EOT Position Update – December 12, 2012
December 12, 2012
Market Snapshot
Today is the last Fed meeting of the year. And Old Saint Bernanke delivered his Christmas presents to the market a few weeks early this year.
The Fed Chairman announced the Fed will initiate a new $45 billion per month asset purchase program. Yes… this is QE4.
He also explicitly tied interest rates to the unemployment level. More specifically, interest rates will stay at their current low levels of 0% to 0.25% and the Fed will continue to buy Treasuries until the unemployment level falls below 6.5%.
Based on the Fed’s estimates, unemployment isn’t expected to fall below this level until mid-2015. And if employment never falls below 6.5%? I guess the Fed will continue buying $45 billion worth of Treasuries every month forever!
The initial reaction from the market was positive. Stocks reached their high of the day following the Fed announcement.
But don’t forget, stocks initially reacted positively to the last Fed announcement in September. And then the S&P 500 proceeded to shed 8% as stocks sold off sharply over the next two months.
Figuring out how the markets will react to this Fed announcement in the weeks ahead is just as much of a crap shoot.
More importantly, Mr. Bernanke noted that Fed policy is useless against the Fiscal Cliff. If politicians don’t reach an agreement to avoid the automatic tax hikes and spending cuts on January 1st, the economy is heading for a recession.
Where does that leave us?
Right where we were… waiting on a resolution to the Fiscal Cliff.
The good news is, investors seem optimistic that a deal will get done. And the S&P has enjoyed a 6.5% rally off the November lows.
In fact, the S&P is on the fast track to retesting resistance around 1,460. The technicals will carry us only so far. At some point, the fiscal cliff will make or break this market. But until then, the bulls are in control.
Let’s move onto the updates…
Position Updates
Just a quick note: Remember, we won’t update every open position every week. I try to focus on the positions that have some significant news or price movement.
DIS April 2013 $50 Calls
DIS is a new trade we sent out yesterday. Take a look at the trade alert for more details… If you haven’t already, feel free to buy this option up to $2.40. Resistance is at $52.50 and $55.00. Support is at $47.00 and $46.00.
CAB January 2013 $50 Calls
CAB’s initial performance has been disappointing. The stock has drifted lower since we recommended buying call options a few weeks ago. But don’t thrown in the towel just yet… We may have been a little early on this trade, but I still think it will close the year out on a strong note. Continue holding… Resistance is at $53.00 and $56.00. Support is at $43.50 and $41.00.
YELP February 2013 $20 Calls
YELP had an interesting day today. Two analyst firms initiated coverage on the stock. The firms had very different opinions of the stock. One said its current price fully prices in the company’s potential. While the other thinks it has the ability to increase revenue and earnings growth and soar much higher. These competing views have been prevalent in the market for some time now. It’s why the stock has been range bound since its IPO earlier this year. And I expect that to be the case going forward. The good news is our trade will be a success by simply moving back to the high end of the trading range. And with plenty of time on our February options, it shouldn’t have any trouble reaching our resistance levels. Resistance is at $22.50 and $28.00. Support is at $15.00 and $13.50.
PHM April 2013 $19 Calls
PHM hadn’t moved much over the last week. But the homebuilders stock has made a big move higher today. Obviously, the Fed announcement of targeting 6.5% unemployment is good news for housing prices and homebuilders. At this point, it appears that mortgage rates will remain at or near all time lows for another two and half years… or longer. That’s a big window of opportunity for builders to make money. Continue holding for PHM’s next leg higher. Resistance is at $25.00 and $30.00. Support is at $15.00 and $13.50.
Category: EOT Update
