Market Volatility to Slow as Investors Assess Data, Central Banks
Non Farm Payrolls moderate disappointment at 162,000. Unemployment rate improves to 7.4%. Bernanke opens the way for extended stimulus. Earnings season mostly strong but nearly over.
The S&P 500 continues to press ahead to new record highs (and record closes), with very little seen in the way of corrective moves to the downside. Last week, we saw enhanced price volatility in stocks, commodities, and forex after Wednesday as investors waited for two key event risks to pass (FOMC meeting, monthly Non Farm Payrolls) before committing to large new positions. And while we did see some moderate disappointment in the headline jobs numbers, most of the information has been positive and this is keeping markets supported through the summer months.
On the central bank side of things, no changes in interest rates were made at this latest Federal Reserve meeting (as expected by the market consensus). Because of this “no change” decision, all of the investor focus was placed on the accompanying policy statement, which was clearly interpreted as dovish. Specifically, the Fed said that quantitative easing stimulus programs will continue at their current levels “until the outlook for the labor market has improved substantially.” Prior to this, investors had started positioning themselves for the possibility that the Fed would begin its tapering strategy to exit these programs, but these latest statements drastically reduce this as a realistic possibility. On the whole, this is a positve for stock markets and a negative for the US Dollar (against all the majors, except perhaps the Japanese Yen).
The Week Ahead
In the week ahead, the economic calendar is much quieter, with only a few second-tier released out of the eurozone. Earnings season is also starting to come to an end, so we will likely see a period of sideways trading as investors position themselves in response to the employment data seen last week, and the latest evidence that the Fed is not yet ready to start cutting back on stimulus programs. Corporate earnings releases will be coming from CVS (CVS), McDonald’s Corp. (MCD) and dairy company Dean Foods Co. (DF).
My Trading Ideas:
1. The Swiss Franc saw some erratic price moves into the end of last week, first breaking good short term resistance and then meeting selling pressure in the final sessions. In all but one case, taking the bull side on the EUR/CHF has been positive for these positions, and I will use this latest end of week dip as another opportunity for CALLS. This week, look to buy weekly CALL options in EUR/CHF at the week’s open on Monday, which should come in near the 1.2330 area.
2. For stock trades, I will be looking to capitalize on the consistently high prices in energy markets, with oil still trading firmly above the 106 level. This has translated to better than expected earnings at oil companies, the latest example of which is Chesapeake Energy Corp. (CHK). CHK’s second quarter net income came in at $457 million ($0.66 per share). Total revenues increased to $4.68 billion (after posting $3.39 billion during the same period last year), this was much better than the consensus expectation of $3.21 billion. Buy one month CALL options in CHK on any drops into support at $24.80.
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