Skip to main content

Morning Update

This morning the Non-farms payroll report showed the unemployment rate was 7.8% in September, which was well below expectations of 8.2%. This has the S&P 500 futures up pre-market but gold futures are down. The past few days the market has opened higher only to drift lower throughout the day, so holding today’s gains will be an important sign that the bulls are back.

Yesterday it appeared as though the market got a “Romeny bump” and at least one options trader believes the market’s rally will follow through into the election. We saw someone buy 56,650 QQQ Nov. 71 calls for $0.68 and 45,000 QQQ Nov. 72 calls for $0.39. The breakeven at expiration of this bullish bet is 71.99, which is 3.8% higher than yesterday’s close. The underlying thesis for this trade could be that a tighter election race where Romney has a good chance of winning will be good for markets as they try to price in the chance of a Republican victory. When the broad market rallies tech has typically outperformed, which makes the NASDAQ 100 ETF a logical choice for traders expecting a rally. Buying out of the money calls is a great way to participate in a rally without a huge outlay of cash, but in the event the market does not move high enough all of the premium paid for the options can be lost.

Comments

Post a Comment

Popular posts from this blog

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower.  (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007).  So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
Post a Comment
Read more

The Week in Review

One of the questions I get most from clients is how to generate yield when the Fed is on hold with rates at zero. For a while many defensive clients were content receiving their 3% annual yield from Treasury bonds, but the Fed’s most recent meeting minutes shows that the Fed’s pace of bond buying may soon slow. While I do not think tapering is likely before year end (unless economic data accelerates significantly) the bond market is forward looking and already beginning to price tapering in. Smaller Fed purchases of Treasury bonds will mean that bond yields go up and bond prices go down. Bonds have been in a multi-year bull market, and we may now be on the cusp of a multi-year bear market. The most important indicator to watch is the 10-year yield, which cracked the 2.10% level this week for the first time in a year. If we continue to hold above 2.05% in June, the top is likely in for bonds and borrowing rates will be on the rise for everyone, including the US Treasury. So, how am ...
2 comments
Read more