Trade The Journey

Trade The Journey

Insight 11-4

Top of the Morning! I hope all is well. My trade for this week was a bullish options position on Intel which I found using the thinkorswim scan. My real reason for placing the trade was playing the Fed rate decision to the upside. I fell into the trap of anticipating a Fed that would possibly be pivoting soon or at the very least moderating its aggressive tone. I spent the day monitoring the news, awaiting the announcement, and at 11:00 am the Fed made its announcement of a seventy-five-basis point increase.

The rate increase of seventy-five basis points was expected, however, the market was awaiting the Fed’s remarks to find a hint of what the Fed has planned in terms of rates. The Fed’s prepared statement gave the indication of some easing soon and the market rallied. Apparently, this isn’t the action that Fed chairman Powell wanted to see and during his press conference, he threw cold water on the market’s enthusiasm by stating that the Fed isn’t easing anytime soon.

In fact, he stated that terminal rates will likely be higher than the market is anticipating. The market reacted by selling off. It recovered some of the losses towards the end of the week but the damage was done. The intel call position I had placed was losing money up until the rate decision which I had expected but turned into a winning position as the market deciphered the Fed’s statement. Eager to let my profits add up, I set a limit position far above the options price, hoping to finally reach my set goal.

I went back to what I was doing and listened closely to the Fed’s press conference, and it wasn’t going well. When I checked my position, I watched it slowly turn into a losing position and when the press conference position ended, the option lost 50% of its value. All of my market discipline evaporated, and I found myself unable to close the position.

I kept thinking that if I just held the position a little longer, I could recoup some of the option’s value, but it never happened. The next thing I knew, the option lost 60% of its value and soon it ballooned to 90% of its value.

I sold the option for little to nothing. I blamed the Powell press conference for my losing position. Unfortunately, I had to accept that a bounce back after a sell-off doesn’t always happen. There’s no rule or law that states that when a stock falls a certain amount it’s bound to bounce back.

Lesson: Don’t fight the Fed.

Economy

The ISM report showed that manufacturing rose for the 29th consecutive month, coming in at 50.2%. The new orders index remains in contraction, below the 50% level, but higher than the September level. The prices index fell 5.1%, while the production index rose 1.7%. The backlog of orders indexes also fell below the 50%, coming in at 45.3%. The supplier delivery index showed an improvement, falling to 46.8%. The inventories index also fell for September. Lead times remain high, although easing new orders and a backlog of orders are improving.

The employment index was nearly unchanged, as issues remain, employers, look to moderate the rate of hiring. As the supply chain challenges ease,  employers will be able to better control the wages and hours offered.

 

Machinery, Petroleum & Coal Products, and Transportation equipment registered moderate to strong growth.

Respondents’ remarks:

Global uncertainty, slowing housing market, supply chain pressure are easing, and flat business activity.

The ISM services index rose for the 29th month in a row, rising to 54.4%, although 2.3% lower than September’s reading. Business activity and new orders both fell in October. Supplier deliveries rose 2.3% from the previous month, indicating the slower pace of deliveries. The price index rose 2% in September. Inventories and inventory sentiment both fell in October. Employment activity fell by 3.9% in October. The backlog of Orders fell by 0.3% for the month of October.

Respondents Remarks:

Customers are pulling back and delaying projects. Some supply chain challenges still exist in some industries. Wholesale indicated an oversupply of some goods. Concerns of a recession remain.

The factory order report showed that new orders increased slightly. New orders for manufactured durable goods in September rose by 0.4% led by an increase in orders for transportation equipment. Nondurable goods new orders for manufactured goods rose 0.2%. Shipments for durable goods rose  0.2% led by transportation equipment (Light trucks and utility vehicles & heavy duty trucks), and nondurable goods shipments also rose by 0.2% led by petroleum and coal products and also chemical products (pesticides, fertilizers, and other agricultural chemicals).

Unfilled orders for manufactured durable goods rose by 0.5% led by transportation equipment. Inventories of manufactured durable goods rose 0.2% led by machinery while inventories for nondurable goods were unchanged. Shipments of capital goods fell for September and rose slightly in capital goods new orders and unfilled orders.

Job openings increased slightly much to the market’s dismay. The increase in job openings can be attributed to the following industries: accommodation and food services, health care and social assistance and transportation, warehousing, and utilities. Hires, separations, and quits were little changed for the month of September.

Initial claims decreased slightly while the continuing claims increased slightly. The job market is showing resilience in the face of the FED’S attempt to slow down the economy. As the population ages and leaves the workforce, the search for skilled workers will continue. Initial claims have yet to be at the level the Fed is seeking to begin to ease on the size of its rate hikes.

The employment situation report also was released this week. Employment increased by 260,000 jobs and the unemployment rate rose by 3.7%. Permanent job losers and the long-term unemployed remain unchanged. The labor-force participation rate was unchanged at 62.2%. If the participation rate were to rise perhaps that could help ease the ongoing rise in wages and help loosen the tight job market. The largest job gains were in healthcare, professional and technical services, and manufacturing.

The average workweek remained at 34.5 hours and average hourly earnings rose by 0.4% or 12 cents. The total rise in average hourly earnings in the last twelve months is 4.7%, much lower than the rise in inflation.

Total Construction spending increased slightly for September. Private and public construction spending increased at the same rate of 0.4%. Residential construction was unchanged in private and public construction spending. Commercial spending for both public and private construction fell slightly.

Mortgage applications fell 0.5% this past week. The refinance index rose 0.2%, while the purchase index fell 2%. Adjustable rate mortgages fell 11.8% in its share of total applications. Conforming 30-year fixed mortgage rates fell from 7.16% to 7.06%. Jumbo loan 30-year fixed-rate mortgages rose 0.2% from the previous week and now stands at 6.53%.

The economy is evidently slowing judging by the recent economic reports but not enough for the Fed to pivot. The Fed is worried about inflation becoming entrenched and pivoting too early could result in a repeat of the 70s-80s. However, with the outcome of the rate hikes and monetary tightening unknown, a recession and its severity is also unknown.

Some are saying that we have reached peaked inflation but I’m not sure if the Fed agrees with this statement. This situation closely mirrors the challenge I face in moderating my blood sugar with insulin. Sometimes my blood sugar rises to high levels and in order to bring it down, I have to give myself an extra dose of insulin. Most of the time there is a lag, as insulin takes time to bring down my blood sugar, so I often end up giving myself too much insulin.

Usually, my sugar remains high and then it sinks as the cumulative effect of too much insulin brings down blood sugar quickly. I fear that the Fed will overplay its hand in its effort to kill inflation but only time will tell.

This past week’s cash-flow management in review:

This past week didn’t go as planned, I spent too much. Although I was able to save some of the money I received from my paycheck, I ended up having to transfer it back to my checking account to cover expenses. This coming week, I hope to do a little better. Perhaps setting a weekly spending limit might help.

Grade: D+

Reason: Overspending.

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