Trade The Journey

Trade The Journey

CPI Sparks Bull Rally!

Top of the Morning! For the second week in a row, I decided to rely on the release of another economic report to select my options position. The options position I selected was  UUP  Invesco DB US Dollar Index Bullish Fund based on the US dollar index. The US dollar had retreated from its highs to the bottom of a sideways trend. When I entered the position, the price of the US dollar index was $109.

 UUP closely follows the dollar index. The consumer price index report was going to be released before the market opened. The month before, the report came in close to expectations, so my thinking was that inflation would remain near the previous month’s level. Looking back, it was a bad idea to enter into a trade in which the report is released before the market open.

Any unexpected information could cause the position to gap up or down depending on how the information was perceived by the market. Below is a chart of the option’s price history and corresponding greeks.

Opening the position wasn’t the only mistake I made. There’s a saying that’s well known to most market participants which are “The market is an expensive place to find out who you are”. Instead of waiting to get filled at the best possible price, which was $0.33 for the contract, I chased the market and got filled near the high at $0.42.

I’m learning that I’m short of patience, especially when I’m trying to open a position. I get anxious and feel that I’m missing out on the upside action. When I entered the position on Tuesday, UUP rose on the open, and instead of waiting until UUP returned to the price I set the limit order for, I opened the position. I watched UUP, it rose a little bit further and returned to the $0.33 limit price.

As the day proceeded, UUP rose again the next day and closed at $0.49. A $7 profit wasn’t bad, considering I just exited a position a day earlier with a small profit on a bearish put on UUP. On the day of the CPI report release, I wasn’t sure what to expect. The report was released, and the market skyrocketed to the upside, and the position lost 61% of its value.

UUP gapped down as did the dollar index and the options position neared $0.09. I closed the position immediately, but the damage was done. In two weeks, my trading account suffered two catastrophic losses by being on the wrong side of the market. Looking at the price history, open interest drifted higher, which could signal that participants could have brought call options as the options price drifted near its low.

However, with a delta of 11, the recovery of the 29.5 call option is highly unlikely unless participants are opening a bearish call position by going short the call.

Clearly, the market took the lower reading from the CPI as a sign that the Fed could be pivoting from the large rate hikes. Even if it’s only one report, it adds to the sentiment that inflation has peaked but will this be enough evidence for the Fed to pivot?

Also in the news was the collapse of FTX, a crypto trading platform led by Sam Bankman-Fried also known as SBF. The release of FTX’s balance sheet showed that they couldn’t cover their liabilities with the assets on hand, and there was an immediate sell-off. SBF lost close to 94% of his wealth and went from the Crypto world’s darling to its villain. After a deal with another crypto platform fell through, FTX declared bankruptcy.

The rumor is that FTX needs close to $10 billion to cover its liabilities. The news shook the crypto market and reinvigorated concerns about trust and needed regulation to help prevent events like FTX.

Economy

Consumer credit from September increased by $25 billion, as consumers continue to spend using credit and money still in savings. Consumer credit usage has steadily risen from 2020 lows of the Pandemic. Student loans and motor vehicle rates rose slightly in the third quarter. Credit card plans and personal loan rates both rose in the third quarter.

The NFIB’s small business optimism index declined 0.8% and remains below the 49-year average. Inflation was reported as the biggest concern for small business owners. 90% of the owners reported looking to fill a position but found little success in finding qualified candidates. This challenge is particularly acute in transportation, construction, and manufacturing.

54% of the owners reported capital spending down from the previous month. According to the report, price increases were the highest in retail, wholesale, and construction. 44% of small business owners reported raising compensation. It seems like small business owners are reluctant to lower compensation or lower the headcount due to the difficulty in finding qualified workers.

Mortgage applications fell slightly from the previous week. The refinance index fell 4% from the previous week while the purchase index rose 1%. Conforming loans for 30-year fixed mortgages remained above 7%, and jumbo loans fell 0.05%.

Initial claims increased slightly from the previous week as did the continuing job claims. The labor market remains tight and above the 200k four-week moving average.

Consumer sentiment fell 8.7% in November for the University of Michigan, consumer sentiment preliminary release.  Current economic conditions fell 11.9% and consumer expectations fell 6.2%. They also released a report before elections, asking respondents which party they thought would control the house and senate as well as which party would be better for the economy and their own finances.

Most respondents were convinced that republicans would take control of both the senate and the house. However, the report also found that consumers were indifferent as to which party would be better for the economy and their own finances. As the tally continues, the red wave that was expected never materialized and the democrats are one senate seat away from taking control of the Senate. The house is largely expected to be controlled by the Republicans.

The consumer price index rose 0.4% in October, bringing the y/y level to 7.7%. The shelter index contributed to most of the increase, rising 0.8%. Rent fell 0.1%, coming in at 0.7%, remaining around the same level for the last few months. The energy index increased by 1.8% for October, after falling in the previous months. The food index rose 0.6% and rose 0.4% for the food at home index. Food at home fell 0.3% from the previous month.  Food away from home remained at the previous month’s levels of 0.9%. Used cars and trucks fell 2.4% for October. The core index excluding food and energy rose 0.3%, rising 6.3% in the last twelve months.

All in All, the CPI report showed signs that the rate hikes had their intended effects which affected market sentiment the day the report was released. Some analysts think that inflation peaked but only time will tell. It’s too early to call a bottom in markets.

My best advice is to remain cautious as the market remains volatile. If you don’t believe this to be true, scroll to the top of this post or read my last post to see what could happen if you aren’t as cautious as you should be.

This past week’s cash flow management in review:

This past week went okay, I did a little better than the previous week managing my expenses. As I continue to build up my savings account, I feel comfortable increasing the amount of money I can allot to pay off my credit accounts. Now that the student loan debt relief plan is in doubt, my student loan payments are coming due again and most likely I’ll have to pay off the full amount.

Grade: C+

Reason: Some improvement

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