It has been fun while it lasted, but all good things come to an end. It is mid-August so it has already ended for some people. I could be talking about summer vacation or current Fed policy. Either way, September is right around the corner so you might as well be prepared for a change.
LABOR MARKET NEWS
Sometimes good news is not necessarily good for everyone. Jobless claims came in at 320,000 for the week earlier today. This was down 15,000 from the prior week, and better than the consensus expectation of 330,000. The 320,000 mark was the lowest level we have seen since October of 2007, a full year before the financial crisis began. On first glance this data, along with the Consumer Price Index slowing down to 0.2% (compared to 0.5% for June), you might think the market may like the news and run with it. Not so fast my friend.
TAPER WATCH
If you have been reading some of my prior commentary, or following the markets in recent months, you are familiar with the buzz word for the quarter, “taper.” Any move in the equity indices since June has the talking heads and those with the power of the pen talking about the taper debate. “Will the Fed taper it asset purchase program?” “When will the Fed taper?” “Is tapering on or off?” Market commentators are giving Barber College a run for the money on the use of the word taper.
The Fed has hinted that it will be watching economic data closely for any signs of improvement in the economy. They have already let us know that the two key numbers they are looking at are inflation and unemployment. This morning’s numbers may be giving them a bit more reason to start cutting back on the asset purchase program, perhaps as early as September. Previous market reactions have shown that many market players view tapering as a bearish sign. The thinking coming from traders with that view is that this market rally will not continue without the help of the constant flow of money from the Federal Reserve.
LONGER TERM PLAY
I’m looking at a long a bit longer term bearish play, in anticipation of a possible market reversal. I like buying the October E-Mini S&P 500 put spread 1620-1570 for nine points ($450.00) or better. The maximum risk on the trade is the cost of entry plus fees and commissions. Expiration is not until October 18, and I am content to take this trade as close to that day as possible. Right now only two things would change my exit strategy, the opportunity to take profits in the nearer term, or a change in data causing the Fed to leave the current program as is. If the data does change and the market goes into a rally, I would look to cut my losses and get out around four points.
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.
