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Jonathan Parr
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Jonathan Parr, currently a CFA level II candidate and a financial professional for 12 years, has earned a living as a futures trader, a financial advisor, and an options market maker. Passionate about investing and the markets, Jonathan is currently seeking opportunities in consulting and/or... More
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  • So Summers Is Out - And The Week Ahead

    As we approach the week ahead, nearly everybody has Wednesday circled on their calendar. That's the day the FOMC minutes are released, and financial markets are seeking clarity concerning the future of the Federal Reserve's asset purchase policy. Monday and Tuesday were expected to be quiet days as that meeting trumped all else. But as is often the case, reality threw us a curveball a few hours ago as markets reacted to an unexpected headline - "Larry Summers withdraws from Fed Chairman consideration".

    The market's knee-jerk reaction was as expected. Both equity and bond futures caught a bid as more dovish candidates become the frontrunners for the Fed chair. Janet Yellen appears to once again be the candidate de jour, and the markets have rallied in approval as the easy money tap seems ready to flow.

    But are equities a good buy here? The bonds have been selling off since May while the equities continue to reach new highs. Should we be buying equities on the "Summers Withdrawal" headline? I suggest the wait and see approach. Ben Bernake is still the Fed Chairman, and he has been very clear that some sort of tapering is in the cards. Bonds have been selling off since May, yet equities continue to rally, ignoring the effect of higher borrowing costs and a less accommodative policy. Although I try to refrain from the day to day crystal ball predictions, I expect Bernake to announce some sort of taper, and I expect a pullback in equities with the announcement.

    In addition to the Fed announcement, keep an eye on housing numbers and CPI, also due out this week. On Tuesday, we get CPI. We also get the homebuilders index. Although any market reaction is likely to be muted heading into Wednesday, the numbers may give us a hint of how rising interest rates are affecting home building. Look for confirmation early Wednesday when housing starts and building permits are reported, and on Thursday we'll see existing home sales.

    So a busy week has already started, and it's still Sunday. Keep your powder dry, and expect volatility ahead.

    Tags: Macro View
    Sep 16 10:37 AM | Link | Comment!
  • Buy QQQ Sell IWM – Here's One Way To Play The Taper

    Just as I was ready to submit this article, I looked at my charts and saw red on the screen. True, the NFP data missed, but the real headline was one that rocked the political landscape: "Russia will aid Syria if attacked". Immediately, the S&P retreated 19 handles, and is offered at the current moment. Who knows where it goes from here? While not trying to trivialize the seriousness of the headline it seems an opportune time to introduce this "pairs trade" - one that seeks to capitalize on the relative performances or QQQ and IWM. As this article was written last night, it is still very relevant, and perhaps even more so as today's sudden pullback in the general market underscores the point that it is important to have hedges and to not always have directional bias. So without further introduction, here's the article as it was written:

    The word "taper" has become quite fashionable among economist within the last few months, and the smart money have been selling bonds at a precipitous rate. The 10 year yield is currently hovering around 2.85%, up from 1.63% in early May. Tapering is in the cards, it's just a matter of when, and higher rates should affect the stock market, but to what degree? Stocks remain within a stone's throw of recent (and all time) highs, and whether or not we'll see a pullback is anyone's guess. But one thing's for sure: higher borrowing costs mean more expenses, and smaller firms will start to face headwinds.

    IWM has outperformed QQQ for the better part of the year. But mention the word "taper" and the tables appear to be turning. IWM (the purple line), which had been outperforming for the majority of 2013, appears to have lost some steam. QQQ (the green and red line)has narrowed the gap, and a crossover appears likely as higher rates will continue to take a toll on the more highly levered and smaller companies. Furthermore, higher rates don't affect all companies equally. AAPL currently has an S&P rating of AA+, while MSFT carries the pristine AAA rating. Together, the two behemoths account for 20% of the QQQ. The smaller companies comprising IWM don't get those credit breaks, and higher rates will hit them harder. So if you subscribe to the notion that IWM has lost steam relative to QQQ, you should buy QQQ, sell IWM in equal dollar amounts, and don't worry about the overall direction of the market. This trade should work well under the following conditions: "taper" continues to be a topic of discussion, rates continue to move higher, and AAPL continues to market perform or better. (Remember, AAPL currently comprises 13% of QQQ.) If you believe in these three premises, expect QQQ to outperform IWM, and expect a tidy profit regardless of market direction.

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    Disclosure: I am short IWM.

    Additional disclosure: I am long QQQ and Short IWM. I have no plans to exit this position in the next 72 hours

    Tags: QQQ, IWM, AAPL, MSFT
    Sep 06 11:41 AM | Link | Comment!
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