Category Archives for Uncategorized

The Euro Reacts to Data Surprises

EURUSD Daily 060814

Good Morning, Friends. Apparently, unrest in the Middle East and tensions in Eastern Europe aren’t good for either business confidence or production in Western Europe. German June factory orders fell 3.2% from last month; a rise of 0.9% was expected. Italy slipped back into recession as second quarter GDP shrank by 0.2%, and European retail PMI (Purchasing Managers Index) fell to 47.6 in June from a previous 50.0, with Germany, France and Italy all seeing declines. Since FX traders react quickly to all data surprises, EUR/USD dropped and the Dollar Index ($DXY) hit a high for the year. Normally well-informed friends working on desks in London report that some of their largest institutional customers have been periodically taking profits in short EUR/USD, reloading into any strength. That may provide it with more downside momentum than I have been giving it credit for. While I continue to be bearish on the pair – the chart seems pretty unambiguous – I had suspected that a more significant rebound would be needed to bring in new sellers. If large players are taking money off the table periodically, however, it may take an actual change in fundamentals to get a sizable pullback.

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GBP/USD continues in a downtrend, although it hasn’t been making much progress in recent days. There is some concern that the Bank of England’s Monetary Policy Committee may be leaning toward tightening interest rates in order to subdue a rise in housing prices (which appears largely to be a central London phenomenon). Higher interest rates in the UK should be positive for GBP/USD, making traders nervous about being too short, but if the meeting that ends on Thursday concludes with no rattling of sabers, market participants may feel more relaxed about pushing the pair lower.

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I look at correlations fairly regularly, just to see which asset classes are moving more or less in tandem. At the moment, the few major currency pairs that I looked at on the daily charts have very weak correlations with Treasury notes and bonds, which surprised me slightly, since the Dollar is normally fairly sensitive to changes in domestic interest rates. A rising Dollar in times of global stress tends to be related to demand for Treasuries. At the moment, the stronger numbers are versus equity futures; for example, EUR/USD is 0.7% correlated with the E-mini futures. They aren’t moving in lockstep, but as futures prices move lower, the Euro is tending to move lower against the Dollar, as well. The correlation of the Dollar Index ($DXY) to the E-mini is even stronger at a negative 0.83%; when the index goes up, stocks go down. Since uncertainty around Russia’s intentions appear to be having an impact on both the Euro and on U.S. equity prices, these relationships make sense at present.

If you have positions that are working, I’d suggest not being too eager to dispose of them. It’s the surprises, of course, that can create reversals, and by definition those are tough to predict. Keeping protective stops in place that will permit you to retain the bulk of your profits if things begin to unwind, as Todd Mitchell teaches in his courses, continues to be a sound approach. As always, best of luck!

Updating Some Currency Pairs

Good Morning (EST), Friends; here’s hoping that everyone’s weekend was pleasant, and restorative. Both the European Central Bank and the Bank of England’s Monetary Policy Committee meet on Thursday. The ECB is expected to stand pat, while there’s believed to be some chance that the MPC could move to tighten slightly. That’s on Thursday, though. Over the weekend, it was announced that Portugal’s Banco Espirito Santo, which caused a ruckus when it ran into funding difficulties, is being taken in hand by the local authorities. While peace hasn’t broken out in the Middle East, things there don’t appear to be any more dangerous than they were on Friday. In general, I’m not seeing much in the way of news that’s likely to alter ranges in the FX market. There may still be some adjustments in store as traders and investors digest the implications of last week’s non-farm payrolls report, and the decline in U.S. equity indexes.

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Technically, Cable (GBP/USD) has entered into a downtrend on the daily chart; it’s extended now, but a bounce back to 1.70 or so looks to offer a reasonable balance of risk to potential reward for a short position.

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EUR/GBP has already bounced to some extent, and has reached levels where in my view it could be sold, again with reference to the daily chart. Something around .8000 would be nice; I wouldn’t be inclined to hang around long if it moved back above the former pivot high at .8033.

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USD/SEK is in a nice uptrend. The 6.80 area looks appropriate for a long entry. There has been a slight pullback, but not enough, it seems to me, to make it appealing at current levels.

