Value of Perfect Information

Monday, October 25, 2010

Alert …. Bullard to speak at 1:30 p.m. today….So is QE II going to happen!

Doves pretty much have the votes

Bullard on the fence…

Fed’s Bullard: Want to See GDP, Other Data Before Back QE2

St. Louis Federal Reserve Bank President James Bullard said Thursday that he wants to see more data before deciding whether or not to support a resumption of quantitative easing at the Fed’s early November monetary policy meeting, but said that if the Federal Open Market Committee does approve “QE2″ he would like to see it announce $100 billion in long-term Treasury security purchases between FOMC meetings.

Bullard, a voting member of the FOMC, said that the FOMC should then proceed meeting by meeting in a “disciplined” and “flexible” way to assess whether and how much further asset purchases are needed. And he said the Fed should not set itself a purchase limit but rather should leave the amount “open-ended.”

Bullard, talking to reporters on the sidelines of a St. Louis Fed conference, said the FOMC could provide “forward guidance” on whether or not further quantitative easing was likely to be necessary based on its latest assessments of the forecast for economic growth and inflation.

He likened his suggested approach to the way the FOMC conducts conventional policy, in which it moves the federal funds rate up or down in increments of 25 basis points and doesn’t pre-announce how far the it will take rates in any direction.

Bullard said he believes quantitative easing would be effective in lowering interest rates and said that, indeed, the mere anticipation of QE2 has been effective in lowering long-term interest rates.

However, he said QE2 is still “a tough call” in his mind.

Looking forward to the Nov. 2-3 FOMC meeting, Bullard called it “an important one” in which he and his colleagues must go through the “important exercise” of revising their quarterly, three-year forecast.

“A key part of that updating is the outlook for 2011,” he said. “So we will have to assess that.”

He said he has not yet made his own forecast, saying he wants to “wait for the last minute to get the most data I possibly can.”

“One key report that has yet to come in is the third quarter GDP report,” he noted, adding that “it may come in a little stronger than the second quarter.” So he said “we have to keep our eye on that.”

Bullard said he will “wait until all the data comes in” before deciding whether QE2 is needed.

“No decisions have been made, and no decision will be made until the November meeting and we have a chance to hash it out there,” he said.

“If we do decide to go ahead with quantitative easing,” Bullard outlined “a good program we could adopt.”

He said the FOMC “could think in terms of units of $100 billion (of purchases) between meetings” and “think about the level of the balance sheet as being the operative part of this policy, so if you decide to purchase $100 billion more what you’re saying is you’re going to increase the size of the balance sheet by $100 billion … all in longer date Treasuries.”

Bullard said the FOMC “could give forward guidance” on “how likely it is that we continue these purchases in the next meeting.”

“By extension that would set up a whole path of purchases for the future.”

Asked whether the FOMC should set a maximum amount of intended purchases, as some officials have implied, Bullard replied, “I think for now you’d just leave it open ended. I think that would work just fine.”

Again likening it to funds rate policy, Bullard observed, “when we do interest rates … (and) you embark on an interest rate tightening and you go up 25 basis points you don’t name an end point.”

Fed watchers “could extrapolate and say they’re going to go all the way to 20%,” he said, but in practice that’s not what happens.

Kansas City Fed President Thomas Hoenig, a fellow FOMC voter, has warned that once it embarks on QE2, the FOMC could find itself buying more and more securities and pumping more and more excess reserves into the banking system in order to achieve an effect — leaving itself with a much larger balance sheet from which to eventually exit.

Quadruple witching (expiration of stock index futures, stock index options, stock options, and single stock futures) occurred with relatively low volume and volatility…

Recommendation:
Take no action.

Daily Trend Indications:

- Positions indicated as Green are Long positions and those indicated as Red are short positions.
- The State of the Market is used to determine how you should trade. A trending market can ignore support and resistance levels and maintain its direction longer than most traders think it will.
- The BIAS is used to determine how aggressive or defensive you should be with a position. If the BIAS is Bullish but the market is in a Trading state, you might enter a short trade to take advantage of a reversal off of resistance. The BIAS tells you to exit that trade on “weaker” signals than you might otherwise trade on as the market is predisposed to move in the direction of BIAS.
- At Risk is generally neutral represented by “-“. When it is “Bullish” or “Bearish” it warns of a potential change in the BIAS.
- The Moving Averages are noted as they are important signposts used by the Chartists community in determining the relative health of the markets.

Current ETF positions are:
Long at DIA $102.80
Long QQQQ at $44.76
We are long Oct $106 DIA puts at $185 per contract ($1.85 per share) on Friday, Sept 17th. (current bid = $195)
We are long Oct $48 QQQQ puts at $94 per contract ($0.94 per share) on Friday, Sept 17th. (current bid = $104)
We are long Oct $113 SPY puts at $231 per contract ($2.31 per share) on Friday, Sept 17th. (current bid = $258)

Daily Trading Action
The major index ETFs opened higher and peaked within the first ten minutes before moving lower for about another half hour to reach their low of the day. The rest of the session was spent see-sawing higher which gave way to weakness in the final hour of trading. A surge with a half hour left to go again gave way to weakness in the final fifteen minutes which ended with the Dow and S&P-500 lower, but only after their index ETFs went ex-dividend. This left all the major index ETFs posting modest gains. The Russell-2000 (IWM 65.21 +0.27) gained ground like the NASDAQ-100 with the Semiconductor Index (SOX 334.35 +0.11) posted a minor gain. The Bank Index (KBE 23.23 -0.19) lost most of one percent and the Regional Bank Index (KRE 22.39 -0.04) lost a nominal amount. Both bank indexes remain in trading states with BEARISH BIAS. The 20+ Yr Bonds (TLT 101.67 _0.41) posted a minor gain on above average volume. NYSE volume was above average with 1.227B shares traded. NASDAQ volume was above average with 2.410B shares traded.

There were three economic reports of interest released:
• CPI (Aug) rose +0.3% versus an expected +0.2% rise
• Core CPI (Aug) was flat +0.0% versus an expected +0.1% rise
• University of Michigan Consumer Sentiment (Sep) came in at 66.6 versus an expected 70.0
The first two reports were released an hour before the open. The final report was released twenty-five minutes into the session.

Quadruple witching (expiration of stock index futures, stock index options, stock options, and single stock futures) occurred with relatively low volume and volatility. Quadruple witching occurs quarterly and generally sees significantly greater volume. Measured by the fifty-day moving averages, volume was above average on both the NASDAQ and the NYSE but overall volume didn’t spike as much as it often does with quadruple witching. Volume is just beginning to return and we expect it to build over the coming week.

Healthcare and Materials were unchanged. Four out of ten economic sectors in the S&P-500 moved higher: including Industrials (+0.9%), Telecom (+0.6%), Tech (+0.5%), and Consumer Discretionary (_0.3%). Energy (-0.5%), Financials (-0.5%), Consumer Staples (-0.1%), and Utilities (-0.1%) moved lower.

Implied volatility for the S&P-500 (VIX 22.01 +0.29) rose a bit more than one percent and implied volatility for the NASDAQ-100 (VXN 22.26 +0.45) rose two percent.

The yield for the 10-year note fell one basis point to close at 2.75. The price of the near term futures contract for a barrel of crude oil fell ninety-one cents to close at $73.66.

Market internals were mixed with advancers leading decliners 3:2 on the NYSE and by 4:3 on the NASDAQ. Down volume led up volume nearly 5:4 on the NYSE while up volume led down volume 5:4 on the NASDAQ. The index put/call ratio rose 0.46 to close at 1.51. The equity put/call ratio was unchanged at 0.58.

Commentary:
Friday’s trading saw most of a stand-off between bulls and bears. The resistance levels we have been monitoring have been breached by the Dow and NASDAQ-100 but not yet by the S&P-500. The Dow also has overhead resistance at the 10,720 level from its August 9th high. The levels we are monitoring are:
Index Resistance Actual
Dow 10,590 10,607.85
NASDAQ-100 1,940 1955.83
S&P-500 1,130 1125.59

I will continue to monitor these levels and I am looking for topping action to occur shortly. The nature support is such that a shallow dip could be recovered from but a more drastic move lower could be profitable for short (or put) positions. The markets opened higher and we took the opportunity to buy put positions on the cheap as insurance for our long positions. With the major indexes in uptrend states with a BULLISH BIAS, probabilities favor a continued move higher. However, patterns are such that a sharp move lower is possible in the next couple of sessions and we would like to be protected from such a move. We will bide out time in our long positions fully protected by our puts for a couple of days.

This post is a follow up to the Euro Bounce I mentioned a week ago which has completed as it moved exactly to the area I had forecast.

The S&P has also moved into the area I had picked where I intended to be completely out of my longs.

Is it time to short stocks?  Perhaps with tight rules, but I was positioned long and for now feel comfortable taking profits here at the very least.  I have a bearish bias, but realize the market could make a push higher.

The dollar has pulled near its 50 day moving average which has served as support on numerous occasions.  These bounces have been accompanied by drops in the euro and an accompanying drop in stocks.  This relationship seems somewhat uncoupled as of late so caution is advised for any short taken here.

I am expecting at least a short term pull back from here.  At the moment, I am in cash.

Click here for VIDEO
Trade Details:
THC, Tenet Health Care
Reversion Trade Strategy aka The Bollinger Band Crash Trade
Time in Market: Less than 17 Hours
Profit: +7%

http://www.screencast.com/users/BalaB50/folders/Jing/media/11e37a6b-8549-4cb8-8a57-acce4342260d