Recent Market Volatility Making You Nutty?

Dear SlingShot Trader Subscriber,

Volatility seems to be a running theme here at SlingShot Trader, and you don’t need to look very far to see why. Yesterday’s market action was a perfect case study of just how nutty the market has become.

The S&P 500 (SPX) gapped down at the opening bell yesterday and continued to move lower until it had lost more than 1% of its value. Then, it staged a complete reversal and was back into positive territory a few hours later. Sadly, that rally didn’t last, and the S&P 500 dropped back down to near session lows. But then, with less than an hour to go before the closing bell, the market rallied to close up more than 1% on the day.

That’s just not normal. Well … it’s not normal in most market conditions, but it does seem to be the norm nowadays.

As we prepare for more market volatility to come, we want to make sure you’re acquainted with the following three terms that will contribute to the continued nuttiness: “troika,” “minimum bid rate” and “nonfarm payrolls.”

 

Troika

Troika is the term given to the group of three institutions — the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission — tasked with making a recommendation on whether Greece should receive its next round of bailout funding by the middle of this month.

If the troika recommends that Greece should be given more funding, then the markets won’t have to get even nuttier just yet. But if it doesn’t make that recommendation, then you better believe the market will take “nutty” to a whole new level.

 

Minimum Bid Rate

The ECB — the European equivalent of the Fed — will announce tomorrow (Oct. 6 at 7:45 a.m. ET) whether it will cut interest rates in the eurozone. The ECB actually has been raising interest rates recently to try to keep inflation in check. But the situation in the European economy is dire enough, and European banks are in bad enough shape, that the ECB may have to reverse course and risk rising inflation in an attempt to try to add some stability to the economy and the markets.

The nutty response to the ECB isn’t so easy to predict. If the ECB cuts rates, then the market could view it in one of two ways. It could be viewed as a stabilizing sign that the ECB is willing to help smooth things out. Or it could be viewed as a capitulation by the ECB, and the only reason they would do that is if they were extremely worried, which means the sky may be falling. We’ll have to wait and see which version of nutty we get tomorrow. Either way, the euro is bound to take a hit.

 

Nonfarm Payrolls

The first Friday of every month, the Bureau of Labor Statistics (BLS) reports the nonfarm payrolls. That number tells us how many jobs were created in the U.S. economy during the previous month.

Even though that number will come out Friday at 8:30 a.m. ET, we got a sneak peek of what may be in store for us with this morning’s ADP Non-Farm Employment Change number. Analysts had been expecting ADP to announce that 76,000 new jobs had been created. Instead, ADP announced that 91,000 new jobs had been created last month. This better-than-expected news is a good sign for the U.S. economy and a bullish signal for Wall Street.

If the nonfarm payrolls number comes in better than expected Friday, watch for stocks to shoot higher (more nuttiness, but at least it’s bullish nuttiness). If the number comes in worse than expected, watch for stocks to drop (extreme bearish nuttiness).

 

This Week’s Events

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

  • 10/6 — ECB Minimum Bid Rate
  • 10/6 — Weekly Jobless Claims
  • 10/7 — U.S. Nonfarm Payrolls
  • 10/7 — U.S. Unemployment Rate
  • 10/11 — FOMC Meeting Minutes
  • 10/11 — Alcoa (AA) Earnings Announcement

 

The Bottom Line for Next Week

It looks like the market is trying to hammer out a bottom right now, which gives us a good indication of when we’ll need to shift from a bearish to a bullish stance in the SlingShot Trader portfolio — and vice versa.

And we’re moving into earnings season next week as Alcoa (AA) officially kicks things off Tuesday, Oct. 11. Earnings season is our favorite time of year here at SlingShot Trader, and we get to enjoy it four times per year. We love it because it provides so many compelling trading opportunities, and we can’t wait to make some big profits with you this month.

In the end, volatility is here to stay for the near term. But just like we said last week, we have a leg up as options traders. Bring on the nuttiness!

 

TRADE REVIEW

When it’s time to open or close a trade, we’ll send you alerts via email. 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.

 

Positions Opened

CurrencyShares Euro Trust (FXE) — On Oct. 3, we recommended you to “buy to open” the Nov 130 Puts at market. We still like this trade for $2.55 or less.

 

Positions Closed

Costco (COST) — On Oct. 3, we opened the Oct 85 Calls for $1.85. We bought these calls anticipating that Costco would have a positive earnings announcement today before the market open, which it did. However, traders seemed to be spooked by the announcement that Costco will raise membership fees, and the stock price fell. We recommended you “sell to close” the puts at market this morning. We closed the position at 40 cents.

Micron (MU) — On Sept. 26, we opened the Oct 6 Puts for 40 cents. We had anticipated holding this trade through the company’s earnings announcement on Sept. 29 after the market closed. However, because the stock moved lower and lower — and the puts became more and more profitable the closer we got to the earnings announcement — we decided to close the trade early. We recommended you “sell to close” the puts at market Sept. 29. We closed the position at 74 cents, for an 85% profit in three days.

Yum! Brands (YUM) — On Sept. 28, we opened the Oct 50 Puts for 75 cents. We had anticipated holding this trade through the company’s earnings announcement on Oct. 4 after the market closed. However, because the stock plunged the day after we bought the puts, we decided to close the trade early. We recommended you “sell to close” the puts at market Sept. 29. We closed the position at $2.15, for a 186% gain in just one day.

 

Top Trades Now

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

 

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

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 johnandwade@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’ll typically be posted within about two hours of the end of the live session.

 

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader