Another turbulent week in the market is behind us. As we continue into the second half of 2023, the question of inflation and market uncertainty is just as prevalent as it was to start the year. Back at home, just as we started the year with a fervent book club discussion, we held another one just this past week.
This time, our book club embarked on a fascinating journey that takes us from the realms of science fiction to the pressing realities of our modern financial landscape. Our adventure begins with a slight detour into the captivating pages of "The Gods Themselves" by Isaac Asimov, a novel that deftly weaves together parallel universes, human settlement on the Moon, and the quest for sustainable energy.
As we delve into the book's intricate tapestry of story, we encounter a profound realization: our existence, both as individuals and as a civilization, is intimately entwined with the availability and utilization of energy sources. The discussion of how reliant we are on energy and how we have always, as humans, sought out sources of energy to improve our well-being was a fascinating one and one that we do not often consider.
Just as the characters in Asimov's work grapple with the intricate concepts of particle acceleration, isotopes, and the profound impact of gravity on human psychology and physicality, we are reminded of our own reliance on energy and its profound influence on our financial systems.
Consider the stark reality that even in this day and age, approximately 80% of our energy is derived from fossil fuels. The implications are profound, for our planet, our markets, and our very way of life. The recent fluctuations in oil prices serve as a stark reminder of how energy markets can shape the conditions within which financial decisions are made. Traders and investors must pay heed to these fluctuations, as they harbor the potential to impact our economies and influence the trajectories of industries.
However, amid the challenges we face, there glimmers a ray of hope. In a breakthrough that once seemed confined to the pages of science fiction, scientists have recently achieved a net positive energy output through nuclear fusion. This momentous milestone brings us one step closer to realizing the sustainable and clean energy sources that Asimov's visionary tale alluded to. It signifies a future where our dependence on fossil fuels can be diminished, paving the way for a more resilient and prosperous financial landscape.
So, my fellow financial adventurers, let us embark on this journey together. Let us explore the intricate connections between energy, markets, and our collective future. As we navigate the ever-changing tides of finance, let us remember that the lessons of the past and the promises of tomorrow are intertwined, guiding us toward a brighter and more sustainable world.
Until next time, stay curious and keep an eye on the horizon.
Recent Trade Review
In this edition of our trade review, we delve into a recent opportunity identified by our Profit Accelerator Trader (PAT) service. For those who missed it, you can catch the recording of our live trading room session from Tuesday here:
Our PAT model flagged Transocean Ltd. ($RIG) stock as an intriguing prospect, and we seized the opportunity to capitalize on the elevated implied volatility. To enhance our potential returns, we employed a strategy of selling out-of-the-money calls against the stock, allowing us to collect extra premium. This approach was particularly effective given the liquid nature of $RIG and the availability of weekly options.
One of the advantages of this strategy is the ability to generate a return by simply holding the position overnight. By selling options with strike prices above the current stock price, we positioned ourselves to profit from the time decay of these out-of-the-money options. This allowed us to collect a premium equivalent to approximately 0.5-1% of the underlying stock's value.
It's important to note that this strategy requires careful consideration of risk and reward. While the potential return may appear modest, the probability of success is typically higher when selling out-of-the-money options. Furthermore, our diligent analysis of the options market revealed that approximately half of the option volume for $RIG consisted of weekly options and options expiring on the same day (0 DTE options). This liquidity and availability of short-term options played a crucial role in our decision-making process.
One key differentiating factor between our paid and free services is the level of timely guidance we provide. Our paid subscribers receive SMS messages, ensuring they are promptly notified when it is time to enter or exit a trade. This real-time communication allows for optimal execution and the potential to capture the full benefit of market movements.
Remember, successful trading often lies in the combination of robust strategies, careful risk management, and timely execution. Stay tuned for more trade reviews and opportunities in future newsletters.
CURRENT TRADING LANDSCAPE
Another week is in the books and Wall Street found itself on track for weekly losses after the S&P 500 and Nasdaq Composite snapped their multi-day losing streaks on Thursday, ahead of Friday’s PMI data. Despite this recent setback, it's important to note that stocks are still poised to close the month with gains. The week started off positively, but the major U.S. indices took a downward turn, ultimately ending the week in the red.
One significant event that influenced market sentiment was Federal Reserve Chairman Jerome Powell's testimony before the U.S. House Financial Services Committee. His remarks regarding the long road ahead in combating inflation and the likelihood of future policy tightening had a noticeable impact on stock prices, contributing to Wednesday's losses.
Concerns about global growth also weighed on investor sentiment, leading to three consecutive days of downward movement in the market. Powell's testimony continued to garner attention, while in the United Kingdom, inflation surprised economists by remaining unchanged in May, defying expectations of a decline. In response to this worrisome inflation, the Bank of England implemented a larger-than-expected rate hike to address the highest inflation within the G-7.
Amidst these developments, the market had to digest a plethora of headlines from the Federal Reserve. Powell emphasized the central bank's ongoing commitment to combating inflation and reiterated the need for further rate hikes, which impacted investor outlook. This, coupled with initial jobless claims in the United States remaining flat from the previous week, added to the cautious atmosphere.
In other news, the Federal Trade Commission filed a lawsuit against Amazon (AMZN) for alleged unauthorized enrollment of consumers in Amazon Prime and difficulties faced in canceling subscriptions. FedEx (FDX) experienced a decline in its stock price due to disappointing guidance. Major tech companies also witnessed a decrease in their shares, while the Dow Jones Industrial Average showed slight gains thanks to positive performances from UnitedHealth Group, Honeywell, and Caterpillar.
Recent economic data released on Friday indicates a further slowdown in the manufacturing economy, sparking concerns of an impending recession. The June reading for the U.S. Manufacturing Purchasing Managers Index (PMI) fell to 46.3, down from May's 48.4 reading and below the anticipated 48.4 forecasted by analysts. Additionally, the U.S. services index for June came in at 54.1, slightly lower than May's 54.9 figure but marginally higher than the projected 54. A reading below 50 implies a contraction in economic activity. These worrisome figures are not exclusive to the United States, as other nations also report similar concerns. Consequently, attention is now turning back to the possibility of the Federal Reserve resuming rate hikes in July, potentially leading to an economic slowdown in the United States.
Additionally, Bitcoin rallied on news of institutional players like BlackRock entering the market, while a rotation into value stocks and potential top-building in technology stocks were observed. It's worth noting that the market appears overbought, yet it continues to climb higher.
China's decision to lower interest rates and implement stimulus measures to revive its weak economy also had an impact on the market. However, China experienced a pullback this week, despite its investments in the electric vehicle industry, infrastructure stimulus, and efforts to stimulate the economy through interest rate adjustments.
Something to note, the earnings report from FedEx, for example, revealed missed sales and downward guidance. Weak demand in Europe and China, along with a generally sluggish economy, were cited as reasons for the disappointing results.
Looking ahead, it is expected that the market will continue to trade sideways with the anticipation of increased volatility in the second half of the year. Following Powell's testimony, the PMI data released on Friday, and Thursday’s unemployment data it appears the next key player to shape market sentiment will be PCE data next week.
As we analyze these market conditions, it is important to remain cautious, considering the Federal Reserve's commitment to higher interest rates and the historical strength of the U.S. Dollar. Based on these factors, there is a belief that the rally in the SPY may be capped at levels around $440-450, with short-term support potentially found in the range of 400-430 over the coming weeks. See $SPY Seasonal Chart: