Stocks Lower Ahead of Potentially Volatile Week
Potential conflicts in Syria pressure stocks, but gold and oil rally. S&P 500 posts worst monthly performance since May 2012. Heavy data calendar next week signals an end to reduced summer volatility.
Stock markets closed on Friday under heavy bearish pressure, with the S&P 500 down by 3% for the month of August. This is the worst monthly performance since May of 2012, as investors weigh the relative uncertainty created by several market events. Most recent is the prospect of military conflict in Syria, and since this will likely involve a coalition of countries (all with major economies), there will be clear implications for disruptions in economic activity. Add to this the possibility that blockages could be seen in common trade routes for oil and we have a scenario where limited supply of energy products will lead to near term price rallies.
So, it is not entirely surprising that stocks were lower this month, and commodities like gold (a safe haven asset) and oil saw significant rallies. Higher energy prices also weigh on earnings prospects for companies (given the increased cost framework), and this is another negative for valuations in the S&P 500. In addition to this, we have a majority of the market expecting the Federal Reserve to begin cutting back on stimulus, and the collection of these negatives suggest that any rallies in stocks will be met by selling near term.
The Week Ahead
In the week ahead, we have several large event risks that will put an end to the reduced volatility seen in the summer. After the Monday holiday, we will have interest rate decisions from five different central banks, several GDP releases, and Non Farm Payrolls on Friday. Traders should be prepared for increased volatility given the large number of event risks we will see in coming sessions. Markets are expecting an NFP increase of 180,000 jobs, and any number higher than this will indicate the Fed should begin tapering. Overall, expect an exciting week of price activity once markets return to full strength after the Monday trading holiday.
My Trading Ideas:
1. Last week’s trade in the USD/CHF performed nicely, indicating that further weakness in the CHF is in store. At this stage, the EUR/CHF provides a cheaper value and it trading at key support levels that should hold into next week. The pair is also less vulnerable to erratic price moves after next week’s Non Farm Payrolls number. This week, look to buy weekly CALL options in EUR/CHF at the week’s open on Monday, which should come in near the 1.2280 area.
2. For stock trades, I will be looking to capitalize on recent analyst downgrades and disappointing earnings results from Utility company Exelon Corp. (EXC). Growth in the company’s earnings per share has been seen at nearly -20% for the last three quarters and with the expected sluggishness in stocks I expect to see this month, I will be looking to sell at current levels. The company’s price to earnings ratio is another troublesome factor, given the improved valuations that are seen in many of EXC’s competitors. Buy monthly PUT options in EXC at the weekly open, which should come in near 30.80.
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