By: Tom Gentile
on September 20th, 2023
Originally published via our newsletter previously. Subscribe for early access!
There are a vast number of economic reports that come out on a regularly scheduled basis. These numbers and whether they come out as expected. Mis or beat expectations can affect the financial markets and send it higher or lower on the day and subsequent following number of days.
Today and tomorrow the markets are to get both the CPI (today) and the PPI (tomorrow).
Along with the PPI tomorrow, the initial jobless numbers are due to come out.
The CPI, which measures costs across a broad array of goods and services, was a bit hotter than expected.
The Dow ultimately lost 70.46 on the day or 0.20%, its second straight day of decline.
The S&P 500 and the NADAQ both eked out slight percentage gains on the day.
The markets, as we will show with the chart on the S&P 500 in the Market in Focus section of this week’s newsletter, is in a consolidation pattern.
Which way it breaks out of that consolidation will hinge upon the upcoming PPI and jobless numbers as it helps get a bead on which way the Fed will lean when they meet and announce their decision on interest rates this upcoming September 19-20.
As options traders, a key to one’s success is being prepared to trade regardless of market direction. With my tools www.tomsoptiontools.com we can find stocks and ETF’s with bullish and bearish scans to assess possible directional moves to take advantage of.
Market in Focus
This is one of, of not THE, most actively traded ETF on the market.
It is regarded by many to be an even more important ETF than the DIA as it tracks the performance of the S&P 500, which is regarded as more representative of what is going on with the US markets as it has 500 companies to represent the various industries where the Dow only has 30.
One has to wait for the markets to break out, to the upside or down, before determining their directional bias.
What tends to happen is the security moves further in the direction of the break the price amount of the widest widths of the triangle.
Nor matter what triangle formation, ascending, descending or symmetrical.
From the Desk of a CMT – XLE Case Study Close & Probability Cones
Inflation has been re-accelerating and XLE, the subject of the last case study, moved lower briefly before resuming its uptrend.
Since this article will post after an important CPI release, it may be a good time to note how interest rate sensitive stocks behave after the data is absorbed by the market.
A surprise to the upside will increase market fear about a rate increase next and more belief in “higher for longer” while a downside surprise may create exuberance similar to the last JOLTs report.
Stocks that are generally weaker when interest rates are higher include REITs & utilities (with dividends competing against lower risk treasuries) and financials tend to be relatively stronger.
Consider tracking those over the next few days and into next week’s Fed meeting to see how they perform.
XLE Exit and Probability Cones
Post trade performance can be tracked with the back-test tool which is accessible from the risk graph page.
Figure 1 provides the data from August 17th through September 1st (expiration), with the trade exit data highlighted.
The case study had a timed exit after briefly experiencing some gains.
I have to be honest, having a profitable case study turn negative is one of the most difficult parts of mapping out a case study and stepping away for a couple of weeks.
It does force the question of, “how can it be better?” It’s likely why I like to view probability cones in the rearview mirror to see how price action impacts the spread value. Figure 2 provides the probability cone with a back-test date of 8/17/2023.
The bar that has a high range at the zero line is from 8/25/2023, the peak value for the spread. Although price was higher than the two previous, the spread benefitted from a greater decline in the short option (out of the money) as time decay accelerated.
Unfortunately, the move upward eventually translated to losses for the long 90 strike put.
One way to manage the case study is through partial profit-taking or scaling out when the position goes against you.
Short-dated long premiums are going to be impacted by time decay and you need to be thinking about these risks when Fridays roll around.
- Entry price for underlying: $87.94
- Expected gain: $84.82 (80% of 3.12, or 2.5 $85.44)
- Expected loss: $89.90 (80% of 1.96, or $1.57 $88.33)
In this scenario, half the position would have been exited the day after the case study was established. This would result in a total loss of $314, so slightly worse, but managing risk is important enough to think about what suits your style.
Regards, Clare White, CMT
Thank you, Clare!
— Tom Gentile
C1P: Chief 1-Percenter
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