September Option Investing – Commentary

Normally, this is the time of month that you’d expect some technical analysis posts and option trades for September. But these are not “normal” times. The coming week brings us the September FOMC meeting.

You may be asking yourself why I’m touching on this subject. Here are some facts from the August FOMC meeting in Jackson Hole:

  • Additional rounds of unconventional easing were discussed
  • The Dow rallied 430 points after the August FOMC press statement
  • The September meeting was extended to two-days (verses the normal 1 day meeting)

And here are some facts from the last time an “unexpected” 2-day meeting was held by the FOMC:

  • The last two day meeting was December 2008
  • The two-day meeting was used to unveil QE1
  • After the QE1 announcement, the Dow soared 360 points

In his book “Methods of a Wall Street Master”, Victor Sperandeo discusses the US “Fed” and the fact that investors and traders MUST respect its ability to move markets. In other words, the Fed has to ability to stop trends dead in their tracks, so technical analysis of individual investment vehicles is pretty useless. And we all know that fundamental values of leveraged ETF’s are suspect at best. Even if those values were useable, they aren’t a good indicated or short-term price performance.

And apparently, I’m not the only one that is concerned. Zero Hedge posted several commentaries on the short covering that occurred last week, and at one time stated that “Hedge funds do not want to be short ahead of next week’s FOMC meeting”.

So we should all go long, because the markets are headed through the roof…right? Anyone? Anyone? Not so fast. Is some sort of QE3 is already priced into the market? This would mean that something on the order of QE3^2 would be needed to really ignite a rally.

More bad news: Late last week, we learned that the European banking crisis is worse than we feared. How do we know this? Because the Fed announced it was teaming up with the central banks of Great Britain, Japan, and Switzerland to provide US dollars to European banks that lost the ability to access capital markets. Is this the QE3 that is already priced? Or is this just a teaser?

As Barry Ritholtz pointed out:

“The rescue plan could be looked at as awful news — more economies and banks in such dire straights as to need yet another central bank bailout, moral hazard notwithstanding.”

-And-

“Consider the TARP rescue, how Bernanke and Paulson had to scare the congressmen to death to get them to take action. Now consider that in light of what must be going on behind the scenes to get this announcement of 5 Central Banks coordinated intervention.”

John Mauldin had this to say:

The only reason for this move must certainly be that they are acting to prevent what they fear will be another Lehman-type crisis. Otherwise it makes no sense. They can give us any pretty words they want, but this was not something calculated to make the US voter happy. To do this, you have to be convinced that “something evil this way comes.” And to recognize the costs of not doing anything, and try to head them off.

The Bottom Line
No amount of money management can counteract this level of uncertainty. Time to sit on my hands (and money) and watch what happens. The good news? With all the uncertainty comes volatility. And with volatility comes high option premiums. So even if I wait a week or so to judge the fallout, I still have a good chance of meeting this months cashflow target.

Source:
Financial crisis: central banks do not take this kind of action unless something is up
Alistair Osborne, Business Editor
http://www.telegraph.co.uk/finance/financialcrisis/8767072/Financial-crisis-central-banks-do-not-take-this-kind-of-action-unless-something-is-up.html

QOTD: What Coordinated Central Bank Action Means…
Barry Ritholtz | The Big Picture
http://www.ritholtz.com/blog/2011/09/qotd-what-coordinated-central-bank-action-means/

Anatomy Of A Squeeze
Tyler Durden | Zero Hedge
http://www.zerohedge.com/news/anatomy-squeeze

Forget Operation Twist: Rosenberg Says Bernanke Will Shock Everyone With What Is About To Come
Tyler Durden | Zero Hedge
http://www.zerohedge.com/news/forget-operation-twist-rosenberg-says-bernanke-about-shock-everyone-what-about-come

Twist and Shout?
By John Mauldin | Sept. 17, 2011
http://www.johnmauldin.com/images/uploads/pdf/mwo091711.pdf

Gluskin Sheff
http://www.gluskinsheff.com

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About T. Knight
Blogging about my journey to financial independence via investing for cashflow.

One Response to September Option Investing – Commentary

  1. Pingback: September Technical Analysis – EDC « Investing for Cashflow

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