Random Market Observations - August 15, 2013

by Wayne Ferbert on August 15th, 2013

Observation #1: Today’s sell-off was strong – and was definitely a response to the good jobless claims data. When the data showed the lowest initial claims since 2007. Let’s recall that 2007 was before the ’08-’09 market sell-off. So, that kind of data was seen as positive for economic growth.
Good economic data means the Fed is gonna start to Taper its bond buying program sooner since it is ‘pegged’ to unemployment rate. The removal of those funds will drive money away from risk assets. Hence, the market sell-off today. And it was affirmed by the spike in interest rates.
The ten year treasuries hit 2-year highs today. The market saw soft earnings from both Wal-mart and Cisco also – which just gave sellers even more excuse to pile on.
Hence the sell-off. But here is what we learned today: while the market is anticipating the Taper, when the Fed actually starts it (ala announces it), there will likely be another sell-off. Let’s remember that the majority of Wall Street economists have set September as the likely start to the Taper.
September is only 3 weeks away. So, let’s get ready for another potential sell-off and buckle up the seat belts.
Observation #2: Tomorrow is the regular monthly options expiration. So, if you have been using the most popular ETFs we recommend, you might have some protection to roll or a short call in a collar that needs to roll to September.
Here is the good news: When we look at all of the popular US equity ETFs we use (SPY, MDY, IWM), none of them are higher at today’s close than they were at the July options expiration. The International Equity ETFs we use are up slightly – but less than 2% in each case (eg, EEM & EFA).
The upside to today’s correction: you likely have no calls that you sold last month that are in the money today. So, nothing to worry about rolling tomorrow.
The second upside: the spike in volatility will create a little more premium in the calls you may want to sell for next month. But this is a 5-week expiration until the September monthly expirations. So, I would recommend waiting to see what the market does in to next week before selling any new OTM calls in your collars.
Observation #3: I would not wait to see if volatility spikes before you buy any more puts as protection. If you have protection expiring tomorrow, look to buy some mid to late 2014 puts to continue your hedges. If you have any that you just haven't bought yet - look to buy now. I would buy now before volatility gets too high and the cost of protection is too much.

In summary: If Taper is announced in September, we will sell off again. Wait until next week to sell your calls in your collars. Don't wait to buy any puts you might need for protection now.

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