HOTS Weekly Options Commentary
Peter Stolcers
I have been bullish on the economy and Friday's unemployment number tainted my bias. I did not expect the dramatic decline this month and I certainly didn’t expect the huge revisions for June and July. For the month of August, analysts were expecting 115,000 new jobs. The actual number showed a decrease of 4000 jobs. That is a whopping 119,000 miss. June and July numbers were reduced by about 81,000 in total.
High consumer debt levels (and I'm not just talking subprime mortgages) will threaten the strength of this economy if workers get laid off.
Last week, the Fed invited major homebuilders to share their perspective on the economy and I’m sure Chairman Bernanke got an earful. A rate cut is almost certain after this dismal employment report. Inflation is in check and now the Fed can ease rates without the appearance of a subprime bail out.
Next week the economic calendar is light with consumer credit, retail sales, industrial production and consumer sentiment on deck. These releases don't pack the same punch and I believe Friday’s Unemployment Report will induce selling pressure until the FOMC. Traders are scrambling to determine if the Fed will cut rates by a ¼ or a ½ point.
If the Fed reacts quickly and lowers the rate by a ¼ point before the FOMC, it might be viewed as a progressive move and that might be enough to satisfy the market. On the other hand, a ¼ point cut during the FOMC will not carry the same urgency. The market could view that as stingy, feeling that the data justifies a ½ point rate cut.
In this week’s chart you can see the long-term uptrend is still intact and the breakout from April has also held. If the SPY 145 level is violated my bias will turn bearish.
We have bullish positions and this week’s trade will hedge some of our risk.
