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TRADING THE WEEK: Risk Reversal Trade Segues to Month End

Traders Magazine Online News, March 27, 2017

John D'Antona Jr.

Trading wound down after the markets experienced a change in sentiment – which could be a prelude to fast approaching month-end trading patterns.

With the Federal Reserve rate hike now a distant memory in traders’ rear window, the market began to look at things differently. Both the U.S. and global markets experienced a classic risk reversal trade last week, Tuesday, as investors repriced the probability of a reduction in taxes. Investors took profits and reduced their risk exposure by knocking the Dow down 1.14% and the S&P 500 by 1.24% on Tuesday. Seems like with three months of a Trump Administration and action by the Fed caused traders to re-think their appetite for risk.

Larry Peruzzi

“The S&P 500 and Dow Jones Industrials ended their historic streak of 110 sessions without a 1% decline,” began Larry Peruzzi, managing director, international equities sales/trading at Mischler Financial Group. “The economic front was largely void of any market moving numbers.”

As last week drew to a close, more uncertainty was created as the House GOP leaders looked to vote on Friday on their health-care bill while not knowing for sure they have enough votes to pass it, Peruzzi added, and that uncertainty rattled the markets.

“Further evidence of the risk reversal trade can be seen in gold’s trading action as the precious metal is up 3.25% over the last 2 weeks,” he continued. “With the Fed’s rate hike behind us and the next meeting not until May 3rd and first quarter earnings still a few weeks’ away, investors will continue to ponder their risk tolerance in these highly partisan political times,” Peruzzi said.

Trading on U.S. equity exchanges reflected the prior week’s data deluge and change in sentiment as  volume climbed to a healthy 7.52 billion shares for the week ended March 24, moving higher from the 6.78 billion shares per day for the week ended March 17, according to Bats Global Markets data.

Data and Talk on Tap

This week will be one for the talking heads. Everyday there is one or more Federal Reserve governors addressing the markets – a total of 12 speeches – but the highlight being Chairwomen Yellen speaking on Tuesday. Traders will be keeping their eyes and ears on the wires to see if any given an inkling of when and how much the next potential interest rate hike might be.

“With the market drivers changing over the last couple of weeks, I think what the market and investors will be concentrating on is sentiment, spending and politics,” said Pruzzi. “Tuesday’s March Conference Board consumer confidence and Friday’s March Michigan sentiment readings should give us a good idea how the public views the economy while Wednesday’s February pending home sales and Thursday 4Q personal consumption followed by Friday’s February Personal spending will be a good indication of much the recent market rally has buoyed the consumption and spending.”

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