Trade The Journey

Trade The Journey

More challenging than I thought…

Top of the Morning! What an interesting week, being that the Fed finally acknowledged that inflation is a serious problem and presents a challenge to the economy’s ongoing recovery. For some time, Chairman Powell maintained his stance on inflation as a transitory occurrence resulting from the Pandemic.

Inflation is hitting most countries hard, and central banks are left with the challenge of navigating through maintaining recovery while not letting their economies overheat.

The Bank of England unexpectedly hiked their interest rate while the Fed accelerated its tapering to $30 billion from $15 billion per month. The Fed also signaled three rate hikes beginning early next year when the tapering completes.

Markets reacted accordingly-nearly all of the indices ended the week on a downtrend. The Nasdaq and the Dow Jones dropped below their 50 simple moving averages. The Nasdaq responded the most negatively to the proposed increase in rates being that the index is home to mostly growth stocks. The Russell 2000 remained below its 200 sma, and the S&P 500 retreated a bit but remained close to its all-time high.

Yields fell across the board with the ten-year yields gapping down to end the week. On the ten-year yield chart, the 20 also crossed the 200 sma. The five-year yield fell below its 50 sma, and the thirty-year yield has been in a downtrend since its gap down in late October.

As the market seeks to move out of risky assets, there has been a shift toward safety and value these last couple of weeks.

Crypto still hasn’t recovered, and most coins remain bearish. Bitcoin has remained below the fifty-thousand level, although it hovered around the level for the last two weeks.

Although less severe than the Delta, the Omicron variant is five times as transmissible. As people gather for the holidays, we are seeing an increase in infections prompting some states to reinstate safeguards like mask mandates and reinforcing the message of receiving the vaccination. Moderna and Pfizer have been promoted as the vaccines that can fight the new variant.

Johnson & Johnson vaccine took a hit to its credibility, with medical professionals questioning its safety and effectiveness against new variants.

Input prices for producers continued to rise, evidenced by the latest Producer Price Index release. Reports indicate that while jobs are being created and available faster, there is a continued challenge to find and retain skilled staff.

Although declining in the midwest, housing starts and permits rose across the states. Mortgage applications fell for the week. Automobiles and housing are critical indicators for the economy.

Retail sales weren’t as high as expected d due to most of the holiday shopping being completed ahead of time.


Technical Story:

Nasdaq

The short-term direction is downward. 15848.87 is a short-term resistance level that could halt the upward progress of the Nasdaq towards its All-time high. Look at the size of the bars on the down days on the zoomed-in chart below-almost a similar pattern reaction to the test of the 15378.12 reference level. The first test for the Nasdaq will be breaking through the 50 sma.

Dow Jones

The dow drifted below its 50 sma and is retreating towards the 35,517 reference level. 36,179.01 level was tested, and then the week ended with a sell-off which is shown on the zoomed-in chart. The 50 sma will serve as a test.

S&P 500

The S&P stayed close to its All-time high, drifting towards the 50 sma, using it as a dynamic support. On Thursday, the S&P tried to top its All-time High but sold off instead. The S&P could make another run towards its ATH this coming week.

Russell 2000

The Russell fell below its 50 and 200 sma; the Russell looks weak. 2139.13 is starting to look like it will be a resistance level in the near-term future. The Russell tested the 200 and failed, it has steadily sold off after reaching its ATH in November.

Some say that growth has peaked as well as inflation. I don’t know if I agree with that sentiment, but I think that it could be possible. The coming months should be interesting as the Fed winds down its emergency accommodative policies.

It looks like markets will remain volatile for the foreseeable future. The “Buying the Dip” strategy seems to be fading, but only time will tell.


More challenging than I thought…

What are your thoughts about options?

There are plenty of stories of people making large amounts of money by purchasing out-of-the-money calls on Gamestop. Out-of-the-money options are inexpensive and offer dreams of possible retirement by selecting the right option.

I tried my hand at buying out-of-the-money calls and puts, but I haven’t been successful so far. Unfortunately or fortunately, it has been a long grind of profiting a little and losing a little.

I’m still learning the nuances of options trading, which is more challenging than initially imagined. Earlier this week, I came across a tweet from a person asking why their positions were losing so much.

Two of his positions were out-of-the-money calls that were losing big, and he could not figure out why. Both of his calls had a price of five cents and were options on two relatively unknown pharmaceutical companies. I wanted to respond to his tweet, but I decided not to.

There’s so much involved in options trading that the details may overwhelm a beginning trader. It seems intuitive to open an option position with a cost below ten cents because you’re risking so little to make a lot.

However, options move strangely and don’t always move according to the greeks. With out-of-the-money options, it usually takes a large gamma and vega for the option to make any movement towards being in the money.

When the option reaches expiration, it either ends with a delta of one or zero. A significant move is needed for an out-of-the-money option to go in the money, whether in price or volatility. Although we’d like to believe that a stock is capable of significant moves consistently, more often than not, stocks make more of a zig-zag movement sideways.

Buying a call or put outright is a firm statement on the forecasted movement of the stock whether bullish or bearish. Sure, paying five cents isn’t a lot but what about the psychological toll losing positions take on you after a while.

Most professionals place spreads unless they have a good reason for buying a call or put by itself.  One book I’d recommend is Bloomberg’s book called a “Visual Guide to Options” by Jared A. Levy.

He goes through each options strategy in detail, indicating when to use the strategy, what to look for, and so on.

Options are complicated financial instruments that have a steep learning curve. However, investing your time to truly learn about options is well worth it.


This past week:

I can say that this past week was good regarding my cash-flow management. I was able to save a bit more than usual while paying down my credit card accounts. It turns out that my insurance won’t cover my dental procedure, so now I will be forced to pay the total amount for my root canal.

I was a little surprised but not too much because I expect surprise expenses to occur more often than not.

Grade: C+

Reason: Continued Improvement plus an increase in savings.

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