Trading Journal

The European indexes closed slightly higher and were in consolidation throughout the day. At this stage, European investors are more focused on the ECB’s Thursday decision than in the cooling signs of the global economy. Today in Beijing, the IMF reduced its forecasts for global growth. For 2015 this institution estimates a growth of 3.50% and 3.70% in 2016. In October, the IMF projections pointed to increases of 3.80% and 4% respectively. As the World Bank, the IMF pointed to the slowdown in the Eurozone, China, Japan and some emerging countries (including oil producers) as the main reason for cutting their estimates. These should also reduce the positive effects that the oil drop will take in energy-dependent countries such as those in Western Europe. The IMF decision is reinforced by the reading of China’s GDP, which indicated that the economy grew at the slowest pace in 24 years. The prevailing belief in the market is that the ECB will announce its sovereign debt purchase program. This belief was reinforced yesterday by the French President indiscretion that clearly stated that the ECB would go that way. Now, for investors the unknown is the program amount and its mode of action. While these issues do not find answers, many investors increase their exposure to the market, fearing to lose the positive effects that the ECB’s decision could have on the stock market.

The European Indexes climbed. The expectation of tomorrow’s ECB meeting dominates the feeling of European investors. Today starts the World Forum in Davos, an event that brings together many politicians, economists and top investors, it is therefore an opportunity to gauge their perspective on the world economy. The slowdown in China’s economy is one of the issues, as is one of the causes for the cut in global growth estimates for this year. It is not excluded that some of these politicians to wave the ECB meeting tomorrow, which could have an impact on the course of stock market indexes.

The Stock market rose after a three-day rally in the SP500 Index, as banks and transportation companies posted better than expected earnings. The session was marked by the European Central Bank’s announcement (ECB) that will adopt an expanded stimulus plan, including government and corporate bonds of 60 billion euros per month. The purchase will continue until September 2016. The announcement was made after the ECB maintained the reference rates unchanged at record levels.

Stock markets traded up. Investors continue to try to assess the impact of the ECB’s decision announced yesterday. In which extent the equity markets had not incorporated this decision, what are the sectors that most benefit from the acquisition of bonds and their effects in different economies, etc. The Central Bank announced that it will acquire 60 000 M. € monthly of debt instruments (mainly government bonds). The ECB will purchase a total of 1,080,000 € M. of debt instruments, over 18 months, starting in March. This is slightly higher than what was known early yesterday by some rumors. The ECB’s decision reinforced the downward movement of the Euro. This trend has justified the over-performance of stocks from export companies. Another factor that attracted the attention of investors was the publication of the final reading of the PMI activity index (Purchasing Managers Index) for the euro zone which averaged above estimates. A slight improvement over December but not strong enough to dispel fears about the European economy.

The European equity markets started the session trading low but climbed throughout the day, reaching new highs. Investors are preparing for another intense week, with continued earnings season in the US and in Europe and the first meeting of the Fed this year. At the macroeconomic level, the publication of the sentiment index of German business, the IFO, showed a slight improvement achieved in January. In the second half of 2014, this index has been falling before the repeated signs of slowing down not only in Germany but also the Eurozone. Another factor which may gain some weight is the rebirth of the tensions in eastern Ukraine, to the extent that in recent days there have been several armed conflicts in this part of the country. The fall of crude oil can create some selling pressure in the sector of oil shares, as should benefit the airline stocks, chemical companies and automakers. The latter sector has been one of the most favored by the fall of the Euro against the dollar and other currencies. 2014 was the first year since 2007 that saw a rise in car sales in Europe, with major CEO optimistic this sector for the current year, not only by the dynamism of the domestic market and the competitive advantage that the Euro has enabled us foreign markets.

