Dear SlingShot Trader Subscriber,
Wow … what a week! It looks like the bulls on Wall Street had a nice Thanksgiving and came back to work ready to catapult stocks higher, while the bears still appear to have a turkey hangover. We already had one day this week where the markets surged nearly 3% higher, and it looks like we’re going to have another day just like that today — and it’s only Wednesday.
So what’s going on?
It all goes back to a theme we’ve been talking about for the past few months: The underlying fundamentals of the stock market actually look pretty good, and if the troubles in Europe were no longer an issue, we’d be in the middle of an incredible bullish rally.
And those underlying fundamentals just keep getting better and better. Here’s a list of what has changed:
- Five central banks agreed to lower rates on currency swap lines.
- ADP announced that 206,000 jobs were created last month — well above the expected gains of 130,000.
- China lowered its reserve requirements for its banks.
- Pending home sales soared by 10.4% instead of the meager 1.4% that analysts were expecting.
- The Chicago PMI surprised to the upside today, coming in at 62.6 instead of 58.5.
- Consumer confidence came in at 56, its biggest jump in eight years.
- Consumers spent a record $52.4 billion this Thanksgiving weekend.
As you can see, that’s quite an impressive list of bullish changes, and it was just what the doctor ordered to get money flowing back into the stock market.
But we’re not out of the woods yet. We’ve kicked the can down the road in Europe, but we haven’t done anything to fix the underlying problems.
Let’s take a look at the recent developments regarding the rate change on currency swap lines.
Currency Swap Lines
The Federal Reserve, European Central Bank (ECB), Bank of England (BOE), Bank of Japan (BOJ) and Swiss National Bank (SNB) all got together and agreed to lower the rates charged on currency swaps, effective Monday, Dec. 5.
So what does that actually mean?
Central banks frequently swap currencies back and forth. Mostly it’s other central banks that come to the Federal Reserve asking to swap their currencies for U.S. dollars (USD). When they do this, they give the Fed a big chunk of euros (EUR), Swiss francs (CHF), British pounds (GBP) or whatever national currency they use. In return, the Fed gives them a big chunk of USD. At some predetermined date, the borrowing central bank returns the USD — along with an interest charge — to the Fed, and the Fed returns the chunk of EUR, CHF, GBP, etc., that it was holding on deposit.
Decreasing the interest charge on the currency swaps makes it easier (i.e., more affordable) for other central banks to borrow USD from the Fed.
Why do they do this?
Central banks, such as the ECB, borrow USD from the Fed so they can turn around and lend USD to the banks in their countries. International banks need access to USD because most international commerce is carried out in USD-denominated transactions. So if a large bank in France is trying to help one of its large corporate clients fund an international trade deal, then that French bank will need access to USD, which it then can give to its corporate client.
The Market’s Bullish Response — With a Warning
So why did the market respond so bullishly to the news of the currency-swap rate change? Traders responded positively because the easier access that companies have to cash, the easier it is for them to make profits, which in turn get passed along to investors as stock prices rise in anticipation of increased earnings per share.
That’s all great, but if you look a little deeper, you find yourself asking this question: “Are things really bad enough in Europe — and is access to money so tight — that it warrants a coordinated effort by five central banks?”
Indeed, things are that bad. Liquidity is a huge issue in Europe because traders don’t want to buy sovereign bonds, and U.S. banks don’t want to have too much exposure to European banks and therefore aren’t lending like they used to. But liquidity is only a symptom of the underlying problem, which is potential sovereign insolvency, and no one has found a solution for that yet.
The Bottom Line for Next Week
You can’t fight the market. When the Dow Jones Industrial Average surges 400 points higher in one day, you go with it. However, that doesn’t mean you take your eyes off the horizon where trouble still looms. We continue to anticipate high levels of volatility and multiple pullbacks in this bullish move higher. That’s why we plan to remain nimble and take profits off the table quickly.
We’re enjoying this bullish run, but sooner or later, the Thanksgiving hangover will wear off, and the bears will come back, looking for action.
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 live at 6 p.m. ET.
- 12/1 – Lululemon Athletica (LULU) earnings announcement
- 12/1 – Weekly jobless claims
- 12/1 – ISM manufacturing index
- 12/2 – U.S. employment report
- 12/5 – ISM non-manufacturing index
- 12/6 – ICSC-Goldman store sales report
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 trade links below.
These are the SlingShot Trader positions we opened during the past week of trading that we have not yet closed.
Lululemon Athletica (LULU) — On Nov. 29, we recommended you to “buy to open” the Dec 45 Puts for $2 or less. We entered the trade for $1.95. The company reports tomorrow morning, and we still like the trade up to our limit price.
These are the SlingShot Trader positions we closed during the past week of trading.
Krispy Kreme Doughnuts (KKD) — Earlier today, we recommended you “sell to close” the Dec 7.50 Calls. We closed the position ahead of earnings for 40 cents, for a profit of 100% in two days.
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.
Lululemon Athletica (LULU) — 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 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 email@example.com. (Please send any questions about the status of your subscription directly to Customer Service 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