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And speaking of the Euro, how is EUR/USD doing? The pair basically reached the near term downside objectives, but the weight of market opinion appears to remain quite negative, nonetheless. On the daily, a retracement to 1.35 or thereabouts seems plausible, and that strikes me as a potentially decent new short entry.

In all of these cases, volatility remains subdued, and there is the risk not only of taking losses by trying to make something happen when not much is available, but also of missing other opportunities in, say, equities or equity futures by having money tied up in currency trades where the potential for reward hasn’t been all that great in recent months. I’d suggest setting alerts, taking a look at the news and at related asset classes, particularly short term interest rates, if and when they go off, and letting the trades come to you. It’s nice when something like short EUR/USD ultimately works out, but Todd and Doc show trades here every day that might well offer a better profile of risk to reward. If a currency pair offers a reasonable entry, great; if not, well, there are plenty of things to do in other assets.

Whatever you’re trading, very best of luck!


A Blip, Or a Change in the Market’s Tone?

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Good Morning (EST), Friends. I’m not accustomed to waking up and seeing the E-mini futures down significantly (1952.50 as I type, down 12.50), but movement is always welcome. I haven’t seen a real explanation for the decline; no one should be surprised that Argentina has defaulted, and Charles Plosser of the Philadelphia Fed has been as predictable as the outcome of a Red Sox game. Our favorite Portuguese bank isn’t doing that well, and Eastern Europe and the Middle East remain dangerous places. I don’t see much that is new here.

What is always new is how the fundamental backdrop interacts with the positions held by traders and investors, all of whom are constantly balancing greed and fear. At some point, prices become sufficiently high that new buyers are reluctant to step in, and the first suggestion of profit taking is enough to prompt a rush to the exits. We could be seeing one of those “last one to take profits won’t have any” days today. The non-farm payrolls report is due at 8:30 AM EST tomorrow. This number has become the most important monthly data release, since changes in Fed policy are believed to be heavily dependent on its view of the employment situation.

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The yield on the U.S. ten year note (TNX) has been moving up; higher rates at some point will make buying bonds attractive relative to owning stocks. Are we there yet? I don’t think so, but I’ve been known to be wrong from time to time. The prospect of higher short term yields in the U.S., which the Fed directly controls, is positive for the Dollar. Under the circumstances, it isn’t surprising that EUR/USD continues to be under pressure. I’m agnostic as to how far it goes, and since short positions are reportedly very large, a bounce is always possible. My bias is to sell those bounces.

It’s always tempting to let our approach to the market on a given day be influenced by headlines and by the talking heads. Our money is a lot more important to us than it is to them, and we’re responsible for protecting it and making it grow. We can have a sense for which fundamentals other traders and investors are watching at any given point in time, since that can help us understand what the charts are telling us. Todd Mitchell in his courses helps us to understand how to recognize promising setups, where to enter, and how to manage trades after a position is established. That’s what we can do, and the tools are available to us as never before.

As I was cleaning some stuff out of the basement, I came across the class notes from a course I took in, I think, 1994. It was given at the CME by Sheldon Natenberg, a very popular author on options strategies. I was leafing through the materials, and realized just how much technology has changed all trading, not just options. We have information rapidly available to us, we have more charting choices at hand than we can possibly use, and we are inundated with more information than we can process. All the more reason, it seems to me, to concentrate on what is timeless in trading, and thus critically important. Todd Mitchell does, in my view, a great job of pointing us in the right direction, and then giving us a map.

Best of luck today!

Time for a Short Covering Rally in EUR/USD?

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Gregory (Scotland Yard detective): “Is there any other point to which you would wish to draw my attention?”

Holmes: “To the curious incident of the dog in the night-time.”

Gregory: “The dog did nothing in the night-time.”

Holmes: “That was the curious incident.” (Sir Arthur Conan Doyle, “Silver Blaze” via

Today seemed likely  to be a day when EUR/USD would, perhaps should, be lower. Thus far, that hasn’t transpired, a somewhat “curious incident”. Sharper rhetoric from German finance minister Schaeuble suggests that the Eurozone’s foreign ministers will place additional sanctions on Russia tomorrow. German business confidence has declined for three months in a row (July’s number, released on Friday, was 108, down from 109.7 in June), and while Russia isn’t a huge trading partner (it ranks 11th, according to Reuters), geopolitical stress in Eastern Europe tends to make European markets nervous.

