Wait For Clarity From the Trade Talks – I Still Like This Options Strategy
Posted by Pete Stolcers on October 10
Wild news driven market moves are what we can expect the next few weeks. The environment we are in reminds me of the August whipsaw we experienced. Day trading is challenging. Set passive targets and take profits quickly under these conditions. Swing traders need to distance themselves from the action by selling out of the money bullish put spreads on dips to the 200-day moving average. Bearish call spreads can be sold near the 100-day moving average on rallies. I expect us to stay within that range the rest of the month with wild moves from one extreme to the other.
When the market reaches the upper end of the range sellers reduce risk. A tariff war with China, slowing global economic activity and rich stock valuations (forward P/E of 17) all provide a stiff headwind. Central bank easing has pushed global yields to historic lows and fixed income investments don’t keep pace with inflation. Bond investors have negative real returns and they are forced to own equities. Corporations are borrowing money at extremely attractive levels (bond offerings) and they are using the proceeds to repurchase shares. The number of outstanding shares has been cut in half during the last 10 years. This influences are providing a strong market bid at the 200-day moving average.
I don’t see any of these major forces changing anytime soon.
Last night the S&P 500 plunged 30 points on an article posted by a Chinese newspaper. It said that low level trade negotiations were going poorly and that the two day meeting with high-level officials would be terminated a day early. Hours later rumors circulated that China might agree to a currency pact with the US and that new tariffs could be postponed on October 15th. Rumor has it that the US may issue licenses to non-defense related Huawei suppliers and that China will increase agricultural purchases.
Both countries imposed travel restrictions on citizens this week. That does not set a cordial backdrop for the meetings. Additionally, the US blacklisted Chinese companies with civil rights violations. My suspicion is that a tiny deal will be struck and that future tariffs will be delayed. Trump and Xi want to stabilize markets and both know that there will not be a trade deal before the 2020 election.
A limited trade deal was signed this week with Japan and it did not get much press. I believe Trump might be anxious to get some deals done even if they are small.
A hard exit for England looks likely. Boris Johnson will try to force and exit and he will face stiff resistance.
The overnight economic data was soft. Domestic conditions are showing signs of strain and last week’s numbers could prompt a Fed rate cut in three weeks. The market is addicted to easy money and this should provide support at the 200-day moving average the rest of the month.
The press release after face-to-face trade negotiations with China will be critical. Swing traders should look for opportunities to sell out of the money bullish put spreads with the short strike price below major technical support on stocks with relative strength. I highlighted some excellent candidates in last night’s video and I suggest selling them if the market tests SPY $285 – wait for the press conference. The rumors are extreme and the outcome could go either way. From my perspective it’s just a matter of timing the entry. Even if the market drops and both sides storm off, I still like selling bullish put spreads at the 200-day moving average. If the talks go well we can get more aggressive at current levels.
Day traders need to be very nimble. I have been finding 2-3 great stocks in the daily video. Take profits early, reduce your size and your trade count. The market direction is driven by news and rumors. My trade duration is very short in this environment and I am staying very flexible.
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