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  • Which Way Wednesday - Fed Edition 0 comments
    Sep 21, 2011 9:38 AM | about stocks: ANR, CLF, DIA, FAS, GLD, IWM, JPM, LVS, NKE, ORCL, PCLN, QQQ, SDS, SPY, USO

    Click to ViewStrap in folks, it's going to be another wild ride!  

    As you can see from Doug Short's S&P chart,we are about to slam right into that collapsing 50-day moving average, now at 1,223.40 - right about where the S&P topped out on yesterday's morning spike.  Unfortunately, the Nasdaq topped out and headed down before the other indexes got a chance to complete their up cycle and the Dollar rose back over the 77.50 line and tanked the market - exactly as we predicted it would at the bottom of yesterday morning's post

    Of course, I can't MAKE these things happen - I can only tell you what's going to happen and give you trade ideas to help you profit from it.  I mentioned that we had picked up 10 DIA 9/30 $115.75 calls in our virtual $25,000 Portfolio at $1.05 on Monday and they topped out at $1.75 (up 66%) but we took a non-greedy exit at $1.45 in the morning spike (up 33%) and we switched to 20 QQQ 9/30 $57 calls at .45 in the afternoon sell-off.  So, we made $350 off a $1,050 investment and then we spend $900 but now we have 20 contracts instead of 10 but we also have $450 in cash so now risking just $600 of our original investment on the much more volatile Fed day.  

    Another trade idea we like ahead of the Fed that's still playable is 20 FAS weekly $13/14 bull call spreads at .38 ($760), selling 10 JPM Oct $28 put for .55 ($550) for net $210 invested on the 20 $1 spreads.  The worst-case on this spread is owning JPM for net $28.10, which is 13% off the current price and the best case is a $1,790 profit (852%) in a week.  That sounds like a lot but options let you do funny things like at 11:30 in Member Chat, we saw PCLN making new highs against news that we thought was not actually that good for them on closer examination.  Our trade idea to take advantage of that was:  

    If you want to play PCLN bearish – it’s very risky but the weekly $565/555 bear put spread is $6 and you can sell the $565 calls for $4.70 for net $1.30 on the $10 spread.   Oct $620s are $4.10 so your bet is that they don’t go higher than that (and again, if you take a 50% loss on the bear put spread, that’s $3 so your net on the short puts is $1.70 credit if it moves against you).   

    The $565/555 bear put spread finished the day at $8 and the $565 calls finished at $1.40 for net $6.60, up $530 per contract or 407% in 4.5 hours but we took an exit in Member Chat at 3:36 for a 515% gain - catching the bottom right on the nose.  Also right on the nose was my note to Members in that same 11:30 comment warning: "S&P needs to get over 1,220 but, if not, SDS is going to be our friend again."  That led, 20 minutes later (as the S&P failed to hold 1,220) to 3 short trade ideas in Member Chat at 11:50, using SDS (bullish), LVS (bearish) and GLD (bearish) - as we followed through on our plan to flip more bearish on weakness.  

    As we got our sell-off later in the day, we did a little bottom-fishing with AAPL, ORCL, CLF, IWM (twice), ANR and NKE so it's not that we are bearish, per se - simply protecting ourselves into the uncertainty that surrounds today's Fed decision.  If some of the trades do well and give us a quick pay-off - of course we'll take them off the table and get back to lovely, LOVELY cash because, as I often say to Members - I am not a day trader, but I am not adverse to taking profits that are made in a single day.  

    Today is all about the Fed and we are, of course, leaning bullish on expectations that the Fed's move this afternoon (2:15) will favor the stock market a little more than expected by the Punditocracy.  This morning, the Dollar is driving back to 78 as the Euro once again drops to $1.36 on news that the Greek "fix" will take another week to finalize so we have that rally to look forward to next week now.  

    Last week, we played a similar move with an FXE spread that returned 900% on Friday but, unfortunately, FXE does not have weekly options and a lot of things can happen between now and October expirations (21st).  Still, the FXE Oct $135/136 bull call spread is .60 and those can be paid for by the sale of the $129 puts at .58 for net .02 on the $1 spread with 4,800% upside if FXE holds $136 ($1.36 on the Euro) for 30 days.  The downside to this play is ending up long on the Euro at net $1.2902, and it was that low in January (very briefly) and between May and July of 2010 so not impossible - just unlikely.  

