Warning fundamental event approaching.
Next week is sure to bring significant volatility to the markets. Beginning on Tuesday with elections, followed on Wednesday by the FOMC’s decisions on rates (no change expected) and quantitative easing, and ending on Friday with the monthly labor report, there are numerous opportunities for significant volatility in the marketplace.
At this point in time the market has already priced in a victory by the Republicans. But just how much of a victory? What if not as many Republicans are elected as the market is expecting ? Should the actual results fall short of what the market is expecting I suspect that there will be a significant movement to the downside by the broader market and the majority of equities. I think that there is little potential for an upside move out of these elections. All of the risk, all the probability, seems to be to the downside. Okay so that’s Tuesday. On Wednesday we have another issue with potentially serious consequences.
The FOMC meets for its regular two-day meeting on Tuesday and Wednesday of next week. At about 2:15 in the afternoon on Wednesday, the FOMC will release its rate decision. Much more importantly though will be its comments and decisions on quantitative easing or QE2. The market is expecting some $800 billion of bond buybacks by the Federal Reserve. I suspect that any number less than $800 billion will be met with disappointment by the investment community. This is not meant to be a discussion about the suitability of QE2 or its ability to jumpstart the economy, but rather an observation of what the market is expecting. As we have said many times in classes, in many ways the market behaves in a spoiled three-year old brat. As long as the child gets what it wants its happy, but if it does not get what he wants it throws itself on the floor and has a temper tantrum. Not pretty.
Finally, on Friday, we have the monthly jobs report. This particular report almost always has a dramatic impact on the direction of the market for the trading day. With the markets looking for 45,000 nonfarm jobs and an unemployment rate of 9.6, there’s plenty of room for disappointment. Hopefully the numbers will be better than expected and will be met with bullishness in the marketplace, but at this point in time we have no way of knowing for sure.
I was looking at some trades today, some potential trades, and decided that the uncertainty of next week’s events warranted not placing any trades today. I shall wait until at least Wednesday before making any decisions about additional trades. In fact, I have closed many of my positions and am sitting largely in cash at this point in time. It’s been a really nice two weeks for the airlines and there have been many opportunities for significant trade profits. With so much uncertainty in the near future, why risk it?
As I see it, next week is full of fundamental events for the broader marketplace. Events that will certainly shape the direction of the markets. Because they are unknown and uncertain they become very difficult to trade. Someone once said to me; “Opportunity lost is preferable to capital lost”. For me, this is one of those times.
Jeff McAllister
OptionsANIMAL Instructor
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