Tom’s Weekly Newsletter August 2, 2023

Originally published via our newsletter previously. Subscribe for early access!

The Fed Did Pretty Much as Expected

There wasn’t much discussion whether the Fed will raise or not raise interest rates going in to this Fed decision.

Quite the contrary, this quarter of a point rate hike was pretty close to 100% expected.

That being said, the immediate pop or drop on the announcement on an intra-day basis didn’t happen.  The pop did come, though about a half hour afterward; around 2:30pm US PT.

Then we got some milder than usual price volatility into the close as the SPY, for example, popped, then sold off to intra-day lows before closing up pretty much break even.

The biggest take away as I see it is in June the Fed intimated the prospects of two rate hikes by the end this year, but based on today’s comments it seems  the markets are pricing in a chance that there won’t be any more moves this year.

We will see what the data is showing as we go into the September meeting to see if their potential actions come clearer, but right now I still lean more  bullish than bearish.

Market in Focus

Equities: XLI

It’s no secret the markets have been on quite the bullish run since their October lows.  If one wants to look at a particular sector of the market that is leading the way and helping account for this bullishness look no further than the Industrials.  Industrials are represented by the chart on the XLI below.

The XLI is the Industrial Select Sector SPDR Fund.

This ETF is at what looks like all-time highs, (at least per my tools that goes as far back as 999 days it is at its highest closing price over that range.

If one likes the strategy of trading stocks or options on stocks at highs anticipating strength begetting more strength, research stocks in that ETF or research options on the ETF itself.

From the Desk of a CMT – DE Exit

Unfortunately, there won’t be an opportunity to make another adjustment to the DE option position. The preferred scenario was to be able to sell an Aug put heading into DE earnings on Aug 18th and benefit from an earnings crush that would follow, but our max price (exit for an expected loss) was reached today.

Here are the exit rules we had for this paper trade:

Exits for an expected loss remains the same as last article and the expected gain level uses only the 2 standard deviation level:

• Exit with an expected loss at the intermediate term high price of 445.61 from Dec 2022 (if that does not exceed the $750 max risk) 
• Exit with an expected gain at $355 (2 standard deviation band), if there’s an opportunity for reasonable adjustments

In all cases, a single close for price > 445.61 or < 355, or a loss of $750, will result in an exit the next day. The close on Tuesday was 446.33, the first above our 445.61 limit, which requires an exit of the existing long put.

To see how the position was tracking we can use the back test tool which is accessible from the Risk Graph page:

Last week the use of a faster MACD setting for declines was discussed, so figure 4 provides a side-by-side chart of the current MACD picture for both the fast and default setting.

The difference between the fast and default setting is more discernible in the histogram view with choppier action in the fast MACD.

It’s interesting to look at the two MACD views without the price chart also in view. These fast settings truly are best in declines. Note the cleaner bearish crosses from bullish conditions when the default setting is used.

The current set-up prompted me to checkout a bullish spread that would allow us to take advantage of that short-term IV rise going into earnings, but other factors for DE had my shy away.

Do take a look at other names you may be tracking during earnings season to see if there is an opportunity to benefit from a rise in short-term IV heading into the earnings report and a subsequent drop (IV crush) once earnings are reported.

Regards,
Clare White, CMT

Thanks, Clare!