Originally posted by R.Cox. For the full trading breifing click here
Correlation Breakdown in Stocks and the US Dollar
One of the most striking market events this week was the breakdown in the traditional correlation that is seen between stock markets and the US Dollar. Equities typically fall into the “risk” markets category while the US Dollar is a safe haven asset, bought up when uncertainty is the prevailing theme. Because of this, these two assets perform well in opposing environments. This week, however, both assets rallied and in order to decipher the reasons for this, we must look at all three of the main market drivers as the mostly positive economic data and the Fiscal Cliff resolution brought a sigh of relief to equity investors while the stimulus program comments from the Federal Reserve had the reverse effect. Looking ahead, attention will start to focus on the next round of corporate earnings. The first major companies to report will be Alcoa, which will be reporting on Tuesday and Wells Fargo which will come on Friday.
My Trading recommendations in 50 words
This week we will look at two stock picks, with corporate earnings season likely to be the next main driver of market sentiment. Tuesday’s Alcoa report is expected to show a quarterly profit of 7 cents per share and with the company’s history of beating analyst estimates, I will enter into weekly Alcoa (AA) CALLS in the 9$ region.
The other main story will be Wells Fargo
, which has an attractive P/E below 11 and has yet to retest its yearly highs at 36$. I will be looking to enter into weekly calls in Wells Fargo (WFC) near 34$
, as a new yearly high could be breached if earnings come in strongly.