Weekly Market Assessment
"Taper off, Fed keeps foot on the easy money pedal!" Complete shock hit the markets as almost everyone that had a voice was estimating at least a $10-$20 billion bond reduction would occur. In the words of Ben Bernanke, "The committee concluded that the economic data does not provide sufficient confirmation of the baseline outlook to warrant such a reduction." It goes to show that even the top analyst and economist cant get it right when it comes to trying to figure out the Federal Reserve policies. The market reacts by the 10 Treasury Bond falling 20 basis points to 2.67% and the Dow Jones rallied 150 points in just 5 minutes. Shorts had to cover as investors believed the Federal Reserve misled them. Reduction in bond purchases will remain data dependent as opposed to date dependent, which again gives investors no true signal to when the Fed will step out of the market. Were the Central Bankers spooked by the rise in the 10 Year Treasury Bond as it flirted with 3%, knowing the economy wasn't ready for such a rate change? We are again at all time highs in both the S&P 500 and Dow Jones as the easy money continues to lure investors into the equity market. In 10 days we are again threatened by another crisis, a government shut down. The market seems over and done with taper talk and now, center stage is the grueling question, how will the gridlock in Congress affect the market? After so many so called "market crisis", will this just be another confrontation that passes us by only to be soon forgotten?
Through the Looking Glass: My Perspective on Stocks Reactions to Market Conditions
Builders sentiment and interest rates
Looking to continue to short the XHB ($30.85) and other home builders such as KBH ($17.57) and Pulte Group PHM($17.15). Even though we did not receive the taper as expected the recent rise in yields have caused U.S. home builder sentiment to become unchanged in September after four straight months of gains.
Also looking to short some of the largest originators and holders of residential mortgages Wells Fargo ($42.75) and Bank of America($14.50) that should be affected by this change in sentiment.
From the Trading Floor to the Option Pit: A quick look at what's on the trading desk
E-Mini S&P 500 futures-no trades
Apple (AAPL)-Continue to like to trade AAPL options. With what feels like a floor has been put in after Carl Icahn announced his position I will be selling Iron Condor options on this. I sold the weekly $480/485 "CALLS" and sold the $450/$445 "PUTS". Collected the entire premium for a 38% gain on the Iron Condor. I will be putting on more Iron Condors as it looks like AAPL is in a trading range.
SPDR S&P Homebuilders (XHB)- The market rallied on the decline of rates and the home builders followed along. They found resistance at the 50 day moving average with heavy volume. I am still short XHB at $30.25, while hedging my position with monthly $30.50 "CALL" options and financing this trade by selling a monthly Vertical "CALL" spread. I am looking for the XHB to fall below $30. I also will be looking to short other Home Builders such as KB homes($16.97) and Toll Brothers($32.15).
Transocean (RIG)- I have opened a long position in RIG at $45.25. This has been selling off on recent downgrades. The yield is now near 5% and close to its 52 week low. With oil above $100 I will continue to add to this long position if RIG drops below $45. RIG looks to be forming what is called a falling wedge, in technical terms this is a bullish formation.