The Three E’s You Should Be Watching

Dear SlingShot TraderSubscriber

In this topsy-turvy, uber-volatile market we are living with right now, traders no longer seem to be looking months, weeks or even days down the road. Nowadays, traders seem to be grasping for anything that will tell them where the market is going to go in the next hour. Will another huge trading firm file for bankruptcy (thank you very much, MF Global)? Will another European leader throw a monkey wrench in the fragile political machine that’s trying to save the eurozone (nice move, Mr. Papandreou)?

Trying to trade in a market like this can make you crazy if you can’t find something to hang on to that will help guide your investment decisions. That’s why we think you should be focusing on the following three E’s:

  • Europe
  • Employment
  • Easing

 

Europe

Naturally, the first E you should be focusing on is Europe. After all, the huge rally we saw in stock prices last week — and the just-as-large collapse of stock prices we saw at the beginning of this week — both were driven largely by events in Europe.

Stocks rallied when European leaders announced they had reached an agreement on what steps they needed to take to save Greece, shore up the European banking system and protect other countries — such as Italy — from turning into the next Greece.

Stocks fell when Greek Prime Minister George Papandreou announced that he was going to put the Greek austerity measures to a referendum vote and seek a new vote of confidence for the Greek parliament.

So where are stocks going next?

This weekend, members of the G20 are meeting in Cannes, France, to discuss what leaders from the world’s largest economies can do to keep the global economy growing. Apparently, German Chancellor Angela Merkel and French President Nicolas Sarkozy are going to put the screws to Papandreou, telling him there are no other options on the table to save Greece. Nobody knows what the outcome will be, but we do know there’s bound to be more volatility ahead.

 

Employment

The second E you should be focusing on is employment. ADP released its National Employment Report today — ahead of Friday’s official employment report from the Bureau of Labor Statistics (BLS) — and the numbers showed a continuation of the trend we’ve been seeing for the past few months: The number of jobs being created in the United States continues to rise.

 

Of course, the number of jobs being created isn’t growing as quickly as we all want it to be growing, but the trend is encouraging. It’s tenuous, but encouraging nonetheless.

Keep your eye on Friday’s announcement from the BLS. A better-than-expected announcement could do a lot to improve the mood on Wall Street.

 

Easing

The third, and last, E you should be focusing on is easing. Easing comes in many forms. It comes when central banks lower interest rates, and it comes when central banks inject gobs of money into the economy. We may get a little bit of both in the next few months from the Federal Reserve, the European Central Bank (ECB) and the People’s Bank of China (PBC).

The Federal Open Market Committee wraps up its two-day meeting today. Nobody really expects the FOMC to make any dramatic moves today — they can’t really push interest rates any lower than zero — but many analysts anticipate the Fed may be considering QE3 in early 2012. If they do that, and if the reaction is anything like the reaction to QE1 and QE2, then the stock market is in for some good times.

The ECB just got a new leader this week. France’s Jean-Claude Trichet stepped down, and Italy’s Mario Draghi took the helm. This is just in time for the bank’s interest-rate announcement tomorrow. Once again, most analysts don’t anticipate that the ECB will change its current stance much at tomorrow’s meeting, but there’s a lot of talk that the new leader will cut interest rates in the near term. The ECB currently has rates set at 1.5%, and many believe Draghi will cut them to 1% to help spur on a stagnant European economy.

The PBC also is rumored to be considering easing interest rates to spur on economic growth in China. Growth has been slowing there in recent months, and the PBC needs to make sure it doesn’t slow down too much or else the Chinese economy won’t be creating enough jobs to employ the millions of Chinese looking to join the workforce.

If any of these central banks takes easing steps in the next few months, then stocks should see a nice lift.

 

The Bottom Line for Next Week

Even with all of the volatility, the market has confirmed a move higher from the consolidation range that it was languishing in during August and September. With the bounce up and off of support on 1,225 on the S&P 500 (SPX), we’re looking for prices to bounce back and forth in a new trading range between 1,225 and 1,300.

 

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 live at 6 p.m. ET.

11/2 – FOMC announcement
11/3 – ECB interest rate announcement
11/3 – Weekly jobless claims
11/3 – Caremark (CVS) earnings announcement
11/4 – U.S. employment report

 

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 portfolio here. You also can see more trade-specific details by clicking on the stock links below.

 

Positions Opened

These are the SlingShot Trader positions we opened during the past week of trading that we have not yet closed.

Caremark (CVS) On Nov. 1, we recommended you to “buy to open” the Dec 35 Puts for $1.15 or less. We entered the trade for $1.10.

 

Positions Closed

These are the SlingShot Trader positions we closed during the past week of trading.

Corning (GLW)On Oct. 26, we recommended you “sell to close” the Nov 14 Calls. We closed the position for $1, for a profit of 81.82%.

CurrencyShares Euro Trust (FXE)On Oct. 27, we recommended you “sell to close” the Nov 135 Puts. We closed the position for 53 cents, for a loss of 75.35%.

CoinStar (CSTR)On Oct. 28, we recommended you “sell to close” the Nov 57.50 Calls. We closed the position for 20 cents, for a loss of 89.74%.

Akamai Technologies (AKAM)On Oct. 28, we recommended you “sell to close” the Nov 24 Puts. We closed the position for 20 cents, for a loss of 87.26%.

Clorox (CLX)On Nov. 2, we recommended you “sell to close” the Nov 70 Calls. We closed the position for 15 cents, for a loss of 57.14%.

Top Trades Now

These are the current SlingShot Trader positions that we still recommend getting into now, assuming you haven’t already bought a full position.

Caremark (CVS) 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 about our trades or the market in general that 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. (Please send any questions about the status of your subscription directly to Customer Service 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’ll typically be posted within about two hours of the end of the live session.

 

 

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader