It’s “tea time” technically as bulls and bears take a break ahead of the Fed Wednesday. As of 10:30 ET the SP-500 (SPY) is up narrowly by 0.10% in action that only an option hedgehog might appreciate following last week’s optimistic, Olympic-sized gains across-and-up the Channel.
Pins and needles best describes Wednesday’s anxious chop along with maybe a few “$@#$!!” bombs for gold bugs as those traders come to terms with a likely ‘pass’, but stronger “ready to act” dialogue from this afternoon’s FOMC Decision regarding any potential QE3 unveilings.
Based on Wednesday’s recalculated, efficient market pricing hypothesis, investors have lowered the bar from last week’s optimistic nod of imminent action by policymakers. Expectations now reflect the Fed more likely to simply push back rate hike guidance from 2014 into 2015 and hint at future stimulus initiatives by admitting to a substantially weaker outlook for the US economy as compared to its forecast back in June.
While possibly soured by those prospects, bulls may not have to wait until late August’s annual Jackson Hole Economic Policy Symposium or the Fed’s September meeting for more stimulating policy measures. The ECB and its monetary policy meeting hold court on Thursday and in which traders can gain a better understanding of President Draghi’s recent “do whatever is necessary” defense of the Euro.
On the economic docket this morning, data has proven bountiful and mixed. PMI readings across both ponds included two weak, “but potentially worthy of monetary action” readings from China. Out of Europe, Britain’s PMI missed views as the index slid deeper into contraction turf at 45.4 for July compared to June’s 48.4. At the same time, the broader Eurozone showed a dip to 43.3 from its flash reading of 44.0 with both Germany and France’s PMI’s nipped narrowly in the bud.
A sneak peek at Friday’s BLS jobs report for July saw private sector payrolls grow by a better-than-forecast 163K compared to estimates of 125K and off just 9K from June’s modestly-reduced figure of 172K. Separately and intraday, the ISM index for July narrowly missed forecasts with a 0.1% increase to 49.8 versus the Street’s 50.1, while construction spending reflected a much more modest increase of 0.4% compared to views of 0.9%.
In those intertwined markets of influence and notice, as noted Comex Gold (GLD) has gotten a case of cold feet. Bulls appear to be pricing in more drawn out, gold-friendly stimulus measures rather than more immediate gratification. Intraday, shares of GLD are off 0.65% and re-testing Monday’s challenge of key 10/30 SMA and symmetrical triangle support.
Within shouting distance across-the-room, well if commodities still traded on exchange floors, the US Oil Fund (USO) is up 1.45% and leading the broader market. According to CNBC.com, traders are optimistic the Fed and ECB will take the necessary actions to help boost their economies and in turn, increase demand for oil. Bulls also appear to be taking notice of Chinese PMI readings still flirting with the dividing 50.0 threshold and comments from the country’s President regarding “supporting its economy.”
The iShares Bull ETF (AAPL) are off 0.55%. Profit-taking from a surprising series of four straight higher highs and gains of about 7.5% into the end of the second quarter and maybe bearish quarterly inflows for Q3 appear primary drivers rather than the twenty or so unmelodiousness and largely ho-hum news flashes for Apple on Yahoo Finance.
On the corporate confessional side, bulls appear pleased with mixed, but non-disastrous results from insurer Allstate (ALL). Shares of ALL are up 7.0% and forging a breakout to four year highs after it topped profit estimates by $0.29 with actual earnings of $0.86 per share on slightly worse-than-forecast sales growth of 3.2%.
In passing, bears are reacquainting themselves with the likes of MasterCard (MA), BMC (BMC), Energizer (ENR) and Harley Davidson (HOG), while hedgehogs are likely better appreciating wickedly volatile action in Allergan (AGN). The stock is sporting non-sleepy, nothing to sneeze at gains of 6.3% after its penny beat, in-line sales growth of 6.5% and issuing mixed-to-weak Q3 and FY12 EPS and revenue guidance.
Finally and in those sometimes accurate heat-seeking option markets, in front of tonight’s earnings release, First Solar (FSLR) is seeing twice its daily volume with more than 14,000 contracts changing hands. With evenly-matched attention paid to both its calls and puts and premiums well-bid, the ATM Weeklys August 15 straddle is priced for $1.86 per spread on roughly 210% IV.
With just two trading days until the contract expires, a move in excess of 12% by Friday’s close to either 16.86 or below 13.14 is needed to breakeven. Using implieds to calculate the expected move for the earnings event, more theoretical types are pricing in a 68% or 1SD chance shares of FSLR will remain within 15.5% of its current positioning at 15.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