Anticipation of further tension, combined with the prospect of a slowing German economy would normally be expected to bring the Euro, and EUR/USD in particular, lower. While there has been nothing resembling a reversal, the lack of movement suggests that the market is already about as short as it’s inclined to be. That raises the possibility of a “buy the news” reaction, and a bounce. Those who have been holding short positions on the long, slow slog down might wish to put tighter stops in place.

Todd Mitchell covers Fibonacci confluence in his courses; it’s something that I have found to offer generally reliable resistance or support. On the EUR/USD daily chart confluence comes in around 1.3555, offering a short entry on a rebound that offers a reasonable ratio of risk to reward. Another tactic would be to place a sell stop under the 1.3420 low; given the oversold stochastics and the low level of historical (realized) volatility, I wouldn’t be inclined to do that here, since a failure to follow through seems likely to generate a sharp short covering rally. As the saying goes, the last one to take profits won’t have nearly as many.

We’ll see what the Eurozone foreign ministers do tomorrow, and how the market reacts. I’m far from being bullish on the Euro, but a bounce now seems as likely to me as another leg down, and selling a bounce to open a position is a lot more fun than is using it to improve the average of a position that’s under water.

As always, best of luck!

Currency Pairs Are Moving, Ever So Slowly

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Hi, Friends, As those who read the Blog regularly are aware, I’ve been waiting impatiently for EUR/USD to break below 1.35. The loss of an airliner isn’t the catalyst I would have hoped for, but it appears now that there are too many differences among the European Union’s governments to generate much pressure on Russia. That probably limits the downside momentum; on the daily chart, the historical (realized) volatility remains mired well below 4% on an annualized basis. The Average True Range has been 44 pips over the last 8 sessions, and since the FX market almost never sleeps, that’s less than 50 pips in a 24 hour period. Since not all of us catch every pip on a given day, why trade EUR/USD? Implied vol on Facebook “at the money” calls for Friday expiry is around 98%; that’s something we can get our teeth into. Currency volatility has been substantially lower than has that for equities for the entirety of my career (going back to 1985, I’m afraid), but this is as subdued as I can recall. As my last head trader frequently remarked in the afternoon “This used to be such a great business.”

Still, the 1.35024 low from June 5 has been broken. I ran a Fibonacci extension from the subsequent (now a pivot) high at 1.36997 on July 1 to the 1.35024 level; the 127.2 extension is 1.34487, which has basically been attained, since the low for the move has been 1.3454. The next extension, the 161.8%, is at 1.3380. The Fib extensions are, it seems to me, reference points rather than real targets, but what might be considered a minimum target for the move has more or less been attained. There are plenty of institutions that trade at leasr a portion of their FX portfolios using technical models, but the patterns in the charts are established by institutions responding to changes in fundamentals. The chart indicated, or so it seemed to me, that a downside break would come, but it didn’t know that an airliner was going to be shot down over the Ukraine. FX traders are very quick to incorporate new information into prices, so a surprise is required almost by definition to alter an existing range.


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Given the exceedingly low volatility environment for most currency pairs, carry trades, where investors borrow in a low yielding currency (like JPY) and invest in a higher yielding currency (such as AUD) remain popular. I continue to like long AUD/JPY, although it is subject to risks on both sides of the trade. AUD is highly sensitive to Chinese economic data, and there are no guarantees that any given report will be stronger than expected. Japan’s government is attempting to generate a degree of inflation and weaken the Yen, but in periods of geopolitical stress, JPY generally serves as a safe haven. Those capital flows strengthen the Yen. In addition, institutional investors are heavily underweight the currency according to my former colleagues at a large custodial bank. These factors are reflected in the pair’s historical volatility, which is 6.3%, no great shakes, but substantially higher than EUR/USD. The uptrend was almost broken, but the pair is now recovering, and the interest rate differential in AUD’s favor (roughly 2.5% annually) should, on balance, continue to pull it higher.

Still, as you can tell from looking at the Blog entries of both Todd Mitchell and Doc Severson, there may be much more interesting trades out there than are available in most currency pairs at present. The day of the major currencies may come again; in the meantime, while there are still trades that can work, they may do so painfully slowly.

As always, best of luck!


Why Stops are Crucial, Chapter X

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Good Afternoon (EST), Friends. I was having a pleasant enough day trading the E-mini futures when at 11:05 I received an e-mail from a former colleague who now trades Russian bonds. It reported a rumor that a Malaysian airliner had crashed near the Ukrainian-Russian border. The E-minis were already heading south; it took me a minute longer to react than should have been required, but I closed a long position, losing a point, and went short, making 5.75. There has been a bounce, but new lows have just been put in place.

Apart from the importance of having friends, this episode, along with many others in the course of a long career in FX, highlights the sad fact that institutions will always have important news ahead of those of us who work in home offices. My friend e-mailed me at 11:05, with the futures at 1972; I saw the headline hit MarketWatch at 11:41, at which point the contract had been as low as 1961.75. It was obvious that “something” was happening, however, and a prudently placed stop would have minimized the damage and permitted a redeployment of precious capital. Todd Mitchell teaches this in his courses, and reiterarates it in his daily training sessions; this is a demonstration of the importance of these lessons. We can all recount occasions that we’ve seen a stop triggered only to see the contract reverse and move in what would have been a profitable direction. That does happen, but the point of stops is to prevent the catastrophic losses that can occur when the reason for a move isn’t obvious, but the tsunami just keeps coming. Those can be account eroding and career ending, and I’ll gladly give up the occasional bit of upside in return for being able to remain in the game.

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For what it’s worth, the most recent information that I’m seeing indicates that an air to ground missile was responsible for the apparent crash of the airliner. That could have significant geopolitical implications, depending on which of several sides is blamed. It should, on balance, be a negative for EUR/USD, where I continue to wait, not very patiently, for the previous low at 1.3502 to break (today’s intraday low has been 1.3515), and bonds are benefiting as safe haven vehicles, with the long bond ETF (TLT) up 0.91% on the day.

Here’s hoping that your day is going well; best of luck!

Portugal Sneezes, the Euro (and Equity Futures) Catch Cold

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Good Morning, Friends. Foreign exchange traders react quickly to all new information, and while the resulting sharp, and usually short-lived, moves may not alter the trend, they can create opportunities (and to be fair, hazards). This morning, a weak French industrial production release, which was more a corroboration of a view than “new news” was followed by a report that one of Portugal’s leading banks is having severe funding problems. One Portuguese bank may not seem like a big deal, but the interrelations among banks, and the various defense mechanisms put in place by the European Central Bank, are so complex that traders decided, apparently, to sell first and do analysis later. Sometimes an assasination in Sarajevo leads to World War I, although not often, thank goodness.

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The news has alaso had an impact on equity futures, which are down significantly as we head into the regular session opening. While my best guess is that this won’t be a major move, I don’t own a crystal ball, even one that doesn’t work. Since it will take some time to sort out the implications, I wouldn’t be too eager to fade this move. I’ve been looking for EUR/USD to move lower for a while. The downtrend remains intact, but it still has some work to do on the daily chart in order to break the previous low at 1.3502. A rupture there could lead to some nice followthrough action, but that, too, is a future prospect, not a current event.

Let’s be careful out there; EUR/USD hasn’t been particularly closely correlated with the E-minis, but if we do see a large upside move in the currency pair, I’ll be inclined to grab some futures contracts on the assumption that the currency’s retracement means that good news, or at least resassurance, is breaking out.

Best of luck!

Breakout on Top of a Breakout for BK (Time to Take Profits?)

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Good Morning, Friends. Back on June 18 (“FOMC Day and the Trust Banks”), I mentioned BK as my favorite stock in the custodial bank space. At the time, it was poised to break above its previous trading range, with 35.55 as a trigger. It did break, although given the low volaltility in the market and in the ticker, it wasn’t all that exciting, until today. This morning, news that Nelson Pelz’ Trian Fund Management has taken a $1 billion stake in BK has it substantially higher, reaching 37.95. That’s roughly 6.75% above the breakout level, which was achieved on June 17.

Even at the current 37.41 level, that’s a prett decent return for a couple of weeks’ work, and taking some profits off the table, or placing a tight stop underneath today’s session low, might make sense. Trian has made previous forays into this space. It did have some impact on STT, helping “persuade” management to cut costs more rapidly than would otherwise have been the case. The stock benefited from the actions. BK, however, has always been a “linoleum and metal furniture” sort of place, and there may not be as much in the way of quick savings to be achieved. There may well be more upside here, but whatever Trian ultimately brings to the table, it seems likely to take some time for its moves to fruition, and the landscape for financial services in general, and trust banks in particular, seems bumpy to me. Cashing in at least a portion of today’s profits seems to make sense; I’ll be surprised if the stock doesn’t dip from here (although not necessarily today) providing a more attractive re-entry.

Here’s hoping that your week is off to a good start; it’s hard to believe that we’ve made it halfway through 2014 already. My fund manager friends will be spending their July 4 holidays writing up their quarterly and mid-year reports before breaking for hot dogs and fireworks.

Best of luck!

AUD/JPY Reacts to Chinese Data

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Good Morning (EST), Friends. Most currency pairs have one or two principal data points that market participants tend to focus on as a convenient way of determining, roughly speaking, “Up or down?” As one of my head traders – and a very good one – always yelled when an economic report flashed across the screen, “Is that good or bad?”, by which everyone understood that he meant “Is that positive or negative for the Dollar?” It’s helpful, when trading FX, to have a sense as to what the key factors driving a given currency pair are at any moment in time. It’s not hard to do, as they tend to remain intact for considerable periods; just reading the FX market summaries at (disclosure: I was a commentator there) and will provide an overview of what institutional traders are mentioning as significant inputs.

It’s even easier in AUD and the AUD crosses, including my current favorite, AUD/JPY. Australia is an export-driven economy, with raw material exports to China accounting for a good chunk of its overall trade. Traders are thus sensitive to changes in the outlook for Chinese growth, on the assumption that when China sneezes, Australia’s economy will catch a cold. By the same token, Chinese strength tends to echo loudly in Australia, and in demand for the Australian Dollar. Last night, one of the most closely watched reports, the HSBC Chinese Manufacturing PMI, came out at 50.8 for June, versus expectations of a 49.7 print. A number above 50 indicates economic expansion, and this was the first number in that camp in the past six months.

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AUD/JPY was already moving slightly higher into the report, but the release gave it a boost. It managed, in fact, to poke its nose above what had been resistance at 96.14, although it hasn’t been able to remain there (it’s currently at 96.07). I still like the uptrend, and the positive carry (Australia offers roughly 2.75% more for short term deposits than does Yen). In times of geopolitical stress, however, Japanese investors tend to move money back home. This seems dysfunctional, since a rising oil price directly hurts Japan’s economy, which imports all of its petroleum, but nonetheless, Yen tends to strengthen at times of unrest. Like the U.S., Japan benefits from being able to denominate its debt in its own currency, and Japanese Government Bonds (JGBs) continue to provide a haven for Japanese investors, who have had a mixed record in their cross border ventures.

Nonetheless, given the positive carry, there is no reason for institutional investors to be quick to pull the ripcord on AUD/JPY longs. Once Iraq fades from the front pages, assuming that oil prices settle down, AUD/JPY seems positioned to move higher, particularly if Chinese data continue to surprise to the upside.

As always, best of luck!

FOMC Day and the Trust Banks (With Thoughts on the E-Mini Success Formula)

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Good Morning (EST), Friends. If you’re reading this, and you’re thinking about investing in Todd Mitchell’s E-Mini Success Formula Mentoring Program, I have a couple of thoughts to offer. My introduction to Todd was through his initial E-Mini mentoring course, which I took back in 2009. I was a bit skeptical; I had vast experience on bank FX trading desks, and I wasn’t at all sure that additional training would be worth the time involved. I discovered, however, that trading the E-Mini contract from a home office was very different from working as an FX market maker for a large bank. For one thing, I no longer had privileged access to a huge order book; for another, unlike the institutional FX world, a lot of the trading seemed to be technically driven, and I had never had much time for charts.

