Trade The Journey

Trade The Journey

Rates higher for longer!

Top of the Morning! I’d thought I’d open this post with some helpful trading hints from TD Ameritrades’ blog: Walmart, Target, Home Depot, and Lowes are the four highest-volume publicly traded importers of goods via ocean container ships. What is the Neutral interest rate? The neutral rate is the rate that neither stimulates nor restricts the economy

Last week’s trade was a bit of a rollercoaster. Due to the Jackson Hole speech, volatility rose as the markets awaited Chairman’s Powell speech at the symposium. More details on the speech are given below. The markets had been selling off due to several reasons, one being higher yields and perhaps signals that the Bull run was loosing steam. None the less, I decided to place a bull vertical call spread on DIA, which the DOW Jones SPR etf.

The trade fell close to 20% a few hours after I placed the trade, however believing that the indices were oversold, I decided to keep the trade on. Last week was the first time I opened an option position with a two-week expiration and its nice having a little more time for the trade to work. Although the option position was down significantly at the beginning of the week, I recovered most of the premium on Friday as Powell’s speech didn’t have any surprises that could spook the market.

Let’s look at the chart and short-term reference levels for DIA:

In order to find the prices where DIA saw the most conviction or volume, I had to look at the Monkey bar chart. The monkey bar chart is a version of the time-price-opportunity chart shown below.

The picture of the EUR/USD chart shows where price and volume were most favored on 11/15 which 1.3620. These charts will not help you predict the future but might assist you in discovering where the depth is in the asset you’re trading. I use these charts periodically to develop entries and exits and to discover where the liquidity might be in the market.

Let’s look at a chart of DIA again but this time I included the prices where volume was the highest. $341.96, $342.22, $343.33, and $344.42

Economy

The Housing Market

Existing Home Sales: July

Existing home sales fell 2.2%. Year-over-year sales have declined 16.6%, as existing homes on the market remains low due to higher rates and home prices. The inventory of unsold existing homes rose 3.7% from the June levels, equating to a 3.3-month supply at the current monthly sales price. Properties remained on the market for an average of twenty days, up six days from the previous year.

The median existing homes sales price rose 1.9% from a year ago to $406,700. First-time buyers increased by 3% to 30% of the sales. Single-family homes sales fell 1.9% from the previous month’s level and are down 16.3% over the past year. 74% of the homes sold this past month were on the market for less than a month. Today while I signed up for a new auto insurance policy, the agency spoke briefly about the housing market.

His efforts to move from renting to owning was thwarted by someone who bid $100,000 more than he was offering and made their down payment in all cash. With fewer people willing to sale their homes, he must now wait for newly constructed homes to come on the market at a lower price. He may be waiting for some time.

New Home Sales: July

New single-family homes rose 4.4%. The median sales price for new homes was $436,700 and the average sales price was $513,000. At the current sales rate, there is a supply of 7.3 months. New home sales for the $200,000 to $299,999 remained at June’s levels. The $300,000 to $399,999 fell slightly, while the $400,000 to $499,999 and the $500,000 to $599,999 rose slightly.

For new homes sold during the period, homes “not started” fell to its lowest level this year. Homes completed fell slightly, while homes under construction rose to its highest level this year. For new homes for sale at the end of the period, homes not started rose to its highest level this year as did homes that were completed. Homes under construction fell to their lowest level this year.

MBA Weekly Index

Mortgage applications fell 4.2% from the previous week. The refinance index and the purchase index both fell, 3% and 5% respectively. The average rate for a 30-year fixed conforming loan rose 0.15% to 7.31%. The average rate for a 30-year fixed jumbo loan rose 0.16% to 7.27%.

Manufacturing

Durable Goods Report: July

After four consecutive months of rising new orders, new orders for manufactured durable goods fell sharply. New orders fell 5.2%, with transportation contributing most to the decline. Excluding transportation, new orders rose 0.5%. Shipments were unchanged from the previous month. Unfilled orders rose 0.5% and inventories were unchanged. Capital goods new orders fell 15.6% indicating that companies possibly halted investment in machinery and equipment after the previous month’s sharp rise. Shipments fell 1.1%, and unfilled orders rose 1%. Inventories fell 0.1%.

Machinery new orders rose 1.2%, slowing from the previous month’s decline of 0.6%. Computers and related products’ new orders fell 2.2% after slowing a slight increase in May. Computers and electronic products fell 0.1% after rising sharply in May. Communication equipment new orders rose 1.2% following the previous months’ sharp rise of 3.4%. Transportation equipment new orders fell sharply, shipments also declined.

For unfilled orders, most industries remained around the same level except for computers and related products, which fell sharply.

Initial Claims

Initial claims fell by 10,000 to 230,000, which were below forecasts. Continuing claims also fell in the past week, declining by 9,000 to 1.702 million. The four-week moving average increased by 2,000 to 237,000 indicating that the labor market remains tight.

The Jackson Hole Economic Symposium

Chairman Powell opened by restating that the Fed’s goal is to bring down inflation to 2% and that they are prepared to raise rates and keep them higher for longer to ensure that inflation as been quelled. The outlook remains data dependent.

According to Powell a couple months of declining core PCE inflation isn’t enough to convince the Fed to reverse its policy stance. Instead, underlying inflation declining over coming quarters would be a more welcoming sign that inflation is abating. Three drivers will likely determine the decision ahead, inflation for goods, housing services and non-housing services.

Housing services encompasses rents paid by all tenants and estimates of equivalent rents that could be earned from homes that are owner occupied. Core goods prices continued to fall but remained above pre-pandemic levels. Non-housing services which cover industries like healthcare, food services, transportation and accommodations have modestly declined due to it being less interest sensitive and labor maker intensive.

The labor market remains tight, however participation among workers aged 25-54 and immigrants has picked up. There are signs that the labor market is reaching a demand-supply balance. The chairman noted that nominal wage growth much slow to a rate that is consistent with 2% inflation as real wage growth continues to increase.

There is a feeling of uncertainty as to what the lagging effects of tighter policy and credit conditions will mean for the economy moving forward. The Fed is stuck between the risk of doing too much or too little and time will tell if the Fed is able to achieve a soft landing. Overall, Fed chair Powell reiterated the message that the fight against inflation still has a way to go. The overall tone of the speech seemed to be continuing cautiousness and vigilance in returning inflation to its 2% rate.

Earnings

Dollar Tree

Dollar Tree beat on both earnings and revenue forecasts as consumers spent mostly on food and necessities. Same stores rose 6.9% across the company, with Dollar Tree rising 7.8% and Family Dollar rising 5.8% year-over-year. They still plan on raising their price points and expanding to items that are frozen or refrigerated. The price point for these goods will be $3, $4, and $5.

Dollar Tree noted that margins are under pressure with the increase in wages, investments, and higher utility bills. Selling, general and administrative expenses made up 25.3% of the total revenue. As with other retailers, Dollar Tree is also facing the risks of theft, lowering its margins. Shopping traffic rose sharply but the average amount spent by customers declined by 1.6%, as customers elected to focus on essentials which aren’t boosting margins.

Family dollar saw shopping traffic rise by 3% and the average amount spent by customers increase by 2%. They also reached a settlement with US regulators over workplace safety violations. Dollar Tree opened 118 stores. Free cash flow improved by $40.5 million, year-over-year.

Nivdia

Nivdia beat forecasts impressively on earnings and revenue as it proves that AI and computing generative technologies are growing part of the future. They expect third-quarter revenue and sales to rise sharply. Its A100 and H100 AI chips are needed to run AI applications. Revenue doubled year-over-year and rose 101% from the past quarter.

Its data center business is up 171% year-over-year. Its gaming division’s revenue is up 11% and professional visualization revenue is up 28% from the past quarter. Its automotive division declined 15% from the previous quarter. Nivdia has managed to increase its income while only increasing its operating expenses by 6%.

Its shares hit an all-time high of $502.66 after its earnings release before declining 8.45% at Friday’s close. Some market participants noted that the lack of bullishness in the market following Nivdia’s earning release may signal that the bull run has come to an end.

Dick’s Sporting Goods

Dick’s sporting Goods missed sharply on earnings forecasts and missed on revenue. Dick’s saw a 23% fall in profits and slashed guidance in its earning guidance. Dick’s voiced concern about the rise in retail theft and is attempting to clear out its build up in inventory. Sales rose slightly from the previous year. Retail theft had a big effect on Q2 earnings results.

Inventories were down about 5%. Same-store sales rose 1.8% but are down year-over-year. There was a 2.8% uptick in transactions, slightly higher than the 2.7 forecast. They also cut 1% of their global workforce, which mostly took place at the higher levels. Dick’s also opened seven new house of sports locations.

Technical Story:

Nasdaq

Dow Jones

S&P 500

Russell 2000

VIX

This past week’s cash flow review:

This past week, I was hit hard by expenses surrounding my car which including fixing the breaks and finding a new auto insurance policy. The total amount was well over $1500 and basically depleted my savings and checking account. Not a good start but I can’t imagine these types of expenses occurring every month.

In the coming weeks, I’ll be sharing my budget which I believe is in bad need of a readjustment. Unfortunately, I didn’t have much to spend on discretionary expenses and see a spending freeze as one of the components of my new budget.

Grade: C-

Reason: Survive a swath of unexpected expenses.

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