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Volatility = C-O-N-F-U-S-I-O-N

Well, well, well, what an interesting day in the market!  Billed as one of the most anticipated Federal Reserve policy statements in decades, the market digested the news with the following intra-day moves:   It was initially down, then it was, up, then it was down, then it was up, then it went up some more, then it went down a lot, then it went up a lot, then it went down, then….heck now I am confused…where did it end up?  Flat?!?! 

At 1.37 I mentioned “I sure hope we get some reaction either way, I’ll be very disappointed if we don’t get volatility after the statement comes through.”  Well we got the volatility alright, but it sure would have been nice to see the move in one direction!  As it is we end the day up just slightly, 35 points on the Dow, 14 on the NASDAQ and 9 on the S&P 500.

Today, I think we all learned that volatility can be spelled C-O-N-F-U-S-I-O-N!  The market didn’t know how to react to the policy statement which read:

“The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

“Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

“Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

“Although the downside risks to growth have increased somewhat, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.”

Well it seemed everyone was confused.  Our pal Jimbo – oh you know we love you Jimbo! – did a complete 180 on CNBC where he stated that he did NOT want a rate cut because it would lead to panic in the markets and, in fact, he believed that a policy statement received well could lead to an UP 500 point day in the Dow.  No such luck!  We were disappointed too Jimbo!

Nevertheless we made the most of the conditions.  Happy directed us to trades on WYNN ($118) and GRMN (back above $100) among others while I kept riding EBAY higher – up another 3.67% today to $35.89.  Seems like a long time ago I mentioned we were breaking $34 but in fact that was just yesterday!  And Google (oh how I love thee!) showed great strength the last couple of days as it made a run for $520.  The Fast Money guys are behind it now so we’ll see if that gives it a push over the edge to start a nice new uptrend.

After hours we had a great reaction from Cisco, up to $31.39 after hours.  REMEMBER after hours movement is a potential indicator for price action the next day not a guarantee.  I’ve seen too many stocks in the past reverse down to consider the movement a certainty that can be relied upon but it sure is looking good!

The Associated Press reports:

“Cisco’s fiscal fourth-quarter profit rose to $1.9 billion, or 31 cents per share, from $1.5 billion, or 25 cents per share, in the same period a year earlier.

“Earnings excluding items were 36 cents a share, beating the average analyst estimate by a penny, according to Reuters Estimates. Revenue also topped market expectations.

“Cisco shares rose 5.8 percent in after-hours trading to $31.40, after closing at $29.69 on the Nasdaq.

“The stock has risen by more than 70 percent from a year earlier despite concerns about the U.S. economy, as both communications service providers upgraded their networks to handle growing Internet traffic.”

Watch Juniper also tomorrow to gauge the breadth and strength of the reaction to Cisco earnings.

This is certainly a positive for the markets tomorrow unless of course we lose all confidence in our government maintaining a stable economy and strong dollar.  The wonderful aspect of PSW is that we are on top of all the latest news and mj23 provided this link to Britain’s Telegraph newspaper which has a leading story

“China Threatens to Trigger US Dollar Crash”

The article mentions

“Two Chinese officials at leading Communist Party bodies have given interviews in recent days warning, for the first time, that Beijing may use its $1,330bn (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.

“Described as China’s "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is breaking down through historic support levels.”

Hasn’t the Dollar already crashed?!  Gosh I am not looking forward to a real crash if this isn’t one, especially as I prepare to gallivant around Europe in the next few months – that exchange rate is just horrible….Phil I feel your pain spending euros over there!

Speaking of Phil, I really don’t know where he finds the time to check in with us but he did on numerous occasions again today and my favorite quote from him was:

“I still get more useful info about the market reading the day’s comments here than in all the other financial news I can read combined! Nice job by all.”

Kudos to the team on job well done – again!

He also found some interesting links for us all to peruse as we evaluate our virtual portfolios.  Take a look at this link  to note the global squeeze occurring in easy credit.

And one final note from Phil:

“If CSCO can’t get us over 2,600 during the day and can’t sustain 2,575 EOD and the SOX continue to drag (CSCO not a member)… then shorting the Qs may be in order – along with the rest of the market they could drag down!”

I still feel good about being hedged and Phil still feels good about having lots of cash.  In volatile times of confusion, cash, hedging and prudent virtual portfolio management will ensure you live another day!

Trade Safely!

OptionSage


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  1. BillBigD

    Sage
    I know Phil likes SBUX and will be doing more spreads trades so I thought you could look at this one for the group.
    Buy SBUX Jan 25 at $3.85

    Sell SBUX Jan 27.50 at $2.25 Net debit $1.60

    Close above $27.50 .90 profit 56.25% Return
    If you don’t like told hold back

  2. Phil

    SBUX – my only issue with that trade (as with all bull call spreads) is that anything can happen in a short-time-frame. I suppose if the market maintains itself during Aug then I could relax about the rest of the year but even pre-beaten SBUX would not be immune to a major crash. For the same $1.60 at risk I can sell the same Jan $27.50s against ’09 $30s, giving me 12 additional months to be right but, of course, my favorite is always to take the same leaps and sell the Sept $27.50s for $1. While there is, of course an appeal for low-budget investors to tie up less money, the sale of 3 $27.50s at $1 yields 25% more over 4 months which equals 100% more over the course of the 16 months you hold the leap ($2.40) which is exactly what the expression penny-wise and pound-foolish means!

    China I don’t take too seriously. It’s kind of like you have a store and your number one customer (about 1/3 of your business) threatens to take his business elsewhere if you don’t fix some policies he doesn’t like so your response is: “Oh yeah, well I’ll show you, I’m going to throw the money you gave me down the toilet, knocking off perahps 20% of my total wealth (which is held in that money) and I’m going to make sure that any additional money you give me or owe me buys 20-30% less for me than it did in the past. Then I’m going to slow your entire economy, which can knock another 20-30% off half my future sales while I foolishly hope my erratic behavior doesn’t cause you to seek more reliable suppliers.”

    There are close to 1Bn Africans who dream of one day having a fraction of China’s standard of living and the Chinese need to be mindful of the ancient wisdom I just made up which goes: “People who live in grass huts will work for stones!”

  3. OptionSage

    SBUX – how can I add anything to Phil’s detailed analysis! BillBigD as Phil pointed out the big challenge with the trade is evaluating the contingency should something go wrong and having more time is always going to yield easier trade modifications. In general I like those plays a lot…you still have a reasonable time remaining before expiration so personally I would be surprised if it didn’t do well. Although a correction may occur short-term the likelihood of it lasting thru to 08 and causing the position to lose overall is improbable in my view.

    China – agreed! If things really do get ugly Paulson should perform some hocus pocus and save us!

  4. ramana

    An excellent write up, OptionSage.

  5. ramana

    I love your ancient wisdom, Phil. :=)

  6. OptionSage

    Thanks ramana!!

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