Stocks languished yesterday until the release of the minutes from the September FOMC meeting. Then came the announcement that Mr. Bernanke and his governors had discussed “buying more Treasurys and new inflationary strategies if prices remained too low and unemployment too high.” After a pause for analysts to decipher the Fed-speak, stocks rebounded and closed with slight gains.
The Fed announcement held few surprises since the governors have been open about the need to have a “QE2” stimulus. But the Fed’s staff cut projections for economic growth in 2011, and said they expect the inflation rate to fall further. Expectations are that the Fed will decide on additional stimulus measures at its November meeting.
The U.S. dollar was up along with Treasurys just prior to the Fed’s announcement, and both fell immediately after. But Treasury yields rose with the 10-year going to 2.419%, and the dollar ended the day with a 0.1% loss after being up 0.6% in overnight trading.
Financial stocks made the biggest gains, closing with a 1.3% gain. JPMorgan Chase & Co. (NYSE: JPM) rose 1.69% ahead of earnings today.
And technology stocks were up 0.7%, with Intel Corporation (NASDAQ: INTC) gaining 1.07% ahead of its earnings after the close yesterday. Intel reported that Q3 profits climbed 59% to 52 cents a share versus analysts’ expectations of 50 cents. And revenue topped $11.1 billion versus an expected $11 billion.
Pfizer Inc. (NYSE: PFE) said that it will acquire King Pharmaceuticals, Inc. (NYSE: KG) for $14.25 a share.
At the close, the Dow Jones Industrial Average rose 10 points to 11,020, the S&P 500 gained 4 points to 1,168, and the Nasdaq rose 16 points at 2,418. The NYSE traded 922 million shares, and the Nasdaq exchanged 518 million shares. On both exchanges advancers exceeded decliners by about 1.3-to-1.
Crude oil for November delivery fell 54 cents to $81.67 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) fell 9 cents, closing at $58.43. December gold fell $7.70 to settle at $1,346.70 an ounce. The PHLX Gold/Silver Sector Index (NASDQ: XAU) fell 0.76 points, closing at 204.18.
What the Markets Are Saying
Stop-loss orders for options seem to be on the minds of our readers with most of them interested in an effective stop-loss technique. Let’s start off by saying upfront that call and put options must be treated differently than stocks. When you purchase a stock, it is easy to determine almost the exact loss that you are willing to take, and that’s where the stop-loss order is placed. In that situation, the stop is like a “market order to sell” once a certain price is hit.
But with options, there are additional risks:
1. There is implied volatility, which even in the absence of a move in the underlying stock could trigger a stop in the option.
2. Large spreads between bid and ask are not uncommon, so what triggers your stop — the bid, the ask, or the last price? Ask your broker.
3. There is the risk of time premiums declining as expiration approaches. This risk could even cause a decline in an option price while the stock appreciates, especially if you bought the option at a big premium.
4. Finally, options are a leveraged means to participate in a stock’s movement over a limited time. Thus a relatively small move in the underlying stock results in a much larger move in the option — and often that move is in the wrong direction.
Despite the differences, placing stops on options positions is a prudent strategy. But I recommend keeping it simple. Apply a stop-loss point as it relates to the stock, not the option. If it is 5% of the stock’s value, then at a 5% decline in the stock’s price enter a market sell order for the call. But this requires discipline since you can’t enter a contingent order to sell a call versus a stock’s price ahead of time. You will have to monitor the stock’s price and use a “mental stop” if it hits that price.
As for the stock market, stocks gained again yesterday, though by a small margin. Volume has not kept pace with the gain since early September, and our internal indicators are grossly overbought. Stocks are definitely due for a round of profit-taking, but the indices continue to aggressively cut through overhead resistance lines like they don’t exist. Stocks are moving in direct relation to a weak dollar and Fed’s policy of “accommodation.” The trend remains your friend, so “be long or be wrong.”
For a homebuilder to go long, see the Trade of the Day.
Today’s Trading Landscape
Earnings to be reported before the opening include: ASML Holding, Cantel Medical, Host Hotels, iGATE, JPMorgan Chase and Medtox Scientific.
Earnings to be reported after the close include: Apollo Group and Spartan Stores.
Economic reports due: MBA purchase applications, import and export prices, and Treasury budget (the consensus expects -$32 billion).
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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