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The Way We Were: One Year Ago on Feb. 18, 2010

 Let’s rewind back to exactly one year ago on Feb. 18, 2011 and see what our Chief Market Strategist Jeremy Klein had to say on that day:

“Fade to Black…”

It’s 3PM on Thursday, February 18… Sitting around an oval shaped conference room table at the Federal Reserve’s offices in Washington D.C. are Chairman Ben Bernanke and members of his FOMC. Some of the regional bank presidents are dialing in via conference call. Chairman Bernanke speaks first…

Bernanke: Ok… so we are all in agreement? We are going to raise the Discount Rate 25bps along with a statement that we are not signaling a change in monetary policy. That way, the markets won’t move a lick.

FOMC: Agreed.

Bernanke: So, Governor Warsh… you are my capital markets guru with your 2 years experience as a financial analyst in Morgan Stanley’s Investment Banking unit.

Warsh: Don’t forget my law degree from Harvard and my B.A. in Political Science from Stanford. I am chock full of market knowledge. Just ask the guys at The Wall Street Journal.

Bernanke: Oh that’s right. You’re a whiz. So, what time should we release this information?

Warsh: Well, we usually do this at 8:15 in the morning, but for whatever reason, stocks, bonds, commodities, and currencies swing wildly then. So why don’t we try 4:30 PM this afternoon? All these markets will be closed, so they won’t be able to move!

Bernanke: Are you sure? I think some of them trade electronically and the F/X markets never close.

Warsh: You’re right, but no one is around, so there won’t be very many bids and offers. It won’t move things too much. Trust me.

Bernanke: What about this thing I keep hearing… “a double witch” in the stock market?

Warsh: What’s that? The only double witch I have ever known was the Good Witch of the North and the Wicked Witch of the West from “The Wizard of Oz.”

Bernanke: A double witch is an options expiration where index options, such as those on the S&P 500, expire on the third Friday of the month at 9:30 AM and single stock options expire on the market Close of the same day. Won’t there be an issue if we do this tonight before this huge liquidity event tomorrow on the Open?

Warsh: Ben… may I call you Ben?

Bernanke: Sure-

Warsh: Ben, whoever heard of anyone actually TRADING the Dow, Nasdaq, or especially the S&P 500.

Bernanke: Hmmm… Kev…I see the S&P 500 is trading right around 1100. This could be problematic.

Warsh: No worries. The CPI comes out at 8:30 AM. This Discount Rate thing will be forgotten in a jiff. Plus, Tiger Woods is speaking tomorrow. No one cares about us.

Bernanke: (glancing over at a golden colored phone in the conference room) You think I should check with Lloyd on this to get his thumbs up?

Warsh: Not a bad idea, but trust me, if we do this at 4:30 PM, no one will care.

The Fed duly raises the Discount Rate at 4:30 PM. Stocks immediately fall over 1% on fears that a tightening cycle may be around the corner. The Euro falls off a cliff against the Dollar and commodities get bombed as a result. Bank stocks slide over 2% and the golden phone in the Fed conference room is ringing. Fade to black…

Author’s Note: Despite the bumbling histrionics coming from the ivory tower that rises above the offices of the Federal Reserve, traders fortunately take pause and realize a raising of the Discount Rate, a mechanism so infrequently used because of the stigma associated with it, is not as fundamentally dreadful as it first seems as December Fed Funds futures contracts only sell off 4 ticks on the announcement. To be sure, this Fed action may make for some anxious moments tomorrow before 9:30 AM for those owners and writers of the 110K SPX OCT 1100 calls and 120K SPX OCT 1100 puts (1098.25 equivalent in the S&P E-Minis) outstanding, longer term fundamental managers will remain sanguine by a forward P/E of 14 on the index with a robust outlook for growth. Any hiccup in the markets should be quickly assuaged as stocks continue their march back up to new highs for the year. And if not, there’s always Tiger at 11AM. Right Kev?

S&P 500 E-Minis Key Technical Levels

Support: 1093.00, 1086.50, 1079.50, 1065.00, 1060.00, 1057.50
Resistance: 1106.75, 1110.00, 1111.75, 1120.00, 1125.00, 1130.00, 1138.25

**** Note, 1098.25 will be a support/resistance point prior to tomorrow’s 9:30 AM expiration, for that is fair value to 1100.00 for the SPX Cash.


Where we were then:

S&P Futures
Open: 1099.75
High: 1106.75
Low: 1093.00
Close: 1105.50

Where we are now:

S&P Futures
Last: 1340.25

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.