Trade The Journey

Trade The Journey

Fed remains Hawkish

Top of the Morning! The main concern of the market this week was the Fed’s remarks about rate hikes at the Jackson Hole Symposium. Everyone wanted to know the Fed’s thoughts on how they would adjust to much stickier inflation. The rally in early June, saw each of the indices and sectors rally, convincing market participants that maybe the worst was over.

There’s little disagreement that the rate hikes are having their intended effect, slowing down consumer purchases and the overall economy. The last meeting in July saw a rate hike increase of seventy-five basis points. Participants were hopeful that the next rate hike would be closer to fifty basis points.

Being that the meeting was scheduled for the end of the week, I saw it fit to place a bearish put trade as the market remained in limbo. The last few years I spent studying charts and placing trendlines have helped me in finding good trades. Most of the charts still have the trend lines, and resistance/support lines I drew as practice.

Most of the reference levels have held thus far. I identified Verizon (VZ) as a stock suited for an outright bearish put trade. Verizon had been downgraded by analysts and its chart activity has been weak for the last few weeks. $43.76 was a major support line, supported by months of chart action. I had a good feeling about Verizon at least testing the support line.

If I’m placing an outright put or call trade, I try to buy an option that’s slightly in-the-money. The delta of the put option was slightly over fifty and the gamma was extremely high. The theta was around eight cents and the vega was low.

Here’s a chart of the daily and weekly charts:

Usually, when I put an options trade on, especially an outright call or put, I plan to be in the trade for a short amount of time. I prefer weekly options, so I typically have a few days to be right about the speed and the direction of the stock. For weekly options, it’s more about the chart action than the greeks for me.

Luckily, Verizon broke through the $43.76 reference level and was unable to return above this level. I closed the trade with close to the maximum profit.

Chairman Powell reiterated his view on inflation being the Fed’s biggest challenge. With unemployment near record lows and consumers still spending, Chairman Powell reiterated his stance on rate hikes continuing into the foreseeable future. Europe isn’t too far behind as they continue to battle sky-high inflation due mostly to high energy prices.

Economy

New home sales continue to trend down, at a rate of -12.6%. New home sales have fallen 30% from last year. The average sales price was $546,800. New home sales for sale at the end of the period increased slightly price range from $300,000 to $399,000 fell for July as did the $500,00 to $749,000. $400,000 to $499,999 remained about the same while the $750,000 and over range increased slightly.

Homes completed and under construction fell to their lower’s levels in a year. Homes not started but sold increased for July although much lower than the previous year.¬† New homes for sale at the end of the period in total increased which includes homes not started under construction and completed all increased.

Durable goods new orders were virtually unchanged for July. Excluding transportation, new orders increased 0.3%, and excluding defense orders, new orders rose 1.2%. Shipments rose 0.4 in July attributed mostly to transportation equipment although new orders declined. Unfiled orders rose 0.7% led by transportation equipment. Inventories increased by 0.2% led by machinery. Capital goods non-defense goods (Business inventories) new orders rose 2.8%. Shipments also rose. Most industries remained about the same in new orders and shipments.

The PCE report displayed personal income and disposable income that rose 0.2% in July. Personal consumption expenditures rose 0.11%. Excluding food, the PCE decreased by 0.1%. Spending on services was the lead contributor to expenditures as consumers shifted away from goods. Housing, food, and utilities represent the main expenditures, followed by travel. Energy goods lead a decrease in spending on goods.

The second estimate of GDP showed that growth didn’t contract as much as originally thought, rising 0.3%. The total for the second quarter based on the second estimate showed a contraction of 0.6% instead 0.9%. Spending on gods increased to the upside, 2.4% instead of the 4.1% decrease.

The decreases in investment and government spending were partly offset by exports and consumer spending. The private inventory investment decrease was led by “Other” general merchandise stores. ¬†Exports were led by supplies and materials, while the increase in services spending was led by travel. Consumers increased their spending on food, services and accommodations. The price index for domestic purchases rose 8.4% in the second quarter.

The University of Michigan’s report on consumer confidence showed an improvement in consumer sentiment. Next year’s inflation expectations fell from 5.2% to 4.8%. While the next five years expected inflation rate remained the same from last month at 2.9%. Personal financial expectations increased for July. Overall sentiment improved, rising from its lowest levels since the 2008-2009 levels.

Initial claims fell from the previous week as did the continuing claims. The four-week moving average increased slightly indicating a resilient labor market.

The MBA weekly report showed that mortgage applications fell close to 10% from the previous week. The refinance index fell close to 9% and the purchase index fell 8%. Adjustable-rate mortgages share of applications rose from the previous week.

30-year fixed-rate conforming loan rates rose to 5.37% from 5.20%.

30-year jumbo loan rate rose to 4.89% from 4.76%.

Next week’s market action should be interesting as the Market adjusts to the Fed’s continuing hawkish tone. The only way to slow down inflation is for the FED to hike rates into a recession. Of course, the Fed can’t say a recession is imminent, but the signs are there.¬† For now, I think the rally may stall as the market gathers its bearings.


This past week in review:

Overall, the week went well. Although my income hasn’t risen as much as I would have liked, I’m doing the best that I can. With my new job, I thought I’d be able to splurge and buy some of the things I always wanted. This hasn’t been the case, in fact, I’ve had to clamp down further on my spending because I’m making less than in my previous job.

Sometimes, I wake up at night and mull over the decision I made to accept a job that pays less than my previous job and feel bad. However, with the experience I have and the experience gained in this new job, my next salary will be the amount I hoping for.

Grade: C

Reason: Continued diligence

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