Someone to Watch Over the Investors
Dear Slingshot Trader Subscribers,
Four Federal Open Market Committee (FOMC) members spoke today, and none of them said anything scary. In fact, one of them even said expanding “Operation Twist” is still on the table. Meanwhile, Reuters reported this morning that Germany is approaching an aid deal for Spain.
With the jobs report coming in so frightfully low last week, many investors are hoping that the bad economic news we have been seeing during the past few weeks will force the market’s guardian angels (i.e. central bankers) to look out for them and inject more money.
But it begs the question of whether that is a realistic expectation at this point. The market is much closer to its highs for the decade rather than its lows. Does the Fed really have a mandate to make sure everyone’s investments go nowhere but up? It certainly does not, but the markets seem to be overlooking that fact as the averages make a broad-based rally two weeks ahead of the next Fed meeting.
And can the European Central Bank (ECB) or Germany really do anything of lasting consequence to address the problems in the Eurozone by simply lending more money? That’s yet to be seen.
Those doubts aside, investors are rallying – at least for now. The Australian-Yen currency pair has rallied for three days in a row, and small cap stocks have outpaced larger stocks during that same time. This would seem to indicate that investors are dipping a toe back in the markets, but have their hand poised over the risk-on switch, so to speak.
But the risk of headline shock still remains high, and so our bias is towards bearish trades, on which we will be all too happy to take quick profits (the LULU trade last week was a good example). Given that we are in between earnings seasons, and that there is an FOMC meeting just two weeks away, the news focus has shifted to macro-economic news. So the headlines are about Europe driving the market’s direction a bit more forcefully than they were a month ago.
Our current trades on the CurrencyShares Euro Trust (FXE), the CurrencyShares Japanese Yen Trust (FXY) and on Goldcorp (GG) have a more ambiguous reaction to anticipated headlines, so if any of them show a reasonable profit from a favorable quick move, we’ll look to take our profits off the table.
Is the Bond Market Tipping its Hand?
A new development is unfolding in the bond markets this week. The price of the 30-year Treasury bond (tracked by an ETF with ticker symbol TLT) is falling sharply, while the price of short-term Treasuries (tracked by SHY) barely budged by comparison (see figure below).
This action is exactly opposite of what the Fed hoped to accomplish with “Operation Twist”, the fed’s latest, more subtle version of quantitative easing. With the Fed buying longer-term bonds and selling shorter-term bonds, TLT should be increasing in price and SHY should be declining, all other things being equal.
The last three days have brought the most significant drop we have seen in the price of TLT in the last three months. At the same time, SHY has stubbornly held its price. This is another illustration of the recent shift back toward the “risk on” end of the investing spectrum, as investors move their money out of safe-haven assets.
The Bottom Line for Next Week
We can’t ignore the recent rebound we have seen in stock prices, but a small rebound does not constitute a new bullish trend. We are still in the middle of a bearish trend, but we are on alert. If the rally can continue, and the market starts to form new higher highs and higher lows, we will have to update our trading outlook. But for now, we are looking to stay nimble and be prepared for potential downward shocks.
June 6 – Men’s Wearhouse (MW) Quarterly Earnings – After Market
June 7 – Gross Domestic Product (GDP)
June 7 – Fed Chairman Bernanke Testifies
June 8 – U.S. Trade Balance
June 8 – China Consumer Price Index (CPI)
June 10 – China Trade Balance
June 13 – Retail Sales
June 13 – Producer Price Index (PPI)
When it’s time to open or close a trade, we’ll send you alerts via e-mail. You also can sign up to receive text messages regarding our trades. For more info about our SlingShot Trader portfolio, you can read trade alerts here and view our portfolios here.
These are the SlingShot Trader positions we opened during the past two weeks of trading that we have not yet closed.
Goldcorp Inc. (GG) – On May 29, we recommended you to “buy to open” the July 37 puts for $2.39 or less. We still like this trade and recommend entries at our maximum price or less.
Men’s Wearhouse (MW) – On June 4, we recommended you to “buy to open” the July 34 puts for $2.25 or less. We still like this trade and recommend entries at our maximum price or less.
CurrencyShares Japanese Yen Trust (FXY) – On June 5, we recommended you to “buy to open” the July 125 puts for $1.90 or less. We still like this trade and recommend entries at our maximum price or less.
CurrencyShares Euro Trust (FXE) – On June 6, we recommended you to “buy to open” the July 126 calls for $1.50 or less. We still like this trade and recommend entering the trade if you can do so at our maximum price or less.
These are the SlingShot Trader positions we closed during the past week of trading.
ManpowerGroup (MAN) – On June 31, we recommended you to “sell to close” the July 35 puts. We closed the position for $2.50 per share for a gain of 8.7%.
Tivo (TIVO) – On May 31, we recommended you to “sell to close” the June 9 puts. We closed the position for $0.65 per share for a gain of 44%.
Lululemon Athletica Inc. (LULU) – On June 1, we recommended you to “sell to close” the June 67.50 puts. We closed the position for $3.12 per share for a gain of 32%.
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Every Wednesday at 6 p.m. ET, we host our live webinar, in which we’ll review this weekly newsletter, discuss coming events in more detail and walk through our Top Trades. We also encourage you to submit your questions live during the session. We want to do everything we can to help you become a successful options trader, which is why you’ll have live access to us for an hour every week.
And if you have any questions or comments you would like to send us in advance of the live session — or anytime during the week — you can write to us at firstname.lastname@example.org.
If you can’t attend the session live, you can watch the archived version on our website in the “Live Weekly” section. It’ll typically be posted within about two hours of the end of the live session.
John Jagerson and Wade Hansen