The long-awaited FOMC meeting concluded Wednesday, with the Fed tapering quantitative easing by another $10 billion, reducing the amount to $65 billion per month and leaving the Fed Funds Rate unchanged at 0.00% to 0.25%. The stock market was down all day in anticipation of this maneuver, even as Turkey raised interest rates overnight to defend its currency and stabilize the run in emerging markets.
Even as the Fed lightens up on fiscal stimulus, the bond market is acting independently of the move, rallying further on more of a rotation into high-quality fixed income in order to ride out the uncertainty concerning China’s future growth rate, volatile currencies and a few high-profile earnings disappointments from Apple (AAPL) and Yahoo! (YHOO).
The S&P 500 is currently tested the next significant technical support level of 1,770 following the release of the Fed statement. The action marks a 5% correction in the S&P for January with only two days left in the trading month.
The confluence of external events capped the rally in the stock market, but hasn’t broken the back of the long-term bullish uptrend. From the three-year chart below, it’s clear chartists will step in there where they see institutional sponsorship if in fact the economy is on as good a footing as the Fed apparently believes. If so, we should see fund managers try to circle the wagons at the 1,770 level, or just below it at 1,755.
The current correction is taking a toll on the overly-bullish sentiment that dominated the landscape at the end of December. Now that the market has been priced down by 5%, the pullback now fits the definition of a correction.
Clearly, there is a mindset of reset at work among investment pros, and if that means slower growth ahead for an economy without QE, then an even stronger case can be made for fundamentally sound high-yield strategies, particularly covered calls which offer traders a way to squeeze some extra returns from their holdings during times of broader consolidation.
U.S. Steel (X) is a name that I’ve traded into and out of for several months, and it’s been good to my Cash Machine Trader members. In November, it gave us a 13% profit in a matter of weeks when our shares were called away.
I elected to get back into the name shortly thereafter, and we wrote December and January calls against our shares, so we collected and kept 100% of the premium. Now it’s time to do it again.
Recommendation: For every 100 shares of X you own or purchase at market, sell to open one X Feb. $29 call at $0.30 or more using a good till canceled.
While it’s possible that X will rally above that $29 strike by options expiration on Feb. 21 and our shares will get called away, what I expect is that X will continue trading below that level for the near term, which simply means you’ll get to keep 100% of the premium you collected from selling the calls.
After February options expiration, you can either sell your X shares at a profit as I believe this bull market will resume, or you can continue writing “spot month” calls against your shares for a continual stream of income.
Imagine doing this with your entire portfolio – that’s exactly our aim at Cash Machine Trader. We get paid immediately on every trade we make! Most people lose money trading options but with our covered call strategy, you can bank 6%-10% every month, like clockwork.
Now is the perfect time to join Bryan Perry’s breakthrough income investing service, Cash Machine Trader, and discover how selling covered-call options can help you manufacture ‘top-up dividends’ of up to 30% per year.