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Tuesday, November 29, 2022


Which Way Wednesday – Fed Edition

[fed funds rate target]No matter what happens today, it can all change at 2:15.

We get a Fed Rate decision but there’s nowhere for them to go, so the question is going to be: "What else can you give us?"  We expect to hear some language that points to quantitative easing, something that will be more likely if we get a tame CPI report this morning.  Our friends at GS are chomping at the bit for more and Goldman economist (one of those guys they poll to get totally wrong predictions about everything) Jan Hatzius estimates (oh no!) that "The Fed needs to slash the equivalent of eight more percentage points from the fed funds rate by 2010 to beat deflation."

Wow, -8% or Goldman throws a temper tantrum – that does not bode well for today’s finish…  Obviously the Fed can’t cut below zero (they pay you to borrow money) but they can flood the economy with money until it is literally bursting at the seems in the banks at 0%, making it too worth their while to lend it to you for 3-5% to turn it down.  This is, of course, ridiculously inflationary because once you increase the money supply like that it’s very hard to put the genie back in the bottle.  We already picked up gold futures at $910 (very tight stops) in member chat, just in case, but we also shorted oil at $50 this morning – so it’s one of those days.  Oil shorts stop around $49 (we use trailing stops based on our 5% rule) and we’ll see what happens around inventories but I’d love to get a chance to short them again ahead of 10:30 as we are likely to have a pretty good build on low consumer demand that will crush oil later (another thing that can take down the market).   Selling USO $29 calls for $1 with a stop at $1.25 (hoping they expire worthless) is one way to play this.

We had a totally fantastic day yesterday but that would be obvious to anyone who read the morning post, where I said: "Hopefully we can test our bottoms and then break through our tops but things rarely work out that perfectly."  Well, this turned out to be one of those rare occasions as the market was like a trained seal, dropping right to our buy points where at 9:45 I sent out an alert to members saying:

"Nice flush to start the morning, let’s see if it sticks.  7,150 is our buy-in on the Dow and 748 on S&P, we’re testing both right here.  NYSE 4,620 is a bit away and Nas 1,430 is already blown so that’s going to be our bullish breakup.  RUT is just over the 380 drop zone so let’s just make sure we don’t blow those levels but buying right here with stops on those limits is a great way to go on DIA, SPY, IWM, QQQQ etc, which all have very low premiums and give you great leverage. "

My trade ideas for members at the time were DIA $68 calls at $4.10, which finished the day at $6.20; SPY $72 calls at $3.90, which ran up to $6.45 and IWM $36 calls at $2.87, which finished at $4.60.  We also blew out yet another set of DIA put covers but we flipped bearish at the end of the day as we came so close to our levels (the ones I set on Monday morning) that Jordan pointed out: "Your levels: Dow 7,404, S&P 775, Nas 1,466, NYSE 4,839 and RUT 402  My sceen is showing:
Dow 7,404, S&P 777, Nas 1,462, NYSE 4,868 and RUT 404

I did call a top in our 1:26 alert to members saying: "Good time to take profits on those index calls if you are still in them.  It’s the volume that’s bothering me mostly….Maybe I’m being grouch too early but, like yesterday, it was a nice run to take profit into."  It turns out I was way too grouchy as Dow did pull back from 7,315 to 7,275 about an hour later but, at 2:28, I noted it was not a very exciting sell-off and 18 minutes later MrMocha went short and guaranteed us a rally which was, once again, a foolproof indicator!  Nonetheless, it seemed overdone and we added DIA $75 puts into the close, a nice way to protect some wild gains on the long side – just in case…

Our primary target is Dow 7,450 and, as I’ve been saying all week, breaking that mark is critical.  That correlates to 788 on the S&P, 1,475 on the Nasdaq, 4,950 on the NYSE and 425 on the Russell.  Failure to break over those levels this week means we are still in a bearish downtrend.  It would take a real catalyst to punch us through and perhaps the Fed will give it to us this afternoon.  On the whole, it’s really a lot to ask from a 2 or 3 paragraph statement!

To the downside, we’ve got yesterday’s highs followed by the same danger zone as we set in the morning (effectively, yesterday’s lows) and it is possible we are driven back there ahead of the Fed in a major shake-out prior to whatever they say (doesn’t matter really) giving the funds an excuse to BUYBUYBUY on the statement.  "Which Way Wednesday" indeed!  We’re really going to have to keep on our toes for this one but we can’t get emotional, we need to let the levels be our guide and take advantage of the plays that present themselves. 

Asia held up well this morning but the World Bank cut their growth outlook for China to 6.5%, well below China’s own 8% forecast.  I think if the premise of the global economy requires ANY economy to grow at 8% per year without pause, we are eventually screwed anyway so we may as well get it out of the way now.  This pronouncement came after the Asian markets closed and the Hang seng closed up 1.7% at 13,091, the Shanghai was up half a point at 256 and the Nikkei was flat, unable to hold 8,000 and finishing at 7,972 as the dollar refuses to break 100 Yen no matter how many of them Japan tries to buy.  Less Yen to the Dollar means less Toyotas per dollar to export and that is killing Japan’s export-heavy economy as they struggle under the burden of being the World’s strongest currency, up over 25% against the Euro since last year and up 10% against the dollar.

The BOJ kept rates at 0.1% but there is no more carry trade as the US and Europe are not far behind and the high value of the Yen means if you convert 98 Yen to a Dollar and get 5% interest on the dollar ($1.05) but then Japan finally succeeds in driving the Yen down to 110 per $1, you still lose 5%.  That means the mighty carry trade, which I had long pointed out as one of the root causes of the commodity bubble (including housing as they invested heavily in MBSs), is pretty much dead at the moment except for those who wish to borrow Yen at 0.1% and invest in Rubles at 12% but how many of us are that crazy? 

[French Press Sarkozy To Tax the Rich]Europe is trading down about half a point (8:30) but that does not tell the story as they opened up nearly 2% this morning so major deterioration in their outlook.  One factor was a poor British jobs report, another is the Baltic Dry Index breaking below 2,000 again – an indicator we follow very closely and, of course, the French are striking.  This time it’s the labor unions, who are planning a nationwide strike on Thursday unless the government taxes the rich more.  France’s rich already pay their fair share at 49.8%, much higher than the UK’s 41% rate.  The problem with being the highest taxer in Europe is there’s no reason for wealthy people to stay in the country as the entire EU has a single passport.  "My goal is to convince people who have money to come to France and invest in our factories and companies, not to push them out."  France’s President Sarkozy said.   

This is just one of the many, many things we were worried would cause a pullback as we went up too far, too fast this week.  It’s what I call an "air pocket" that forms below the gains when they are not built on volume and what is done quickly can just as quickly be undone and that’s what caused us to close yesterday in our most bearish posture in quite some time.  We would be thrilled to be wrong – we still have plenty of long positions to ride up but we’re not going to be emotional about things and we’re going to keep a shart eye on our levels.  Oil failing $47.50 could trail a sell-off in the energy sector, which is up 15% since March 9th without a serious pullback so $43.50 is the line in the sand on the XLE and failure to take that could send them back to $41.50 and will make a nice short play into the energy report so tune in later for that one!

Going short on the Dow overnight allowed us to let our long plays run as we’re still hoping for a test of 7,450 (only 55 points away) and if we break through there we are happy to flip bullish, using 7,540 and 7,400 as stops along the way.  If we see good volume action right at the open we may cash out or cover the puts but we’re going to want to have something on for the big test so let’s not get too ahead of ourselves.  Best news of the morning is IBM reported to be buying JAVA for $6.6Bn, a 60% premium.  This is nice but it’s just a preliminary talk, not a purchase and $6.6Bn is pocket change to IBM and Sun is a uniquely good fit for IBM so this is not really a big bottom signal for tech the way PFE and MRKs acquisitions set a real bottom in the health sector.

It’s all about the Fed today so either in Bernanke we trust or we don’t – it’s a make or break day, whichever way it goes.





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Phil: I want to get more DIA puts: jun75 again or 76 ???

should i sell FAS APIL $5 or mARCH $5 to cover stocks ?

Got SKF 115 puts out for 10! Woo-hoo! Gambling paid off. Basis was 1.30 — 669% gain!

Dammit…closed out my XOM Mar 70 putters at 1.75 thinking I got a good deal! Now XOM is almost to 70!! šŸ™

Phil im about to go to school what do i cover my FAS stocks with šŸ™‚ !!

Daytrading Mar HOV 2.50 puts, easy money? Phil, you taking more DIA puts?

Daytrading SKF 115 calls, this if is way too much fun!

Well so much for what rally.

I sold VNO Apr35s for $4. Now at $2.40. Not bad for three days. Would you take it, or let it run out?

Nice calls so far Phil!
So, who’s gonna be first to head for the exits this afternoon? šŸ˜‰

Big speed bump but it still seems like the market wants to move up.  Up vol and advancers still strong. 

Phil, do you still expect gold to touch 850s before going up? Today’s announcement may have put a gloor on gold, so it may be all up (or at least, no sub-900 retest, from here?

gloor = floor

RUT lagging mightily.  It was up more than 3% at some point.

Phil: closed 1/2 of my FAS puts and took some % off the table,
how do you protect/cover the remaining FAS puts: buy apr 4 puts ????

So the FED joins the BOE in the great QE experiment.Having just read the text of the statement and despite getting hammered today I’m staying short. I hope all those people who blindly bought the "Buying treasuaries scam" take theri profits. The FED were really bleak about the outlook.

phil, where do you see us opening in the morning?

phil, sorry – those are Apr35 puts on VNO.

Phil: found out I had 500 shares in UYG (base 5.6$), thought I had rolled the cash from those into RKH, really do not like these, where would you put the cash from these ?
I have RHK and FAS and JPM in Financials ??

Thanks, Fabregas, for the heads up on TLT and I made some profit with selling the Apr 109 CALLs.  It’s one of my favorite, but was too busy looking at other stocks.

I am just curious if the UK citizens who returned AIG bonus “voluntarily” will have to pay their UK taxes on returned portion. It is such a sorry mess b/c I have no doubt that some good people are being screwed for political posturing. My experience is that all rats that were responsible for making risky decisions are probably long gone and we are beating the “bag holders”. It was so correct that Pres O, cooled the rhetoric and had a “conversation” with Frank.

Phil/FTSE – The FTSE bottomed about the same time the US did. 3rd March. a 500 pt rise from there is about 1.5% – way less than the US has done since that date. QE hasn’t helped one blind bit.

A friend of mine just pointed out DJIA volume today was not especially large.  That, considering it was a Fed day!

Better start selling $$$$
The breakeven spreads on 10 year and 30 year TIPS are exploding. That means they are predicting more inflation down the road. The breakeven spreads generally move glacially.
In both the 30 year sector and the 10 year sector they have moved about 11 basis points today.
That movement would be in line with the absolute cratering of the greenback as well as the huge move(upward) in price of gold.

LOL – Just read this. Basically an article published yesterday saying that the "FEDS wont buy bonds" šŸ™‚

Wow, I made it to my goal of "beating the S&P (i.e. SPY) by 30% annum" goal already, and it’s only been 4 months!
Now the trick isn’t getting there – it’s holding it!

anyone like LDK at 4.50?  I was going to dabble tomorrow …
Was the treasury purchase a big FU to China?

TBT tanked today.  Time to also look at this???

The Fed tanked my positions today (lbocou) in TLT and TBT (short treasuries) & I was really blindsided. Do you have a short term or longer term srtategy re these positions? Everything else I follow from you is WHEEE! Thanks

 Peter D… there you are. I had a question for you on Monday:
I still haven’t sold any calls, though. SPY is moving around so violently… but I need to sell some kind of strangle next month. Thinking of going "light" this month (sell fewer contracts) until I feel that this rally over the last 10 days isn’t bogus. Or maybe move to a less volatile index? TLT?

Picked up SKF at 105.4 AH.  That’s silly cheap.  My what games they have been playing!  Sorry I wasn’t a part of it.  But I’m probably richer for it.
HOV up 50%!!  WTF!!!  Wish I’d realized it before 8.  I’m really going to hate it if they go down from here before I can unload.

Sorry about that.  I’ve been swamped in the past few days.  Yes, the PUTs sold are mostly down to near zero and I got out all the March and a bunch of April putters today.  I’m holding off on selling more PUTs, since we have been up 17% without a pull back (like you mentioned), and VIX has "dropped" to 40, meaning we are getting less for selling PUT and would be immediately in the red when the correction comes.  I’m agreeing with you to start scaling in the short CALLs.  Actually, I feel a little bearish after today, so starting to scale in the SPY May 87 short calls looks good.  SPY 87 is 8-9% up from here and was where we started the slide, and May has premium to sell (versus April). 
If we are patient, we can scale in the short PUTs after a 6-7% correction down to SPY 75, then the SPY May 67 PUT would be around $2 or more.  SPY 67 should hold as it was the low that we just escaped from.  That’s the plan, scaling in short calls now and short puts later.  If this rally has legs, we should place a stop on the SPY callers so that they don’t get away from us.

Yes, TLT, USO and GLD can be used for Short Strangles as they tend to move independently with stocks.  They do move a lot also, so make sure you are sufficiently away from ATM.  I also hedge with selling PUTs on the ultrashorts when there is a market top for hedging.  As long as the positions in your portfolios moves in different direction, I found that there is much less chance you’ll have a margin issue.

What’s our outlook on SKF and financials? Will be interesting to revisit in the morning and see how to play this. SKF at 105! Scared to go long because SKF could go to 60 just as easily as 150!

SKF and FAZ looking good for putters…

GLD/Eph – yay!  Sorry I couldn’t be yay-ing with you during the day today (fulltime job so I mostly log-on before work and at night).  I only did the 88 -> 84 roll, but you must be sitting nice on your 80s!  Similar dilemma as always, when to pull the trigger and write!

Good Morning everyone.
UK opened brightly but has dropped to the lows. FTSE + 0.6% @ 3830.
Anyone care to hazard a guess at what it was that the FED saw that was pushing the recovery out from the middle of this year to some unforseen point ? I’ve scoured online but seen no speculation.

DB, both job losses and falling home prices still accelerating?

Matt – Could be. Isn’t today "Leading Indicator" day ? Maybe they’ll be something in those that’ll give us a clue. The other thing I dont get about the FEDs QE is why the banks got a boost ? Surely with the FEDS effectively lowering interest rates further wont the banks profits suffer as they charge less and less for their loans ? I know they get their money for free these days (bailout money) but its still less of a profit all the same.

Want some down-side protection w/ SKF vs. FAZ. Which one should I go with?

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