Fed Chairman Bernanke showed his strong position to target the unemployment rate and economic slump by pushing a third round of QE with monthly $40B purchases of MBS. The scale was not as large as anticipated by some analysts, but the market reacted favorably, with over 200 points of gain on the Dow.
Our logical analysis of favoring no QE was wrong, but it can be expected that the effect of this QE3 will not be as strong as QE1 and QE2; however, considering the presidential election cycle, it is time to load up bullish positions when the market dips. The market should be going up by October, and by that time investors should be really worried about 2013 with multiple issues pending, including a US fiscal cliff and lack of further Fed bazooka or effective stimulus for the market. It will be time to face the fundamentals. In the short term, we'll go along with the Fed's action and try to enjoy the ride up.
For Intel (INTC), it has been declining 20% since its 2012 high of $29.18 on May 2. As of Sept. 13, INTC remained weak despite the FOMC's QE3, and traded sideways between $22.83-23.41. The volume picked up a bit compared to the previous few days of trading, with 53M shares exchanged, near 39.6% more of the 3 month average volume of 37.97M.
Since last Friday's lowering of sales guidance, INTC still tried to stabilize and find its support. The MACD technical indicator showed a small sign of convergence, and we need to continue to watch MACD convergence before any reversal can be confirmed. Therefore, our view toward INTC is short-term neutral toward medium term bullish, and we set up with the following option play:
INTC (with closing price for Sept. 13, 2012)
Buy Oct 20 Put @ $21 Strike Price at Cost of $0.12
Sell Oct 20 Put @ $23 Strike Price for Credit of $0.54
Buy Oct 20 Call @ $25 Strike Price at Cost of $0.17
Total Credit Spread of $0.25
Max risk $2 - $0.25, Margin Requirement: $1.75
Max potential gain: unlimited
Possible Outcome on Oct. 20, 2012:
INTC closes below $21: max loss of $1.75
INTC closes between $21-$23: loss of $23 - closing price of INTC as of Oct. 20 - $0.25
INTC closes at or above $23, but below $25: $0.25 profit
INTC closes above $25: $0.25 + price difference above $25 at closing price of Oct. 20
Good luck trading!
Disclosure: I am long INTC.