Sometimes summer markets can be slow grinds. Every once in a while you get some fireworks. Trade within in your means and be prepared for either. Risk management is like sunscreen. If you don’t use it, you could get burned.
What a difference a few weeks can make.
As we entered into June the talk among many market observers was that the Fed may be looking at a change in its current economic stimulus program. After the last FOMC meeting, Chairman Bernanke hinted that the improving economy may cause the Fed to start cutting back their asset purchase program (currently at $85 billion per month).
NEW VOCABULARY
The term “tapering” was no longer limited to barbers and tailors. Tapering joins the ranks of “Fiscal Cliff”, “Sequester” and “Debt Ceiling,” as buzz words for everyone from institutional traders on Wall Street to Joe Six Pack at the local watering hole.
BERNANKE SANG A DIFFERENT TUNE
Many Fed observers were looking for the scaling back to start as early as September, and the stock indices dropped over 4%, with Dow Jones dropping over 650 points the from June 19 to June 24. The Chairman hinted that a tapering of current policies would kick in with continued positive economic data. Fast forward to yesterday, Bernanke is singing a different tune.
Speaking a few hours after the release of the FOMC minutes he gave a much different outlook for short term Fed policy. “Highly accommodative monetary policy for the foreseeable future is what is needed in the U.S. economy.” In other words, forget about what I said the last time I was at the mic. Following yesterdays remarks, the S&P 500 returned to the 1667.50 for the first time since May 22.
DON’T FIGHT THE FED
Many are familiar with the phrase “don’t fight the Fed.”
The simple reason you don’t is because they have more money than you.
With that in mind I am looking at a bull call spread as the market rebounds. I like buying the August E-Mini S&P 500 1685-1735 call spread at 10 points ($500.00) or better. . Since the trade is long premium, risk is limited to the cost of entry plus fees and commissions. With over a month to go until expiration (8/16/13) I like the chance of an increase in premium. I am setting my first target exit at 20 points. If this market reverses I would look to get out at half the cost of entry.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
