Trade The Journey

Trade The Journey

Continued Volatility

Top of the Morning! Today is the day that two teams will meet in the Superbowl to determine who’s the best. On one end is a cinderella story team, the Cincinnati Bengals, led by Joe Burrows. On the other end is the Rams, whose season could be summed up as “Championship or Bust.”

It should be an exciting game. I read an article that stated the advertising cost of a thirty-second commercial during the Superbowl to is close to several million. Superbowl commercials are as highly anticipated as the actual game.

Coronavirus cases continue to fall, prompting some US states to remove mask mandates. Some of the European countries have already removed mask mandates. Vaccine mandates are another story, as governments face pushbacks against vaccine mandates for employment. Truckers blocked the Canadian bridge to protest vaccine mandates, as Canada now requires truckers to be fully vaccinated.

Some car companies are already facing supply chain disruptions due to Trucker’s pushback on vaccine mandates. Car companies could be just the beginning of supply chains faltering worldwide due to the uneasiness around mandating vaccination.

Ukraine is a geopolitical threat that won’t go away. As mentioned in the previous post, a significant concern is energy, as Russia is a major exporter, especially to Europe. The U.S. is working with other countries to form sanctions and economic consequences for an invasion of Ukraine, but it doesn’t seem to be deterring Putin.

Optimism among Americans retreated further downward as inflation weighed heavily on their budgets and minds moving forward. Consumer confidence is a tricky indicator when forecasting consumer spending, a big part of the U.S. GDP. A decline in consumer confidence doesn’t always lead to a decrease in spending.

Mortgage applications declined in response to higher mortgage rates. Rates increased from 3.73% to 3.83%, further pricing first-time homebuyers. However, loan sizes continue to rise, closing at close to $500,000 signaling that those with higher incomes are still purchasing homes.

Wholesale inventories increased for both durable and nondurable goods last December. The most significant increase in durable goods inventory came from Lumber, professional, and computer equipment. The most significant increase in nondurable goods inventories came from drugs, apparel, and groceries.

Commercial crude, gas, and finished gas inventories led the decrease in falling crude inventories. Crude oil closed the week near its high of $94.66. Gas has increased almost a dollar from a year ago. The five major oil companies are an increased cash flow from the rising crude prices. After completing restructuring and layoffs to survive the downturn in crude oil prices, the major companies are in an excellent financial position.

Initial claims fell again, with the largest decrease in Ohio, California, and Kentucky for the previous week.

The CPI came in higher than expected with most of the increase in food and energy. Inflation increased in shelter, food, and food at home, with index meats leading the increase in food prices. The meat index includes meat, poultry, fish, and eggs.

Energy Index increased: 27.0% y/y

Gasoline Index increased: 40% y/y

Electricity Index increased:10.7% y/y

Natural Gas Index increased: 23.9% y/y

The Federal Reserve may be forced to act sooner than expected with inflation continuing to rise to historic levels. Some say a fifty basis point increase in rates is warranted. One fed gov noted that the first hike should be above fifty basis points to help rein in inflation. One thing is for sure, the Fed is behind the curve, and engineering a soft landing for the economy may not be possible.

The market will remain volatile for the foreseeable future as I see it. Investors and traders should tread carefully as the market awaits the following Fed action.

I opened an at-the-money call position this past week with a month left before expiration. Before, the cause of movement in the option’s value was a mystery. Now, I know why the option’s value is changing by watching the option greeks and charts.

The paper journal I created in Excel has helped me understand options. If you are serious about trading options, I’d recommend Options and Options Trading, a simplified options course that takes you from Coin tosses to Black Scholes by Robert Ward.

*I am continually changing the blog’s format as I learn more about markets and trading. Fun fact: Initially, each blog post took about an hour to complete now it takes closer to four hours.


Indices

Russell 2000: The Russell closed 1.2% on the week.

S&P 500: The S&P fell 1.6%.

Dow Jones: The Dow fell 1.14%.

Nasdaq: The Nasdaq fell 1.6%

Bonds

Five-year Yield: 2.02% is a good reference level to watch. Buying on Friday caused the two-year yield to fall below 2.0%. The averages confirm a definite upward trend in the two-yield.

Ten-year yield: The ten-year yield came back below its 2.0% level to close at 1.95%. A quick test could be the 1.92% before the ten-year yield ventures back above 2.0%: 2.06% and 2.34% are two reference levels to watch soon.

Thirty-year yield: The thirty-year yield fell from a high of 2.35% during the week to close 100 basis points lower. The 50-period moving average looks like it will cross the 200 sma this coming week.

Across the bond maturities, bond prices made a slight bounce off their Thursday lows. I’m still learning how bond yields react to the Fed as it adjusts its monetary policies.

Sectors

With the exception of the Energy, Financial, and Consumer Staple sectors, most sectors broke below their 200 sma or at least tested it. The energy sector made a new high.

Indices

Russell 2000:

The Russell recovered from its lows and regained some of its value since it broke through its year-long support level. The Russells’ technical pattern looks to be forecasting further downward action.

S&P 500:

The S&P made its way upward towards its 50 sma but ended the week below its 200 sma. It broke through two support levels, and the following reference level below is 4288.

Dow Jones:

The dow briefly rose above its 50 sma, but the ended the week below its 200 sma. 34519 is the next reference level if it continues to fall.

Nasdaq:

A few gap ups in the week could have led you to believe that the Nasdaq could be staging a recovery. However, it did not, and 14,496 served as a resistance point for the candles gapping up. It looks like the Nasdaq could again test its lows.


Cash-flow report for the previous week:

This past week, I had to reassess my spending habits after looking at my total income for the previous year. I didn’t do as well as I previously thought in controlling my spending. Barring emergencies, I spent a lot on entertainment, including streaming services and food.

At the moment, I’d say I save 10-15% of my income each month, but my goal is to save at least 25% of my income. I tend to rationalize my spending on entertainment, believing I am entitled to enjoy myself after a long week.

However, I have to replace that mindset soon or I’ll always be a couple of paychecks away from needing a personal loan.

Grade: D+

Reason: Need improvement

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