Stocks are drifting marginally higher ahead of today's Fed interest rate announcement. What I'd be wanting to see for bullish traders is for bonds to find selling. I don't think today's decision on interest rates will be the overriding factor in how the stock and bond market trade, but what will be important for traders to monitor is how the market reacts.
One thing a bullish trader wants to see I believe is for bonds to find selling and stocks to continue to move higher. A bull needs to see both. The bond market is going to react more to what Mr. Greenspan and the Fed says about the future economic environment. If the market perceives growth ahead, then it should find selling. If the market perceives a favorable risk/reward scenario for stocks then we should see continued buying in stocks.
So far today, the rally in stocks is not finding sellers in bonds and this has me thinking that institutions are taking a wait and see approach to what the Fed is going to do. I think any rally in stocks after the Fed announcement will come if the Fed were to cut rates 50-basis points instead of the more widely expected 25- basis points. As it stands now at 12:00 EST, I'd feel much better for the prospects of a continued rally if the bond market were seeing more selling.
Playing the stock against the sector
I've been "chatting" in the hot list about shares of Citrix Systems (NASDAQ:CTXS) on a frequent basis for the past couple of sessions since the stock triggered a spread quadruple top buy signal at $31 back on June 21st. With the stock breaking higher still to the $33.05 level it is tough to come up with a short- term traders target. One thing a trader might want to do is simply trade the stock as it relates to a corresponding index and the GSTI Software Index (GSO.X). Right now, it looks like the GSO.X might make a rally attempt to the 225 level and this might well be a level that coincides with a period of consolidation for shares of Citrix Systems. I've tried to stress that traders should be looking to simply trade some technology stocks for profits and a trader that was to get an 8-10% gain in shares of CTXS in the matter of a week might want to take some profits off the table if the GSO.X looks to begin having trouble at the 225 level.
If we were to see bond YIELDS turn higher during the session, then I begin to get the feeling that there will be capital coming available to perhaps drive stocks higher. A stock like CTRX and the technicals that have developed in that chart would be a candidate then where sellers might not be as aggressive to try and lock in profits and that may then prolong the nice move the stock is currently experiencing. If a trader can use the bond market, sector and specific stock observations to manage their trade, they should be trading with much more confidence and success.
Relative Strength Comparison of Cyclical stocks and the NASD-100
Still don't believe that boring cyclical stocks are performing better than technology. The above chart measures how cyclical stocks are performing compared to the Nasdaq-100. A rising line means cyclical stocks are rising faster, or falling slower, than technology stocks, and a declining line means technology has the upper hand. From January to April it was no comparison, cyclical stocks were clearly stronger. Technology took the lead in April, but cyclicals are once again starting to gain the upper hand. Friends or co-workers may snicker when you say you are investing in toilet paper stocks, but you can always respond with, "Georgia Pacific is up 21% since I bought it on January 2nd, how are your shares of Juniper Networks holding up?" Sure there are some technology stocks that have done well over the past few months, buy why limit you opportunities? That's the beauty of trading, you can invest in pork bellies or Palm Pilots, but all that matters is the account balance at the end of the day.
It think sage advice offered by Lao Tzu applies quite well to trading:
Fill your bowl the brim