Todd’s first course taught me most of what I now know about reading the market. He does, simply, a great job of  helping people to analyze charts and understand the implications of the patterns. Crucially, he helps us to manage our risk. If we avoid large losses, over time, the gains will add up and our accounts will grow. Todd  has a great deal of help to offer in terms of identifying entries with a good ratio of potential reward to possible risk, and then managing the resulting trades to maximize the gains and minimize losses. The new course does even more to provide a strong foundation of trading knowledge, with additional tools and techniques introduced in a logical and effective manner. There’s no magic formula, but Todd will do everything necessary to help you approach the market in a way that will enable you to succeed. I still take losses; the market will, on occasion, do the unexpected, and I can have a bad trade even if I’m following the process. The losses are small, however, and my percentage of winning trades is high. Most importantly, I don’t take large losses. By following the methods that Todd teaches, I can manage my emotions, which had a nasty habit of getting in the way of my success, despite my advantages in training and experience.

In short, if you’re serious about trading, I urge you to enroll in this course. The price will almost certainly prove to be a small fraction of the “tuition” that you will otherwise pay to the market. In addition, Todd offers ongoing training and support. I still make time every day to review Todd’s videos discussing the day’s trading activity, just to make sure that I’m in synch. In addition, he’ll offer nuances and even new tactics on occasion. Learning is a process, not an event, and over the years since I took the first course, Todd has continued to help me to become a better trader. I am totally confident that he can do the same for you.

And, today is FOMC Announcement Day. As Doc has observed in his valuable videos, these events are often associated with increased market volatility. What institutional participants want to know is pretty simple: when will the Fed begin raising rates? Everyting in the statement, in the economic forecast, and in Dr. Yellen’s press conference will be scrutinized for an answer to that key question. The inflation report that was released yesterday was unexpectedly high; the Fed has indicated that it will be more or less content with ongoing consumer inflation that stabilizes around a 2% annual rate. The sooner that target is reached, the more likely the Fed is to begin “normalizing” rates. This has implications for stocks, which in a sense are in competition with bonds for investor’s Dollars, and for currencies. Changes in interest rate expectations are key inputs in the decisions by institutions to buy and sell currencies. Other things being equal, the higher  the”real” return – the interest rate minus inflation – the stronger a currency will be. For an institution, buying a currency with a 2% real rate advantage over another, and leveraging 5:1, offers a 10% gain. It’s important that the long currency not weaken by 2%, of course, but currencies with a rate advantage tend to strengthen over time.

Once these positions are entered, traders watch like hawks for any sign that the interest rate differential is likely to change. A long currency trade that I like, AUD/JPY, has come under some pressure because of a recent change in perceptions as to Reserve Bank of Australia policy. If softness in the Australian economy is deemed likely to lead to additional RBA easing, the currency will adjust lower to reflect those changed expectations. That’s why it is always important to have a refernce level in mind for a stop; surprises do occur, and institutions will react quickly. Hedge funds will generally enter positions slowly and politely, adding to them as they continue to work. When they feel a need to exit a trade, however, they generally want out right now, and they’ll run their mothers over if the poor ladies happen to be in the way.

Among the companies impacted by the exceptionally low interest rates in the U.S. are the so-called “trust banks”. These are the banks where institutional investors place their stocks and bonds on deposit, along with their cash. That cash is important, as it can amount to hundreds of billions of Dolars. If the trust banks can pay an overnight rate, and then lend the funds out for longer periods at a considerably higher rate, they will generally do very well indeed. When they can borrow at zero, but then only lend at zero plus a pittance, that’s a substantial head wind. Any notion that the Fed will begin to hike sooner than expected will help these banks (and their stocks), possibly significantly.

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I have my views as to the quality of the various companies, but at present, the stock that intrigues me most is that of Bank of New York Mellon (BK). It looks to me to be poised to break higher, possibly establishing a new range. Hints by the FOMC that higher rates are in the offing could help this to occur. Other names in the space are STT and NTRS; while JPM is an important player, it has more diverse businesses, and is less of a pure play than are the other tickers. Of course, if the market reads the FOMC reports, and concludes that higher rates remain a remote possibility, BK and its competitors are likely to get hit. Selling slightly out of the money puts might help to provide a bit of a cushion. At current levels, the dividend yield is just under 2%; not terrific, but 2% more than nothing in what remains a low interest rate environment.

Because of the press conference at 2:30 PM EST, the market’s first reaction at 2 PM may not have staying power.  Let’s be careful, and be lucky!