Trade The Journey

Trade The Journey

Bear Market Rally or Bull Run?

Top of the Morning! I hope all is well. This week there was a bit of a pullback to the recent rally. One report I was especially waiting for was the release of the Fed minutes from last month. I was interested in seeing how the market would react to the report. Recent market action is forecasting a dovish Fed sooner than later.

According to the minutes release the Fed remains committed to its 2% target and fed funds rate target of 2.25-2.50%. The Fed is hoping to front-load its rate increases leaving it room to maneuver in case additional adjustments need to be made. The Fed is also committed to reducing the size of its balance sheet by decreasing its holdings of treasury, agency, and mortgage-backed securities. The Fed also noted in the report that inflation risks skewed to the upside remain a risk.

After closing a profitable call position on LVS (Las Vegas Sands), I decided to place a bearish position on C (Citigroup) before the release of the Fed minutes report. My guess was that the market was overplaying its hand on a dovish Fed. Fortunately, I was right on the bearish put and Citi declined falling close to 3% in three days.

A trading error I keep making is closing the position too early, removing the opportunity of letting the option position reach its maximum profitability. Instead of earning a 100% return on the put option, I earned a measly 13%.  When you’re looking back it’s easy to see what you should have done, but while you’re in the trade, it takes mental fortitude to remain in a trade that could go against you.

 

There’s nothing more defeating than knowing you were once in a profitable trade that ended up as a loss. One adjustment I made to my options trade selection is opening positions with slightly in-the-money options instead of at-the-money options on directional trades. I also stopped trading options on Robinhood and moved to a professional platform, thinkorswim.

The swaps market is forecasting a higher chance of a fifty-basis point rate increase instead of the original seventy-five basis point hike. The Fed has repeatedly clarified its position by releasing statements detailing its intention to raise rates until inflation is within its range.

Whether or not inflation will ever get back to the Fed’s target of 2% is anyone’s guess. In past years, the Fed’s forward guidance influenced the market and helped to prevent major downturns in the market. The Fed could be losing credibility due to its faulty forecast of inflation being transitory.

When the Fed first announced that inflation was transitory, even I knew that they were making a serious mistake.

Judging by companies announcing mass layoffs, hiring freezes, and removing hiring bonuses, I’d say that we are edging closer to a recession.  Some major retailers have cited that consumer spending habits have changed and inventory once held in preparation for supply chain challenges is no longer needed. Walmart is among many retailers reducing the price of overstocked inventory.

Not only is inflation a major concern for the United States, but it’s also a major concern for countries around the world. Europe is facing record high levels of inflation mainly due to the energy costs. Natural gas shortages are a major challenge to surmount as the winter months draw closer.

China is doing its best to spur its economy back to the growth it once enjoyed. Analysts are now forecasting a long road ahead of recovery for China. China is a major consumer of resources and any further fall in production or supply will influence the global economy.

It’s one reason why countries are moving away from globalization, dependence on another country for currency transmission, supply, or production could prove to be catastrophic if a conflict between occurs. Russia experienced this firsthand and although it was deserved, it showed other countries the possibilities.

Economy

Building permits for July fell 1.3%, housing starts fell sharply, and housing completions rose 1.1%. Single-family housing starts fell 10.1%, permits fell 4.3%, and completions were 0.8% below the June month. Permits for 2 to 4 units and 5 units or more both rose for the month of July. Single-family units and multiunit housing authorized but not started both rose, with the 5 units or more coming in at an increase of close to 9%.

New privately-owned units started fell for both one and 5 units or more close to 10%. Units under construction fell for single-family units and rose slightly for 5 units or more. Completions for single-family housing units fell slightly but rose 6.7% for 5 units or more. From the housing data, we can see that home builders are slowing the pace of building single-family homes.

Existing home sales have fallen for six consecutive months. The current inventory of homes is equal to close to three and a half months. The median existing-home sales price retreated from record highs but is still above $400,000. First-time homebuyers represented 29% of sales in July and homes remained on the market for an average of fourteen days.

Single-family home sales declined over 5% from the previous month and is down close to 20% from the previous year. While homes are still selling, potential homebuyers seem to be holding out, discouraged by higher rates and prices.

Mortgage applications, refinance applications and purchase applications fell from the previous week. Adjustable-rate mortgage applications also decreased. The thirty-year fixed rate remains above 5%, decreasing slightly for conforming loans and increasing for jumbo loans.

Retail sales came in flat for the month of June. Retail sales do not pace for inflation. However, retail sales rose slightly for July if excluding, motor vehicles & parts, and gasoline stations. Motor vehicle & parts dealers and gasoline stations fell close to 2% for the month of July. The largest increase came from non-store retailers, miscellaneous store retailers, and building material & garden equipment & supplies dealers. The rest of the retail sales remained relatively flat for the remaining industries.

Total business inventories remain at record highs although falling 0.2% from the previous month.

Industrial production increased slightly in July as did capacity utilization. Manufacturing output rose slightly while motor vehicle & parts production rose over 6%.  Production fell for appliances, furniture, carpeting, and home electronics. Business equipment, construction suppliers, and business supplies rose slightly in July. Total Capacity utilization rose less than 1% for July. Capacity Utilization for utilities rose 1.2% while manufacturing and mining rose slightly.

Initial claims fell slightly while continuing claims rose slightly from the previous week.


This week in Review:

This past week, I did well managing my personal finances. With limited time available for lunch, I brought my lunch each day of the week except for one day in which I went to lunch with a staff member.

Overall, I think my spending plan is working well. While I did increase the amount of credit outstanding, I think the increase in credit is manageable in terms of payment. Increasing my credit outstanding also increased my credit score. I’m also happy to see that I have 100% on-time payment for all of my credit accounts.

Grade: C+

Reason: Continued improvement

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