Trade The Journey

Trade The Journey

Not much to the Market!

Top of the Morning! I trust this Sunday finds you in good spirits as we usher in the Veteran’s Holiday weekend. A special acknowledgment to my cousin for his service in Iraq—his commitment is truly appreciated.

While the past week didn’t unfold with significant economic revelations, the upcoming week promises a different narrative, featuring potential market catalysts. Here’s the scheduled lineup:

  1. Tuesday: Keep a keen eye on the Consumer Price Index (CPI) report, a pivotal metric for assessing inflation.
  2. Wednesday: The stage is set for Retail Sales, the Producer Price Index (PPI), Business Inventories, and insights into Empire State Manufacturing.
  3. Thursday: Initial Claims, Import/Export Prices, and a closer look at Industrial Production & Capacity Utilization.
  4. Friday: Wrap up the week by closely monitoring Housing Starts and Building Permits for vital real estate market insights.

As we navigate the earnings season, the retail sector emerges as the focal point. Earnings reports from major players such as Target, TJ-Maxx, and Ross Stores carry significant weight, offering crucial indicators of the consumer’s financial health. Despite the headwinds of tightening rates, consumer spending has exhibited commendable resilience.

Turning our attention to the Federal Reserve’s discourse:

Governor Bowman: The specter of inflation continues to loom large, prompting her advocacy for a pause in the November meeting. However, she anticipates that a fed funds rate increase will be imperative to bring inflation back in line with the 2% target. Bowman cautions against the volatility inherent in longer maturity bond yields and underscores the Fed’s commitment to a data-dependent approach. She also raises concerns about the potential impact of higher energy prices on the Fed’s battle against inflation.

Chairman Powell: Amidst interruptions from climate change protesters, Powell grapples with the multifaceted challenge of inflation. He underscores the ongoing struggle to re-establish inflation at the 2% target and emphasizes the Federal Reserve’s nuanced, meeting-by-meeting approach to decisions on future rate hikes.

Powell poses three pivotal questions, addressing the post-pandemic equilibrium for interest rates, the efficacy of the “Looking through” approach, and a retrospective examination of the initial causes and ongoing policy implications of current inflation. Notably, Powell’s insights inject a dose of reality into the market’s recent exuberance, leading to a tempered outlook as the week concludes.

Governor Cook: Delving into the realm of Financial Stability, Cook highlights a significant set of vulnerabilities stemming from valuation pressures. The willingness of investors to embrace risk, when disconnected from economic fundamentals, raises the specter of substantial price drops with potential destabilizing effects. While business debt reaches historically high levels relative to GDP, household debt maintains a relatively modest stance.

Cook also extends her commentary to China, emphasizing the risks a prolonged economic slowdown poses to emerging markets. She points to challenges faced by local governments in China, including financial stress, disruptions to economic activity, a deterioration of risk sentiment, and a sharp appreciation of the dollar.

Economic Data:

Trade Balance – September: The trade deficit surged by 4.9%, propelled by a simultaneous uptick in exports and imports. Key sectors driving the export growth include industrial supplies & materials, foods, feeds & beverages, and other goods. On the import front, consumer goods, capital goods, and industrial supplies & materials experienced notable increases. The expansion in both import and export of services further underscores the robustness of trade activities. 

Consumer Credit – September: A 2.2% rise in the total percent change in consumer credit reveals a nuanced consumer landscape. While revolving credit witnessed a significant decline from the previous month’s level of 13.7% to 2.9%, nonrevolving credit grew by 1.9%. The fall in the total flow for both types of credit, coupled with a slight increase in total outstanding credit, signals a shift in consumer behavior, particularly a pullback in credit card usage. 

MBA Weekly Index: Mortgage applications volume registered a 2.5% increase from the preceding week, with the refinance index and purchase index rising by 2% and 3%, respectively. The decline in average rates for both thirty-year fixed conforming and jumbo loans by twenty-five and twenty-two basis points indicates a favorable environment for mortgage-related activities. 

Initial Claims: Initial claims slightly below the forecast at 217,000 suggest a resilient labor market. However, a 22,000 rise in continuing claims to 1.834 million and a 1,500 increase in the four-week moving average for initial claims to 212,250 warrant careful monitoring. 

Univ. of Michigan Consumer Sentiment – Prelim (November): The consumer sentiment index slipping to 60.4, accompanied by declines in the current economic conditions index (down 4.9 points to 65.7) and the index of consumer expectations (down 2.4 points to 56.9), signals a cautious consumer outlook. Rising inflation expectations for the year ahead and five-year periods could impact discretionary spending. 

Yields: Yields staged a robust rebound from the preceding week, culminating in a week-ending surge to their daily peaks in the core of the curve. Following a dip two weeks ago, which saw the two-year yield closing at a low of 4.82%, it has now catapulted above 5%, hitting a multi-year pinnacle at 5.18%.

The ten-year yield, highly indicative of market sentiment, is on the cusp of breaching a formidable resistance level at 4.637%, having rebounded from a low of 4.487%. Akin to its counterpart, the five-year yield, it displays a comparable trajectory, ascending from 4.432% to confront resistance at 4.652% and closing slightly beyond at 4.66%. Meanwhile, the thirty-year yield hovers marginally above its 50-day Simple Moving Average (SMA), concluding the week at 4.73%.

Despite the upward momentum, signs of a weakening trend are becoming discernible. As an option trader, these yield dynamics suggest potential volatility in interest-rate-sensitive sectors, warranting strategic option positions aligning with forecasted rate movements.

Gold: The glittering commodity found support at the 50-day SMA, experiencing a retreat from the $2,000 pinnacle. This retracement in gold’s value is a noteworthy development for option traders. The yellow metal’s movements often reflect shifts in market sentiment, acting as a hedge against economic uncertainties. Professional option traders might explore strategies that capitalize on potential swings in gold prices, considering the interplay of macroeconomic factors.

Dollar: The greenback encountered a pullback during the week but demonstrated resilience, currently positioned at $105.81, aligning closely with its 50-day SMA. The dollar’s recovery has implications for various asset classes, influencing global trade dynamics. Option traders may formulate strategies considering the dollar’s pivotal role in currency markets and its ripple effects on commodities and equities.

Crude Oil: With crude oil edging close to the short-term resistance level of $77, option traders keenly observe this critical juncture. The energy market’s sensitivity to geopolitical events and supply-demand dynamics makes oil a prime candidate for options plays. Strategizing around potential breakthroughs or pullbacks could prove fruitful in this dynamic environment.

Bitcoin: Bitcoin maintains a steadfast position near its $35,000 high, displaying a momentary pause in directional movement. Option traders, attuned to the cryptocurrency’s volatility, might anticipate significant price swings and position themselves accordingly, considering factors such as market sentiment, regulatory developments, and broader economic trends.

Technical Story:

This past week’s cash flow management in review:

Reflecting on the cash flow of the past week, I find myself grappling with a significant challenge in the realm of credit. The recent uptick in interest rates has translated into higher credit card payments, posing a hurdle in managing my financial affairs. The bulk of my credit card usage appears to stem from discretionary and  imprudent spending.

I am earnestly contemplating the prospect of liquidating a portion of my investment accounts. The objective is to strategically reduce my overall credit card balance, making it more manageable and aligning it with my financial goals.

Grade: D-

Reason: Overuse of Credit

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