last week by Fed officials, said Nigel Gualt, chief US economist at Global Insight. But “the general tone was very much in line” with recent Fed statements.
“To the extent that it’s status quo, it is being viewed favorably,” said Todd Clark, director of trading at Nollenberger Capital Partners. “The markets have taken it to assume that there is no tightening [of interest rates] on the horizon.”
The Wall Street Journal’s David Gaffen aptly titled his post on the subject on his MarketBeat Blog “Giving the People What They Want” (subscription required). He notes:
The sharp upward turn [in the stock market] seems to reflect surprise that Mr. Bernanke was as dovish as he was, after more-hawkish comments last week from other talking Feds.
The message remains the same…. But somehow, he’s just not bringing the hammer down the way the others were last week.
‘In a sense, he’s reiterating comments they’ve made from the last two months, but with a little softer tone,’ says Sean Simko, portfolio manager at SEI Fixed Income Management in Oaks, PA.
And boy have the markets responded: The Dow is up 94 points, the Nasdaq 30 points and the S&P 12 (as of 2:54pm EST). 10 year Treasury bonds are also up big with the yield on the 10 year down almost 9 basis points to around 4.73% (bond prices and yields are inversely related – the higher the price of a bond the lower the yield for its fixed coupon is). Gold is up, the dollar is down. Expectations for a Fed rate cut later this year, as measured by Fed Futures markets, are up.
This is bullish for stocks and I expect the market to be strong in the near term. Look for the Dow to test 13,000, the Nasdaq 2500 and the S&P 500 1500 in the weeks ahead.
With two big Nasdaq traded stocks, Applied Materials (AMAT) and Genzyme (GENZ), reporting estimate beating numbers in between yesterday’s close and today’s open, combined with Bernanke’s testimony today, tech seems like it may be regaining its market leadership.
Go long the Nasdaq 100 Trust ETF (QQQQ) by buying the June07 $43 calls (QQQFQ) for $3.10.
With the QQQQ currently trading at $44.56, we are solidly ($1.56) in the money with these calls. We need a rally to $46.10, or 3.46%, in the next 4 months to break even. With the Fed out of the way and sentiment still bullish on tech this trade has alot of upside.