Trading Through the Eyes of the FOMC

Dear SlingShot Trader Subscriber,

Thanks to the Federal Open Market Committee (FOMC) announcing yesterday that it’s making no new announcements, the U.S. stock market is back into “risk-off” mode, and stock prices are sinking once again. The S&P 500 (SPX) made a good run back up to resistance at 1,260 in early December and tried to break up and through that level for three consecutive days, but now it looks like the S&P 500 is on its way back down to support at 1,200.

Based on the market reaction yesterday after the FOMC released its statement at 2:15 p.m. ET and the continued decline today, Wall Street was expecting the Fed to do a little something. Alas, we appear to be on our own. Unfortunately for all those hoping for some stimulus from the Fed, none came. There’s no rescue coming from the Federal Reserve, just like there was no rescue coming last week from the European Central Bank (ECB).

 

What Did the FOMC Have to Say?

First, the FOMC hit us with this bit of “optimistic” news:

“Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. … The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.”

Of course, “moderate” isn’t what anyone is looking for right now. We all want strong growth, especially when we all know there’s another bearish shoe out there that could drop at any time. This was illustrated well by the FOMC when it said this:

“Strains in global financial markets continue to pose significant downside risks to the economic outlook.”

The FOMC then went on to say it will continue to:

  • Extend the average maturity of its holdings (i.e., continue with “Operation Twist”)
  • Maintain the size of its balance sheet by reinvesting proceeds from maturing assets into new assets
  • Keep the federal funds rate at 0 percent to 0.25 percent, at least through mid-2013

This should continue to drive longer-term interest rates lower while keeping short-term borrowing rates for banks and other financial institutions near zero — all of which should help (as much as monetary policy can) stimulate investment and growth in the U.S. economy.

 

How Does This Impact Our Investment Outlook?

The statement from the FOMC and the subsequent market reaction confirms much of what we’ve been talking about for the past few months.

First, we still believe that the underlying fundamentals in the U.S. stock market are attractive. Many stocks are trading at relatively low P/E levels at the same time as the companies represented by those stocks are improving productivity and profitability levels. The retail sector has been taking it in the teeth during the past few weeks as retail sales are proving to be less rosy than had been anticipated. Other than that, many companies continue to thrive as the economy experiences “modest” growth.

Second, the European crisis still is serving as a big wet blanket for any enthusiasm traders on Wall Street may be able to muster. Whenever we get news suggesting that the wet blanket may be lifted — even if ever-so-slightly — the stock market rallies. Conversely, whenever we get news suggesting that things are getting worse in Europe, the market falters. That inconvenient reality is here to stay for a while.

 

The Bottom Line for Next Week

We’re growing increasingly bearish as we head into the final two weeks of trading in 2011. With no more summits in Europe and no more meeting of the FOMC this year, we see little chance of any market forces coming in and lifting the wet blanket before the new year starts. This should give us ample opportunity to make some money playing the bearish side of the market.

However, we know there are certain sectors in the market that have been and will continue to be defensive refuges from much of the turbulence on Wall Street. Because the market continues to show its more volatile side, we anticipate maintaining at least a little bullish exposure in these defensive sectors just in case we do get any type of a bounce, no matter how short-lived it might be.

 

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 during our weekly webinar today at 6 p.m. ET.

12/15 – Adobe (ADBE) earnings announcement
12/15 – Weekly jobless claims
12/15 – Producer Price Index (PPI)
12/16 – Consumer Price Index (CPI)
12/20 – Housing starts
12/21 – Existing home sales

 

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 trade links below.

 

Positions Opened

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

Adobe (ADBE)On Dec. 8, we recommended you to “buy to open” the Jan 27 Puts for $1.35 or less. We entered the trade for $1.29.

FedEx (FDX)On Dec. 13, we recommended you to “buy to open” the Jan 85 Calls for $2.10 or less. We entered the trade for $1.80.

Oracle (ORCL)Earlier today, we recommended you to “buy to open” the Jan 30 Puts for $1.35 or less. We entered the trade for $1.31.

 

Positions Closed

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

Costco (COST)On Dec. 8, we recommended you “sell to close” the Dec 85 Puts. We closed the position for $1.19, for a profit of 20.20%.

Bank of America (BAC)On Dec. 13, we recommended you “sell to close” the Dec 5 Puts. We closed the position for 3 cents, for a loss of 84.21%.

SPDR Gold Trust (GLD)On Dec. 14, we recommended you “sell to close” the Jan 170/175 Bull-Call Spread. We closed the position for 42 cents, for a loss of 76.67%.

 

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.

Adobe (ADBE)See Positions Opened above.

FedEx (FDX) See Positions Opened above.

Oracle (ORCL) 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 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.

 

 

Sincerely,

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader