Big news regarding future U.S. monetary policy surfaced over the weekend. Larry Summers, the candidate favored by Obama to replace Ben Bernanke as Fed Chairman, announced that he was pulling his name from the race. Summers was considered to be more of a monetary policy hawk than others, which means that he could’ve potentially supported less future Fed support for markets if he were to take office. As a result of this development, Janet Yellen is now considered the heavy favorite, and she generally takes on a more dovish stance toward monetary policy. Resulting from this development, markets are sharply higher today on the news as the dollar is weak. Stocks gapped significantly higher, but have since drifted lower from the open. The Dow is currently leading, higher by about 0.9% on the day, while the Nasdaq is currently flirting with negative territory. Bonds opened significantly higher, but have since drifted lower and currently sit -0.5% for the session. Despite weakness in the U.S. Dollar, metals are slightly lower, as gold is off 0.5% and silver is down by about 1%.
CHART OF THE DAY
International Business Machines (IBM) – The tech giant has been relatively weak this year, higher by only about 1% since January. This morning, the shares filled a gap lower from 8/5 and failed at that area, indicating potential resistance going forward. Despite its relative weakness, sentiment toward the equity is currently very bullish. In fact, sentiment in the options market is near the most extreme level seen in the past 52 weeks. This creates the potential for a bearish unwinding of these options, which could act as a headwind going forward.
I like a bearish entry here with a stop on a close above 196. I would initially target a move down to 185, with 175 as a stretch target.
WHAT I’M EXPECTING
This gap higher today was very unexpected, and it appears as if bulls are stepping in here and taking some profits. I expect this slight drift lower to continue until Wednesday, when we find out what the Fed will be doing going forward. From there, it’s any guess as to what can happen. Keep this event in mind as you put on new positions this week.