Trade The Journey

Trade The Journey

Neutral Market Action

Top of the Morning! I hope everyone is enjoying their weekend. Not much in terms of economic data was released this past week.  The only report that could affect market sentiment was the non-manufacturing ism report and it was relatively positive. Apart from the Dow Jones, the other indices moved above their 50 SMA in recovery to end the week.

Some analysts are still optimistic about full recovery in the market and others are saying the last rally was a bear market rally. In my opinion, this market still has more downside action ahead. While the economic growth picture is steadily slowing, the labor market remains tight. Last week’s employment situation report showed that quits are relatively unchanged from the previous month, meaning people are remaining at their jobs.

Emerging out of the pandemic created a situation where employers were scrambling to fill positions to help catch up with demand. People were excited to be out of the house and back to their normal routines which created a demand-supply imbalance. As demand and supply comes into balance, employers in most industries are now in the process of recovery. This balance also helps to create a steading of prices which ultimately improves the inflation picture.

Some companies overstocked their inventories in preparation for continuing demand but as consumers shifted their spending preferences, these companies have now had to discount their inventory to move it. The only certainty we can rely on is that the business cycle is in a constant state of change. Demand overwhelms supply, then supply catches up with demand, and finally, supply overwhelms demand, and the process repeats.

This process creates economic booms and recessions as the economy balances out. The market anticipates these changes in advance because it is a forward-looking mechanism. Great investors can see ahead and anticipate changes in the market before the average investor notices. In a downturn, companies sell below their intrinsic value and these investors scoop up these deals in preparation for the next upturn.

It sounds easy to do but it’s quite difficult to implement due to the sentiment prevailing among the public of bearishness and economic weakness. As the Fed continues to tighten, the risk of a hard landing grows as capital becomes more expensive. Companies are issuing bonds in preparation for higher rates and more expensive capital.

There’s no better indicator than the market because participants’ capital flows are indications of where they foresee the economy and markets going. Capital flows should be tracked if your serious investor or trader.

Before I place an options trade, I always look at where the highest open interest is on the options chain and the options time & sales to get an idea of what traders are forecasting. Last week, I placed a trade on Citigroup, and I noticed that the Financial ETF had little to no sellers of puts on the options chain. Seeing this let me know that there was a high probability that the Financial ETF would see downside action as would Citigroup.

So far, I’ve done quite well placing outright put and call positions. I’d say the most difficult aspect of trading to date is knowing that anything can happen while you’re in the trade. I handle this stress by knowing how much I plan to lose because the profits take care of themselves.

Trader tip:

Seeing where the capital is flowing should be something that a trader accounts for before opening a position.


Economic

The nonmanufacturing index showed its 27th month of consecutive growth. Supplier deliveries slowed while new orders and business activity increased. Prices continued to trend lower while inventories contracted due to continuing supply chain challenges and increasing material costs. Some of the challenges respondents listed were material shortages, longer lead times, and finding skilled labor.

Some of the improvements listed were decreasing cost pressures and improvement in labor retention. Fuel, diesel, and gas were key commodities down in price. Overall, the report showed an improvement in activity and recovery from June’s slight contraction. Below is a more detailed picture of the nonmanufacturing index.

The beige book echoed the same sentiments held by most analysts. Consumers continue to shift spending from goods to services. Residential loan demand continues to fall amid higher rates and home prices. Auto sales fell due to higher prices, as auto manufacturers still are limited in their available inventory. Commercial real estate demand for new office spaces softened reflecting the continuing change of work environments.

The labor market remains tight although there are still some challenges. Wages continue to increase and companies are still offering wage increases to match the uptick in inflation. Price increases were reported in food rent, utilities, and hospitality services. Input costs also remain high for manufacturing and construction.

In the consumer credit report, credit held among consumers continues to increase. Consumer credit increased at an annual rate of 6.2%.

Wholesale inventory rose 0.6% for the month of July. Sales fell 1.4% and total inventories of merchant wholesales rose 0.6%. The inventory-to-sales ratio for July was 1.19. This number indicates that merchants have enough inventory on hand to cover a little over a month of sales. Durable goods sales rose slightly while nondurable goods sales fell for July. Inventory improved for durable goods and nondurable goods were relatively unchanged.

The inventory-to-sales ratio for durable goods fell from June and remained unchanged for non-durable goods.

Initial claims fell this previous week while continuing claims increased indicating that the job market is still strong despite the Fed’s hope that it would weaken amid rising rates.

Mortgage applications fell a little over 8%. The refinance and purchase application index both fell from the previous week. Purchase applications fell across all loan types. Adjustable rate mortgages continue to increase in their share of mortgage applications. Conforming and jumbo loan rates both increased.

Most of the options I’ve placed in the last several weeks have been bearish with the exception of a call placed on Ford. I’m bearish on the market for the foreseeable future as I think we are headed for a recession at some point. The severity of a potential recession is anyone’s guess.


 

Weekly Options Trade (s)

Both options positions had two weeks until expiration.

T: AT&T – Bearish put option at $17.5 strike

F: Ford – Bullish Call option at $15 strike


This past week:

This past week went well and it looks like I’ll have a little money left from my paycheck to add to my savings account. I am optimistic about the weeks ahead as I continue to curtail my spending. My new goal is to save forty percent of my income.

Grade: C+

Reason: Continued improvement

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