A Look at Wednesday’s Market: The overall market finished Wednesday slightly higher on a day that saw many of the various sector indices I track reverse Tuesday’s gains, something I expressed my concerns about in yesterday’s market commentary. It should be noted that bond yields have moved sharply higher over the last couple of days. I think that this is primarily a result of the Fed’s comments on Tuesday that it sees the US. economy improving and there the need to continue to maintain artificially low rates decreasing. In last week’s Sterling Weekly I took a look at bond prices and how I thought they would change as interest rates moved higher. If you haven’t read my analysis or looked at the chart on changing bond prices it is definitely worth a look; as rates move higher there is going to be pain among the holders of government bonds.
In looking at the commodities markets, Oil was lower by $1.28 to $105.43 per barrel, and Gold was lower by a whopping $51.30 to $1,642.90 per ounce. It is obvious that there has been a sell off in Gold this month. It looks to me that we could see the price of Gold continue to move lower and test $1,543.30 on a closing basis. In the grain markets, Wheat was lower by $0.052 to $6.436 per bushel, and Corn was lower by $0.032 to $6.586 per bushel, while Soybeans were higher by $0.014 to $13.50 per bushel.
A Few Thoughts on Thursday’s Markets: In looking at the charts from yesterday’s trading I noticed that many of the stocks that moved sharply higher on Tuesday reversed course and moved back lower yesterday. This is a very clear example of what I find frustrating and annoying about these big, broad moves that are sparked by the announcement of one company. I think the trading in the shares of Met Life ‘MET’ are a good example of this. The shares of ‘MET’ moved sharply higher Tuesday, despite the fact that the company’s capital plan failed the government’s stress test. The shares of ‘MET’ then moved sharply lower on Wednesday after the buying frenzy of Tuesday was over. Basically when the knee jerk reaction was over, the reality of the news set in. It should seem obvious that the shares of ‘MET ‘ moved higher on Tuesday due to all the program trading and ETF trading that was sparked by the JP Morgan’s announcement on Tuesday. I find these sort of movements to be short term distortions of the market, that one has to be very careful to avoid falling into the trap of thinking that they are actually a trend reversal.
In looking at the various sector indices and the heavy volume stocks, I see continued pressure on the market moving into options expiration on Friday. While I would like to balance out my “model portfolio” with a few call positions, the vast majority of the trading candidates are on the put side.
Twitter Model Portfolio Tweet Policy: Currently Sterling Investment Services is managing a trading strategy based upon covered puts and calls. Sterling Investments is currently running a “Model Portfolio” that is based upon this strategy. It should be noted, that at this point in time, Sterling Investment Services is only “paper trading” this model portfolio, and not actually executing trades and creating actual positions within this model portfolio. Therefore, please do not look for actual volume associated with our options selections. It is Sterling Investment Services goal to initiate trading in an actual account based upon our model portfolio in the near future. When that change actually occurs, Sterling Investments will notify its readers via Twitter and our website.
Yesterday’s Selection: We entered a paper trade with a covered call position on CBS, going long at $31.56 per share, and selling the April $31 Calls at $1.20 per call. This should result in a potential profit of $0.64/share, or approximately 20.25% annualized return by options expiration on April 21st, 2012.
The Bottom Line: I see today’s market having a downward bias.