    Will the Fed continue to debase the Dollar (see Ron Paul on the subject) or will there be some brand new scheme that somehow puts money into the economy without inflating the supply of dollars?  Yeah, thought so.  That's why we like to play the Dollar to get weaker and the Euro to get stronger and stocks (which are priced in Dollars) to get more expensive.  Heck, we even took bullish plays on oil and we HATE oil but we did hedge with a bearish trade on Gold because, if the Fed fails to devalue the Dollar, gold will dive but even if the Fed deflates the Dollar further - it should remove enough fear from the market that gold dives anyway.  

    Last night, Republican "leadership" sent a letter to Ben Bernanke - not in private, of course but in a farcical game of political showmanship - telling the Chairman of the FOMC to "resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.”

    The letter was signed by enemies of the state: House Speaker John Boehner (R., Ohio), Majority Leader Eric Cantor (R., Va.), and Senate Minority Leader Mitch McConnell (R., Ky.) and Jon Kyl (R., Ariz.). It was exclusively "obtained" by Uncle Rupert's Dow Jones Newswires Tuesday afternoon and subsequently broadcast globally.   As Robert Reich commented on our site early this morning:

     

    To say it’s unusual for a political party to try to influence the Fed is an understatement.  When I was Secretary of Labor in the Clinton Administration, it was considered a serious breach of etiquette — not to say potentially economically disastrous — even to comment publicly about the Fed. Everyone understood how important it is to shield the nation’s central bank from politics.

    If global investors suspect the Fed is responding to political pressure of any kind, investors will lose confidence in the independence of the Fed and its monetary policies. Even if the pressure is to tighten the money supply and keep interest rates high, it’s still politics. And once politics intrudes, lenders of all stripes worry that it will continue to intrude in all sorts of ways. Lending to the United States becomes a tad riskier. As a result, lenders charge us more.

    The Republican letter puts Bernanke and his colleagues in a bind. If they decide against another round of so-called “quantitative easing” to lower long-term rates and boost the economy, they may look like they’re caving to congressional Republicans. If they decide to go ahead notwithstanding, they’re bucking the Republicans and siding with Democrats. Either way, they’re open to the charge they’re playing politics.

    Congressional Republicans evidently don’t care. They want Obama out, whatever the cost. Besides, they’ve never met a government institution they don’t mind trashing.

    Top Republicans believe they can block all or most of Obama’s jobs bill. That leaves only the Fed as the last potential player to boost the economy. So the GOP will do what it can to stop the Fed.

    After all, as Republican Senate head Mitch McConnell stated, their “number one” goal is to get Obama out of the White House. And that’s more likely to happen if the economy sucks on Election Day.

     

    We discussed the Republican brand of Conservative Cancer that is destroying the US economy in yesterday's Member Chat with some notes on why austerity is the worst possible "solution" to what ails us.  It's one thing to play political brinksmanship inside of Washington, turning our elegantly designed political system that is based on compromise into a winner take all death match but to enforce one side's UNTESTED, UNPROVEN and very likely UNWISE economic will on a nation that cannot afford a political experiment is a right no single party should be given - or even rationally want.  

    Hopefully the Fed can ignore all this nonsense and do what is right despite Perry and the Republican's threat to "treat Bernanke pretty ugly" if he should have the nerve to show his face in Texas and now, apparently, Ohio, Virgina, Arizona and Nevada as well.  

    Good luck to all of us if Ben Bernanke isn't able to stand up to the schoolyard bullies...  

     



    Disclosure: I am long USO, QQQ, FAS, IWM, JPM, SPY.

    Additional disclosure: Positions as indicated but subject to change
    Themes: Bernanke, QE3, Options Strategies Stocks: ANR, CLF, DIA, FAS, GLD, IWM, JPM, LVS, NKE, ORCL, PCLN, QQQ, SDS, SPY, USO
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