Taking Our Cues From the World’s Central Banks

Dear SlingShot Trader Subscriber,

The fear and uncertainty that have plagued the market for months are still the same, but the playing field changed suddenly this week. Up until Tuesday morning, nervous investors could put their money into U.S. Treasurys, gold or the Swiss franc (CHF). But now, thanks to the actions of the Swiss National Bank (SNB), the Swiss franc is no longer a viable option.

You see, the SNB just pegged the Swiss franc to the euro at an exchange rate of 1.2 francs per euro. We’re not convinced that the SNB can maintain this peg, but for the time being, it looks like the money that would have flooded into Swiss francs will be redirected to U.S. Treasurys and gold.

You already can see the effect this increased demand for Treasurys is having on the U.S. 10-year note. As you can see in the chart below, the yield on the 10-year dropped below 2 percent — just like it did before the market bottomed out in early 2009.

Chart courtesy of St. Louis Federal Reserve Bank

 

Of course, expectations that the Fed will start dancing the “twist” isn’t helping stop the yield on the 10-year note from falling. “Twist” is the lingo for selling short-term Treasurys and then turning around and buying longer-term Treasurys. There are a lot of traders who believe this is exactly what the Fed will do, so they’re trying to get ahead of the curve.

So now the question is, will the market rebound just like it did after yields dropped this low?

We see support showing up on the S&P 500 (SPX) somewhere around 1,150 — as you can see in the chart below.

Chart courtesy of Metastock

 

This current channel should continue to provide plenty of trading opportunities, but we’ll keep watching for the inevitable breakout.

 

Current Trade Update

Our Smithfield Foods (SFD) trade, which we entered yesterday morning, already is playing out exceptionally well for us — even before the company’s earnings announcement scheduled for tomorrow before the market opens. We entered this trade after SFD’s stock price got pulled lower with the rest of the market as investors sold off after the long Labor Day weekend. We did so with the expectation that SFD would bounce back. And it has done just that. As of this writing, our bullish position is up about 50%.

SFD currently is sitting near resistance at $22, but the stock should break up above this level with a good earnings announcement. The consensus estimate for last quarter’s earnings is $0.68 per share, but we think that’s too low. SFD has seen input prices rise as commodities took off after 2009, which reduced margins and forced the firm to become even more efficient. During the last six or so months, those commodity prices have stabilized, and margins, sales and ratings have improved.

Look for a trade alert email from us soon — most likely tomorrow — to exit our SFD calls.

We also opened a new bearish trade earlier today on CurrencyShares Euro Trust (FXE). For more details, see Positions Opened below or click here to read the trade alert we sent out via email.

 

This Week’s Events

Here are some of the news events that we may trade in the next week or so. We’ll discuss some of these in tonight’s webinar.

  • 9/8 — Bank of England (BOE) interest rate statement
  • 9/8 — European Central Bank (ECB) interest rate statement
  • 9/8 — Weekly jobless claims report
  • 9/8 — Fed Chair Ben Bernanke speaks
  • 9/8 — President Barack Obama speaks
  • 9/14 — Producer price index (PPI) report
  • 9/14 — Retail sales report

 

Every once in a while, you get a day that is jam-packed with important economic announcements, statements and speeches. Tomorrow is one of those days.

Thursday is full not only of important announcements from two of the world’s most important central banks that are in the thick of the European debt crisis — the ECB and the BOE — but also of important speeches from the two men who perhaps have the greatest current influence on the U.S. economy: President Barack Obama and Fed Chairman Ben Bernanke. Between the interest rate and policy statements from the two central banks and the employment/economy speeches from President Obama and Bernanke, we’re likely to see plenty of volatility in the global financial markets as we head into the weekend.

We’re looking to take advantage of the ECB’s announcement with our new FXE trade today, but we’ll have to wait and see how the market reacts to President Obama’s jobs speech before a joint session of Congress before we make any definitive moves based on U.S. stock prices.

Let’s not forget the weekly initial unemployment claims number that will be coming out on Thursday, too. If that number moves much higher than 400,000, watch for some bearish repercussions on Wall Street.

 

TRADE REVIEW

When it’s time to open or close a trade, we’ll send you alerts via email. You also can sign up here to receive text messages regarding our trades. For more info about our SlingShot Trader portfolio, you can read trade alerts on our website here and view our portfolios here.

 

Positions Opened

Smithfield Foods (SFD) – Yesterday, we recommended you “buy to open” the SFD Oct 21 Calls for $1.05 or less. We still like this trade and recommend it now only on pullbacks to our original price.

CurrencyShares Euro Trust (FXE) – Earlier today, we recommended you “buy to open” the FXE Oct 138 Puts for $2.25 or less.

 

Positions Closed

Manpower Inc. (MAN) – On Aug. 31, we recommended you “buy to open” the MAN Oct 35 Puts for $1.05 or less. On Friday, Sept. 2, the Bureau of Labor Statistics announced that the U.S. economy failed to add any jobs during the month of August, which sent MAN lower, as we predicted. After the report, we advised you to “sell to close” the puts for $1.65 or more, for a 57% profit in less than three days.

 

Top Trades Now

Smithfield Foods (SFD) – See Positions Opened above.

CurrencyShares Euro Trust (FXE) – See Positions Opened above.

 

Webinar Preview: Join Us Tonight at 6 p.m. ET

Every Wednesday evening at 6 p.m. ET, we’ll host our 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 johnandwade@slingshot-trader.com. (For help with your subscription or our website, please contact Customer Service directly at service@slingshot-trader.com.)

If you can’t attend the session live, you can watch the archived version on our website in the “Live Weekly” section. It should be posted within about two hours of the end of the live session.

 

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader