After rallying sharply off the open, stocks have reversed that strength and are now sitting near flat on the day. Starting at 2:00 today with the FOMC statement, the next three days look to be a whirlwind. All eyes are on the Fed today, but the rest of the week will likely be very eventful. There is an ECB Policy decision tomorrow, and Friday will bring the July employment report. Sentiment is very mixed into the next three days, as opinions on one side of the market of the other have been strong. This creates the potential for big volatility, as there is capitulation possible on either side of the market.
At present levels, the Russell 2000 is leading stocks, up by 0.3% on the day, with the Dow lagging, up only 0.1%. Bonds are getting hit hard after the better-than-expected ADP Payroll and GDP numbers this morning, lower by about 0.7%. Metals are getting hit into the FOMC statement, with gold off over 1% and silver 0.3% lower.
CHART OF THE DAY
Currencyshares Euro Trust (FXE) – This ETF tracks the Euro currency, and given the massive amount of market-moving data over the course of the next few days, a long volatility strategy makes a lot of sense to me. Looking at the chart on a weekly basis, you’ll notice that the Bollinger Band width recently plummeted to an extreme low and is now ticking higher. Additionally, implied volatiles on FXE options are dirt cheap, as the August monthly series is running at about 9%. The weekly options on FXE are bid sharply up ahead of the week’s events, so it is preferable to play longer term and give this trade some time to play out. Subscribers in Schaeffer’s Volatilty Trader service were recommended to enter this trade earlier today.
I like buying an August 131 straddle here for about $2.10. This trade will profit on a move above 133.10 or below 128.90 by August 16.
WHAT I’M EXPECTING
A roller coaster ride over the next three days. Don’t get too caught up in short-term moves, and be very mindful of your risk into the events. If I had to pick a side, I would look for an upside move in the S&P 500 above the 1700 level, but these are certainly events where anything is possible. Don’t let price action in the indexes shake you out of your individual stock positions.