Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, M.S. and Jordan Young, CMT
September 25, 2016
The alleged bad guys in today’s economy are drug companies, evil banks and stuffy overpaid Wall Steeters! WRONG! Let’s try again. The villains eating away at consumers’ dollars are the INSURANCE COMPANIES whose overpriced health care policies and red tape proliferating behavior go largely unchecked thanks, in part, to their excessively large lobby in Washington. These bad boys, shockingly, remain pretty under regulated, especially in comparison with their bank and broker/dealer cousins. Who besides the government can guarantee anything in the financial arena? The insurance companies! Take a basket of stocks and package them into a mutual fund. Do you have a guaranteed product? Of course you don’t! Take the same basket of securities and call it an annuity; not only can you call it guaranteed but you can take the highest commissions allowed on the street. Have you ever wondered why your whole life insurance did not build cash value in the first two years? One word, commissions, and guess what, they never end. While yes, you can say the same is true of mutual funds, commissions on the sale of financial instruments are capped at 5%, the instruments are far more regulated (good luck calling a mutual fund guaranteed), and post purchase, fees go to both the selling agent, a small amount, and then to the management of the fund. Insurance company commissions on the other hand, remain sky high. Their possible double digit commissions are by far the highest on the street,. )
Insurance companies have sold the uneducated public a bill of goods promising guarantees on products, cleverly disguised as safe alternatives to bank CDs. Walk into your local bank on a day when your savings account looks extra fluffy. You might just find yourself seated in front of a series 6 registered insurance agent, disguised as your friendly local banker. Go figure…. We are reminded of a wonderful quote eloquently stated in the classic cinematographic work “Tommy Boy.” “If you want me to take a dump in a box and mark it guaranteed, I will. I got spare time. But for now, for your customer’s sake, for your daughter’s sake, ya might wanna think about buying a quality product.” Our apologies for Tommy’s lewdness.
Sadly, the game being played by insurance companies does not bode well as political fodder. These are not outlandish one-time actions that we hear about. Rather, this is a perpetual kick in the rear end; something much harder to get to trend on your twitter feed. The result is underpaid physicians, many of whom will not take Medicare nor Medicaid. Increasingly, many do not take insurance policies as a method of payment, insisting that we file the claims ourselves ……find out how many time you can get your claim rejected. The good news is the unfair pricing methods employed by the insurance oligopoly in our under-regulated environment will certainly get better when it is a monopoly operated by the government… right? Right?….
The FOMC met and yielded a “nothing done” response to its two-day meeting. We are on high alert for a possible rate hike in December. Very few believe that the data will compel the FOMC to move in November, especially given the scheduled Presidential Election. What is an investor to do? Well if you want or need to borrow money, now is a great time to do so. That said, if you want to invest in debt securities, beware of illiquid markets and always investigate how the debt will be paid off. If you are buying a house, now is a great time to lock in that mortgage.
Low interest rates inspire companies to merge insomuch as the cost of debt is low. We can expect to see corporations continue to retire high interest paying debt and issue new lower cost debt. It just makes sense to do so. Although we are at the end of September, the worst month of the year, we are approaching the elections and tax selling season.
The S&P 500 declined 10.75 at 2157.50 in the Friday session leaving an inside candlestick on the chart. The downtrend line is at 2171.48 and the uptrend line is at 2127.63. The stochastic indicator continues to issue a buy-signal but we see the line curling over. The RSI has curled over and is now issuing a sell-signal. Our own indicator continues to issue a buy-signal with plenty of room to the upside. The Bollinger Bands remain moderately expanded and are going flat at this time. We see resistance at 2172.75 and at the high of 2191.50. Above the high, there is no resistance and the market will likely sprint to the upside. The downside has lots of congestion to hold the market from a free-fall. Support is seen at 2144. The intraday chart clearly shows that the sell-off began at the open of the day, continuing until about 1:45 where it printed the day’s low. From here the S&P rebounded to 2163 by 3:30, finally selling off on higher volume into the end of the session closing down just 1.5 handles (points) by the end of the session. This looked more like a pre-weekend flattening than anything else. The most frequently traded price was 2167 which was frequently traded in the overnight session. The most frequently traded prices in the day session were 2161 and 2162.
