by Houghton and Atkeson 05/02/08
Editor's note: While Sam Collins is on vacation through May 15, OptionsZone.com contributors and professional traders Andrew Houghton and Nick Atkeson are taking over the Daily Market Outlook as guest columnists.
They will bring you a market outlook each day along with several trading ideas following their approach to tracking unusual option trading volume. Check back each day for their commentary, and you can also click here to receive it via e-mail!
Three minutes after the Federal Open Market Committee's announcement on Wednesday that both the Funds and Discount rates were reduced by 25 basis points, the S&P 500 (SPX) traded up to its high for that day at 1,404.57.
One hour and forty-two minutes later, the market had traded down 20.32 points to 1,384.25 as the language accompanying the reduction was interpreted as the Fed not being clear enough in its intent to pause the rate-cutting effort.
The hoped-for temporary stop in the rate-lowering process was intended to strengthen the U.S. dollar and begin to staunch the inflationary pressures that the market is beginning to fear might be the byproduct of Ben's over-enthusiastic liquidity injections. After all, this is "Helicopter Ben" we are talking about.
Less than 24 hours after the Fed announcement, the interested parties seemed to have re-read Ben's note as foreign-exchange (forex) traders in Asia and then Europe began to bid up the U.S. dollar. A pause, it appears, is exactly what Mr. Bernanke was communicating.
ROTATION, ROTATION, ROTATION
The early economic indicator announcements on Thursday were too close to projections to add any clarity to the picture, but the fact that the Institute for Supply Management's manufacturing index number stayed at 48.6 instead of dropping to 48.0, as anticipated, sparked the day's move higher. When all was said and done, the 20-plus-point drop from Wednesday had been made up and more.
After this year's first-quarter, 20-point moves in the S&P (SPX) seem like the first few balls that come at you in the batting cage when the dial is still pointing toward "slow." So, what made yesterday's move different?
In the real-estate business, the slogan is "location, location, location." In the market yesterday, the slogan was "rotation, rotation, rotation."
The stronger dollar translated into lower prices for crude oil and other commodities. This translated into a widening of spreads in the credit markets in the associated "real economy" names. As a result, any remaining long positions in commodity-related businesses -- most importantly, energy -- were sold and a number of shorts were initiated.
Because the anti-inflationary aspect of the rate-cut pause also makes for a stronger dollar and a more-attractive investment environment for those outside the U.S., the financial sector also got a boost yesterday. Long positions in some of the banks, brokers and insurers were put on the books.
TODAY'S MARKET OUTLOOK
This morning brings the Uber-Stat of the moment: the Bureau of Labor Statistics' non-farm payrolls and the unemployment figures. Employment is seen as a major player in the economy's recovery, as when more people are working, then fewer mortgages, car payments and utility bills are moving into the "past due" column of the credit reports that are now so easily attainable.
The markets never move in a straight line, so it would be foolish to think it's all up from here. It might not be too silly, however, to think that the worst is behind us. And although there will be a few bumps along the way, the road should begin to smooth.
Andrew Houghton and Nick Atkeson work together to identify unusual options trading activity on the "big money" (i.e., institutional) level and regularly contribute their findings to OptionsZone.com.
For a timely look at big-money options trades taking place under the radar and independent of the headlines, visit Andrew and Nick's full archive of Unusual Options Trading Activity by clicking here now!
