Weekly Market Assessment
This week the Dow hit 16,000! Truly amazing when you look back just 5 years ago when the Dow hit a dire low of 6,465. The government has poured trillions of dollars into the market to stimulate the economy and here we are, residing at new all time highs! The word taper seems to have been retired for the moment and in its place, an even more alarming word being thrown around like crazy, is the infamous word "bubble". Has the Federal Reserve created a bubble in certain asset classes that may pop if the quantitative easing is reduced? Are we even considered to be in a bubble when looking at tradition valuation metrics, such as P/E (Price to Earnings) ratios of the S&P 500 currently at ~16, compared to the 2008 high of ~25?! In a recent interview from Carl Icahn, he said, "I am very cautious on equities today. This market could easily have a big drop." How did the market react to just one persons comments - 100 points in the Dow Jones fell off the map. If this doesn't express how fragile the market is, then I cant imagine what a real economic black swan event would do.
We received the Federal Open Market Committee meeting minutes on Wednesday and I found this one statement interesting, "The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but anticipates that inflation will move back toward its objective over the medium term." In laymen's terms, this is called deflation risk! How can we have signs of deflation when monetary policies are in place to fight this off? If there is a market correction, then we could see even more drastic changes to our monetary policy to prevent this, and the Fed will then be backed into a corner by a market revealing the affects of quantitative easing!
Through the Looking Glass: My Perspective on Stocks Reactions to Market Conditions
Next week is a short week and we look at Consumer Confidence and Housing Starts. Ill be looking at BBY (39.37) and F ($17.01). I think this will be negatively affected by the government shutdown with a rise in interest rates. Housing Starts, I'm looking at the large home builder KBH ($17.34) and LEN ($34.55), again I think a rise in interest rates should have a negative affect on Housing Starts. The housing stocks have been trading in a range in what looks like a consolidation pattern near the years lows.
Last week, I mentioned Existing Home Sales-which came in at a -3%, RLGY dropped over 7% on the day this report was released. On the CPI number came in line with previous numbers but CMG dropped ~2% on this release.
From the Trading Floor to the Option Pit: A quick look at whats on the trading desk
SalesForce (CRM)- I sold an Iron Condor with spreads at $60/61 "CALLS" and $51/50 "PUTS". The stock was trading at $56.15 before it reported its earning on Monday after the close. The expected move was $4.75 with volatility in the mid 90's, giving plenty of extra premium tot he options. Also i placed the trade below its 50 day moving average giving extra support if the stock does sell off investors may look to this level to pick up shares. CRM opened up the following day at $55, where the implied volatility dropped, sucking out a large portion of the premium on the options. Bought back my position for a 55% option gain.
Telsa (TLSA)- Sold a vertical "CALL" spread at $128/130 after the stock sold off more than 10% on Monday and then ralling back 3% on Tuesday. The trend remains down while trading back towards the mean and with volatility in the mid 60's giving some option premium to this weekly trade. TSLA sold off all the way down to $121, where I bought back my options for a 12% option gain.
Priceline (PCLN)- Sold a vertical call spread as PCLN broke out from previous all time highs and rose 3% above its 2 standard deviation channel. I added to this trade through additional "CALL" spreads as this continued to rally far outside of my trading strategy of using standard deviations. I have opened a new Vertical "CALL" spread at the $1145/1150 level. I closed this position on Tuesday as the stock sold off all the way down to $1118. Was looking to open a new position and thankfully I didn't as Goldman Sachs upgraded PCLN on Wednesday and the stock jumped $40. I then sold a $1170/1175 and closed this position the same day for a 26% option gain.
Amazon (AMZN)- I sold a Vertical "CALL" spread on AMZN at the $370/375 strikes last week. I closed out this position on Monday for a 19% gain.