News traders often conform to the general philosophy of ‘Buy the rumor, sell the fact’. This basically means that traders take long positions in the run up to a news event, which more often than not tends to fall short of expectations, with the exception of a few economic releases every now and then.
The basic reason for the rally that often precedes a news or economic release is based on market speculation and there are many such examples with the US nonfarm payrolls data being one of the many such events. Technically, from a trading perspective, the “Buy the rumor, sell the fact” philosophy also coincides with the accumulation and distribution cycles in the markets. Prices are marked up, thus validating long positions and eventually the positions are unfolded more often than not, if the news release falls short of expectations.
The US Dollar and the US economy in general has been experiencing a general broad based rally since mid last year. Fuelled by the monthly decreases in the Fed’s QE purchases and a turnaround since Q2 of 2014 in the US economy, the Dollar in general has rallied sharp and quick further boosted by the end to QE and the rising speculation in interest rate hikes.
In recent weeks however, noted Bond market fund managers have been very vocal in stating that there won’t be any interest rate hikes this year. Noted Bond market expert, Jeffrey Gundlach, in an interview with Barrons noted that the yield on the 10-year bonds will continue to fall, and perhaps decline lower. The same view was also expressed by Bill Gross, head of Janus Capital. The fact that the bond market experts are starting to question the viability of the Fed’s interest rate hikes is something that traders need to bear in mind.
Technically, the US Dollar is currently flirting near multi year highs of 91.57 level, a break of which will see a further rally to 98.16 levels. But considering the strong rally by the Dollar index, one merely has to look at the chart to figure out that the rally which has been rapid has seldom seen any corrections to previous support levels. Such type of rally is usually marked with an overly bullish view of the markets, which trumps all logic.
Besides the Bond gurus, the Fed’s members too have been coming out and urging the markets to remain patient, which could very well be the word in focus in the Fed’s monthly FOMC statements in the coming months. The markets at the moment are tuned to a possible interest rate hike anywhere from March – June and should the markets start to realize that the interest rate hike could be postponed further, we could expect the US Dollar look for a much needed corrective decline lower.
Another interesting aspect to keep in mind is the economic data releases from the month of November 2014 onwards, which basically marks the economic growth after the Fed ended its QE support. It is not hard to realize that most of the fundamentals such as durable goods, Empire state manufacturing Index and so on have fallen short of expectations, which is something worth keeping an eye on especially in terms of how well the US economy is able to come off its QE crutch and be able to stand on its own.
Putting all the above together, the whole scenario of the US interest rate hikes could therefore very well turn out to be a classic case of ‘Buy the rumor, sell the fact’.