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The European stock markets started the session with slight gains. The beginning of today’s session was influenced by some corporate results. Briefly, Roche reported lower annual results to estimates and the proposed dividend (8 CHF) was also lower than the market anticipated. The Swedish retail chain H & M reported higher quarterly results than expected and was confident in relation to the January sales. The European technology sector should respond positively to Apple’s results. The American company is an important customer of several European companies, such as the English ARM. At the end of the session, it is not excluded a decline in trading volume, reflecting the expectations of investors in relation to the meeting of the FED.

The Fed kept the outline of the statement of December. The central bank reiterated that it will continue to adopt a “patient” posture with regard to the standardization process of monetary policy and thus, if all factors remain unchanged, interest rates should not be increased in future meetings. Regarding inflation, the statement said that the increase in the price level has fallen and that this trend will intensify in the short term but in a broader time horizon prices are expected to increase at a faster pace, due to the improvement of labor market and decreasing temporary effects of oil fall. The FED withdrew the words “for an extended period of time” when it ruled on the maintenance of low interest rates. Another change from the December statement relates to the assessment of the economy. The FED believes that the US economy is growing at a “solid” pace instead of “moderate” as mentioned in the previous statement. Contrary to what occurred at the December meeting, the statement was approved unanimously, although it is important to note that recently the Central Bank Committee had some changes, with new members more conducive to an accommodative monetary policy than their predecessors. This event has generated an upward movement of the indexes for a few minutes before investors focus on the price of crude. Oil traded again under pressure after the US Department of Energy has reported that US oil reserves increased 8.84 million barrels last week more than 4.3 million barrels anticipated by economists. With this change, US crude oil reserves reached the highest level since 1982, when it began to be recorded in a systematic way. The crude oil price fall caused a selling pressure on the oil sector, which quickly spread to other sectors. In this harmful effect of oil joins the strength of the dollar, which penalizes revenues of US companies held in foreign markets (which represent about 30% of the total). These factors have raised the concern of investors. The worrying signs of coming earnings season are clearly evident in the good results from Apple. About 120 companies in the S&P500 have reported their quarterly accounts, generating an increase of 8,000 M. USD in profits over the previous year. From the total increase of 8000 M.USD, 5000 M.USD were generated by Apple.

The US economy expanded at a slower pace than expected in the fourth quarter with the slowdown in corporate investment. A fall in government spending and a trade deficit growing took shine to greater gains in consumer spending over the past nine years. Gross domestic product grew at an annualized rate of 2.6%, after a 5% gain in the third quarter, which was the highest level since 2003. The estimate of economists pointed to 3%. Although the American economy is the most dynamic among the main economic regions of the world, some factors have weighed on US actions. One such factor is the strength of the dollar which reduces the competitiveness of US companies as well as the amount of revenue they generate in foreign markets. The companies in the SP500 have a very broad geographic exposure, making them sensitive to this factor. The second factor has to do with monetary policy. Although the FED proves “patient” (in the words of the central bank itself) in relation to rising interest rates, investors know that the trend is for monetary policy to be less accommodating in future. This trend contrasts with that observed in other economic areas such as Japan and Europe. Perhaps this is the most important factor to the extent that monetary policy the Fed was the main catalyst for the bull market started in 2009.

China’s PMI index on manufacturing activity fell in January to 49.8, below the 50.0, thus signaling an industry in a contraction phase.

If the appreciation of the dollar has had a negative impact on profits and revenues of US multinationals, the weakness of the Euro should have benefited European companies. The devaluation of the Euro not only increases the competitiveness of European companies and increases the amount of revenue generated there. The big question is whether the positive effect of Euro worth the still fragile domestic demand in the euro area and the economic slowdown in various parts of the globe.

