Overnight housing data touched a fuse on the markets today with the rocket taking off at the open reversing a 3-week downtrend.
Fortunately that hasn't affected our SPX spreads much–for example this past Wednesday we bagged a 7-day 27% gain on an SPX call spread.
The problem is our more aggressive trades–which by nature are more susceptible to big market runs. This recent bullishness stopped out last week's TSLA call spread at a loss, and forced an early closure of our TNA spread this morning. We managed to roll the TNA higher for a net credit, but we'll still have to see how the rest of the week turns out.
And that brings us to today's massive jump higher–will it continue, or is this just short-covering before another plunge? To answer that question let's take a look at…
The Markets and How They Affect Us
It looks like the sideways pattern is continuing–for now…
The SP 500 jumped 28.02 points today to 2,076.06 as all 10 of its main sectors traded in positive territory. Plus we saw the largest percentage gain for the index since March 11. Among SP 500 shares, nearly a fifth were up more than 2%, another 40% were up more than 1%, while less than 10% were in negative territory.
That's an incredibly bullish day. But what is it based on? And how likely is it to last?
Today's big move higher was sparked by robust new home sales. April sales came in at an annualized pace of 619,000 compared to the March pace of 511,000 homes. Consensus estimates were for a rise to 522,500 homes so the beat was impressive. The spike was a 16.6% increase and put April at 23.8% above April 2015. February and March sales were also adjusted significantly higher. March was raised from 511,000 to 531,000 and February rose from 519,000 to 538,000.
In addition a new survey found that 55% of likely conservative voters in Britain are planning on voting to stay in the EU while only 42% will vote to leave the union. Among all voters, the Remain campaign now has a 20-point lead with 58% planning on voting to remain in the EU. The new survey found that men, Tory voters and people over 65 are increasingly moving to the Remain side of the issue.
And that means the worry over a Brexit has probably run its course. European stocks enjoyed a monster rally with several markets up more than 2% beating today rally of 1.4% in the SPX. The European rally carried over into the U.S. and our markets exploded at the open in yet another short squeeze.
That's all good news but it doesn't really have staying power. The big market influencer is still the Fed and ongoing monetary policy–and that could catch some traders flat footed.
Last week's Fed minutes were already a bit of a shock with virtually no one expecting them to say June was a "live meeting". Since then a number of Fed officials, both voting members and not, have come out in support of rate hikes.
Recent Fed presidents are talking up interest rates. In just the last week John Williams said, "2-3 hikes in 2016 is appropriate." Dennis Lockhart said to expect, "2-3 hikes this year." Eric Rosengren said, multiple "rate hikes are absolutely appropriate." Last but not least William Dudley warned, multiple rate hikes "would be a reasonable assumption." If Yellen says something similar on Friday, we are going to have a tough time climbing higher.
With the US still offering positive rates on its bonds the dollar is rising–and that is causing some problems. Oil is rising on the various outages despite the spike in the dollar to a new two-month high. Unfortunately, gold is crashing as the dollar gets stronger. The rising dollar is another problem for the Fed because it weakens the economy by making our exports more costly overseas.
So the Fed meeting is still a toss-up in spite of the hawkish remarks this past week. The Fed has a tradition of trying to talk rates up, but not actually doing anything–and that may very well be the case this time.
Tomorrow will be dominated by oil inventories, Thursday is jobless claims, Durable Goods and Pending Home Sales, and then Friday it's Yellen's speech and the 2nd estimate for 1st quarter GDP. The consensus is for GDP to be revised up by 0.4% to 0.9%, if that happens it could increase the chances of the June rate hike. The question is…
How Do We Make Money on It?
We've got two trades line up and they both have high probabilities–one is a put spread and the other a call spread…
Our first trade is a put spread on one of the strongest stocks fundamentally in the markets–but today it became one of the best technically as well. We'll be targeting a 22% return for just 10 days of time with a high probability of a maximum profit expiration.
And for our Roth Retirement trade we're looking at a FAR out-of-the-money call spread for a conservative 10-day 20% profit with the potential for more on a well-placed put spread.
We've got two good looking trades lined up to take advantage of this market–so let's get started…
Click here to gain access to today's picks.
Keep up the good work,
Peter