Atlanta Fed President Dennis Lockhart told Market News International in an interview that continued improvement in the labor market would be key, but that the Fed could begin reducing the size of its bond-buying stimulus program as early as September.
On the other hand, Lockhart said, “If we see a deterioration from this point, and I would say my more realistic fear is just a kind of ambiguous picture of mixed data that signal neither accelerating strength nor necessarily deterioration, but that kind of moping along in the middle, then I think it’s not a foregone conclusion that the asset purchase program should be removed or be removed rapidly.”
Noted dove, Charles Evans revealed a few gems on Tuesday saying this: We are quite likely to reduce the flow of purchases rate starting later this year—I couldn’t tell you exactly which month that will be—and it’s likely to wind down over time in a couple or few stages,” Evans told reporters at the regional Fed bank’s headquarters.
Also noted hawk, Richard Fisher who is President of the Dallas Fed spoke Monday, reiterated his continued opposition of the continued QE3 policies, saying that tapering of the program should begin in September. Please note that the Fed doesn’t meet again until September 17th and 18th. There will be plenty of speculation heading into that meeting, especially if economic data doesn’t disappoint.
The point here is the Fed commentary especially from those governors previously supportive of the Fed’s stimulus policies start to change their views on the program start waffling, it could spark some easiness with investors and force them to take profits. The stock indices have been the investment of choice for investors so far this year and much of the credit in my view should go to the Fed’s accommodative policies.
MONETARY POLICY CHANGES
The Fed gives and the Fed takes away. Profit taking sometimes occurs when uncertainty increases, and since we are at all-time highs, uncertainty over the Fed’s program may incite some recent longs to book profits. Therefore a 2 to 3 percent correction could be seen in the near future.
AN E-MINI PUT TRADE
Due to the aforementioned reasons, I propose the following trade. I will look at trying to purchase the September E mini S&P 1600.00 put for a purchase price of $250.00. The risk on the trade is the price paid on the put plus commission and fees. Even though the strike is over 90 points out of the money, I am looking for the underlying futures to retrace back down to the 1640-1650, level by the end of August. If after filled the opportunity arises to sell the put by two to three times what you paid for it, I would be looking to sell the option. I am not saying the mini S&Ps are going below the 1600 level in the next six weeks, what I am saying is to watch out for a correction due to the market looking overbought along with some seasonal weakness. I have other strategies that I am looking at to take advantage of a possible mini S&P pullback.
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.