The NASDAQ 100 made a life of contract high in the Thursday session! The old high printed in January of 2000 was 4884; this week’s high was 4892.25. The volume wasn’t that impressive in either the Thursday or Friday sessions. The NASDAQ 100 closed down 29 handles (points) in the Friday session closing at 4857.25. The Bollinger Bands continue to expand moderately. Both the stochastic indicator and the RSI are now issuing sell-signals. Our own indicator continues to point higher. The most frequently traded price was 4884 seen in the overnight session. The most frequently traded prices in the day session were 4872 ad 4870. The market sold off at 1:45 printing the low for the session, recovered to 4861 by 3:45 after which the market declined and closed at 4857.25. All of this was on moderate volume. We can expect to see the market jolted by sound bites and rally from other sound bites. The Presidential candidates’ debate is coming in fast!
The Russell 2000 retreated 10.50 handles (points) in the Friday session closing at 1248.90. This index has not made a new high as yet. The Bollinger Bands are slightly expanded and steady. The stochastic indicator is curling over to the downside and will likely issue a sell-signal within a session or two. The RSI is issuing a sell-signal. Our own indicator is issuing a buy-signal. The most frequently traded price, 1258.5 was in the overnight session. The most frequently traded prices for the day session were 1254 and 1253.25; however, the highest volume, 14% of the day’s volume, was seen at 1252.50. The intraday chart shows a rally attempt at 3:00 which resulted in a failure and a decline closing at the sessions low.
The US Dollar Index closed the Friday Session at 95.41, down marginally for the week. The Bollinger Bands have contracted; the upper band is 96.25 and the lower band is 94.78. We are currently below both the five period exponential and the 20-day simple moving averages. The RSI is clearly coiling, having made a series of higher lows and lower highs. This Index itself is coiling in a very dramatic and obvious way. The weekly chart shows us a trend line dating to May 2014 on path to converge with a downtrend line which has kept this market in line since November 2015. The apex date you ask? November 16th. So what does this mean? No, this isn’t voodoo and we forgot our Ouija board at home. Markets hate indecision and indecision is exactly what we are facing. The convergence date comes shortly after the US elections. Until then, look to see the market back and fill between 94.78 and 96.25. We expect to see a violent break out once we move past the US elections. US rates are still very attractive compared with our European neighbors. Continued currency inflows together with incoming election results will likely lead to a relatively higher US dollar index. These points are only exacerbated when factoring in the Fed’s probable December rate hike. We remember our former colleague Phil who made the unfortunate decision a year or so back of holding his breath in anticipation of a rate hike… asphyxiation is not a pleasant way to go. Likely as a hike may be, don’t be like Phil. The weekly chart shows extreme points of support and resistance at the upper and lower levels of a volatile trading range at 94.17 and 99.71 respectively. We believe this market will break out in November and make its way to support above.
Crude oil retreated 1.73 in the Friday session leaving a very long red candlestick on the chart. What is worse is that the trade removed Thursday’s high and then reversed course and removed Thursday’s low, closing below that number. That is very bearish action. Both the RSI and the stochastic indicator have issued a sell-signal. Our own indicator continues to issue a buy-signal. The downward trending channel lines are 46.50 and 42.62. The only positive about the day’s action is that it was not on heavy volume. The Market Profile chart is a bimodal curve. The overnight bulge in the upper bell was at 45.96 with the bulge in the lower bell at 44.70. Should crude oil retreat further, we will see support at 42.55, 41.09 and finally at 34.19. Crude oil opened the day-session nicely on good volume but by 11:20, began to retreat, hitting the low of the session at 2:20 and finally rallying a bit into the close, closing the day at 44.59.
Gold lost 3.30 in the Friday session and closed at 1337.40, leaving a doji-like candlestick on the chart. Neither the bears nor the bulls had control of the session and the result was a deadlock. Additionally, the range of the day condensed and left an inside day on the chart. The Bollinger Bands are very flat, going nowhere fast. The trade action seems to be range-bound. All the indicators that we follow herein continue to issue a buy-signal. The monthly chart shows gold at the top of its recent trading range. The most frequently traded prices were 1341.2 and 1340.5. The intraday chart was a bit choppy showing a bias to the downside until the close when it rallied.
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Past performance is not necessarily indicative of future results.
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