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December 13, 2011

Equity market bulls looked to simply "throw in the towel" following this afternoon's Fed announcement.  Although the Fed didn't have anything new, or surprising, the realization that QE3 might be off the table triggered massive selling in risky assets.  Apparently, there were a lot of short-term traders positioned for a Fed rescue but failed to get what they were looking for.  This is even more obvious in gold prices which tumbled over $30 per ounce today in light of the lack of mention of QE3. 

I'm not exactly sure why there were such high expectations for another round of quantitative easing.  Lower interest rates haven't necessarily been successful in stabilizing the housing market, yet it is penalizing "savers" who are forced to hold risky assets in their portfolios or suffer a loss in buying power in their savings accounts.  Similarly, although QE 1 and 2 successfully inflated equity prices it also inflated commodities...making goods more expensive for already struggling consumers.  In addition, QE is a measure only to be taken in extreme circumstances (because the consequences can also be extreme) and the recent string of decent economic data doesn't seem to constitute dire times.  Although it is true that a hiccup in Europe could quickly change things domestically, it doesn't make sense to be pre-emptive in such extreme monetary policy...let's let the Europeans do it this time around. 

The S&P 500 has been in a holding pattern in recent weeks, and in general this typically signals a very large move is coming.  Most technicians consider consolidation after a large move a continuation pattern and we agree...but for different reasons.  Today's action suggested that many bulls have simply given up on the trade; sometimes that is exactly when the bull rears its ugly head.  Don't forget, markets tend to move in the exact manner that is least expected.  More importantly, seasonals haven't been helpful thus far in December but we still have two weeks for the Santa Claus rally to wreak havoc on the bears.  Additionally, the currency markets appears to be overextended; if the U.S. Dollar goes into correction mode stocks "should" rally. 

If we are right about the market pulling out of this funk, the March S&P could see prices in excess of 1300 in the coming weeks (equivalent to 770 in the Russell and about 2400 in the NASDAQ).  If we are wrong, the next "good" area of support in the S&P will be about 1196 and then below that will be near 1172ish. 

Quite frankly this is one of the toughest markets I've seen for position traders.  The wide trading range and massive volatility has likely chopped many traders to the point of surrender.  This isn't the first challenging December, and it won't be the last...for this reason, many professional traders take the entire month of December "off" to avoid giving back profits they've spent 11 months accumulating.  All we can say is "less is more"! 

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

Futures and Options Trading Recommendations

Position Trade -

11-30 Clients were advised to sell the January e-mini S&P 1320 call for about 9.50 in premium or $475.

12-13 Clients were advised to buy back the S&P 1320 call to eliminate risk ahead of the Fed meeting for about 5.50

In other Markets...

(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more.  Email us for more information)

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.