One of today’s session topics will be the recent rise in oil. The oil recovery is based on several factors, from fundamental and technical nature. In recent weeks, there have been several indications that the offer is to adjust to new market conditions. Several oil companies in the presentation of results have reported that will reduce investment in the coming years, which will reduce the production along the time. Another sign was given by the CEO of BP who said that the production of shale oil (extracted oil shales surface) in the US has experienced a sharp drop, and closed dozens of wells every week in states like Texas, the Dakota North, etc. The production of oil shale in the US was the main cause of increased oil supply in the last 3 years. From the technical point of view, a very common strategy among hedge funds in recent months has been selling futures on oil. This type of strategy has been so popular that the level of sellers headings (speculative) reached the maximum in recent years. These investors may be tempted to close their selling positions to a minimum oil sign of strength, materializing the gains achieved with the downward movement of crude oil. The rise in crude should continue to boost the related sector but also affects many other raw materials. Because oil is one of the most traded commodities, their movements influence the price of copper, aluminum, zinc, etc. Thus, the mining sector could also stand out in the early hours of the session. The value of crude oil and the recovery of the Euro may generate an underperformance of the DAX. The reason for this possibility relates to the fact that the German index, one of the best performers this year, doesn’t have any oil company among its members, and a significant portion of its constituents have a high export exposure and thus a negative correlation with the Euro.

Today the ECB published its newsletter, which is no longer monthly and went on to be released every 6 weeks, which describes in detail the Euro Zone Economy. The European Commission (EC) predicted growth for all EU countries in 2015 for the first time since 2007. The EC raised its forecast from 1.1% to 1.3% of GDP for the year 2015, and from 1 , 7% to 1.9% in 2016. the commission said the growth was 0.8% last year. The unemployment rate is expected to fall from 11.3% to 11.2%. In regard to inflation, the EC predicted that consumer prices come down 0.1% this year, after an increase of 0.4% in 2014, but predicted to grow 1.3% in 2016.

Yesterday American indexes closed high, having been influenced by the same factors that marked the previous session: the evolution of oil and business news. The merger and acquisition news continues to animate Wall Street. The shares of Pfizer appreciated after the company announced its intention to acquire Hospira company specializing in the manufacture of biosimilars. Weekly applications for unemployment benefits last week amounted to 278,000, less than the 290,000 estimated. In the last two weeks, this indicator reached levels close to the minimum of the last 15 years. On the other hand, the trade deficit rose unexpectedly in December to its highest level since November 2012 (46 600 M.USD) due to the increase in vehicle imports and a decline in exports. In recent days have been disclosed some economic data pointing to a slowdown in the US economy. These signs have disturbing contours considering the large number of areas of the globe which cross a delicate economic phase. These less solid economic data shook the oasis of status that the US enjoyed until a few days ago. The employment report comes somewhat alleviate the negativity of the latest data, as announced the creation of 257,000 jobs, exceeding the 230,000 estimated by analysts, which corresponds to an above-average number of 2014 (240,000) and stock indexes should react positively.

Presidents’ Day, is a federal holiday held on the third Monday of February and the US markets will be closed. Since 1990, the SP500 closed on the eve of this holiday downwards by 81% of the time.

Price is King!

We should realize that the initial analysis is only a starting point for moving in the right direction. From there, it’s really a matter of seeing what the market is willing to give. The truth is the price level at which negotiates an asset in the given moment, regardless of what we would like to see.

Trend following!

People feel most comfortable in a congestion or a consolidation area, but this may be the most dangerous place to be. So it would be logical to conclude that trading outside the comfort zone shall be the safest and correct one.

Today’s meeting of the Eurogroup assumes crucial importance, after the impasse lived at the meeting last week. The ceasefire agreed in Minsk took effect yesterday, so the next few weeks the financial markets will observe its implementation. The molds of this ceasefire resemble the agreed in September 2014 and it is recalled that in the days that followed this agreement financial markets were quite sensitive to any rumors or news from that area. The movement of European stock markets should only be conditioned by news and events in Europe and the Asian markets, since today the US market will be closed.

Today the SP 500 Index broke 2,100, reaching a record for a second day on speculation that the Greek debt impasse is easing while oil prices erased earlier declines.