Alcoa (AA) results and positive economic data helped to set up a strong open. By 10:30AM the Standard & Poor’s 500 (SPX) rose 1.15%. This, according to my own research, kicked in my 1% Rule Trade.
1% Trade Rule Was Successful
The 1% Rule Trade has the following parameters. If at 10:30AM the S&P 500 (SPX) is rising by at least 1% then traders should short sell index exchange traded funds (ETFs), futures or similar products. If at 10:30AM the S&P 500 (SPX) is declining by at least 1% then traders should purchase index exchange traded funds (ETFs), futures or similar products. The trade is to be unwound by the end of the same trading day and not held overnight. The timing of the unwinding of the trade within the day is discretionary with particular attention paid to taking profits. The index used for the trade is also discretionary. Exceptions to the rule are on days: with a shortened trading schedule; days in which the monthly labor report is issued; days on which the FOMC or a major central bank takes or is scheduled to release monetary actions.
Those early gains began to dwindle late in the morning and disappeared entirely by 1:30 PM, turning into steep losses in the afternoon, yet, closing in the red well off the day’s lows. In the final analysis, had you traded the 1% Rule, you would have been a winner.
Why the markets turned around, is a subject of speculation. Some believe that it was due to news out of the EU. Others chalk it up to profit taking. For whatever reason, the traders were keeping the long side investors honest. Reports that Mitt Romney would make another run at the White House may have helped to lift stocks off of their lows late in the session.
After the market closed, Tesla (TSLA) chairman Elon Musk stated that Chinese sales were less than expected. That sent the car maker’s stock lower. TSLA stock is rather speculative and could go lower. However, we own the convertible bonds maturing 2021 for several client accounts which yield 3.79% to maturity while still offering some upside benefits.
Financial Services Earnings in Focus
Today, there are several important economic releases, retail sales and the Fed Beige book, which should continue to support the trend in economic improvement in the US. JP Morgan (JPM) and Wells Fargo (WFC) the nation’s two largest financial institutions will report results and conduct their conference calls before the market open. I am looking to put some capital into the financial sector and would welcome a bout of profit taking to get better entry levels. The reason for my interest in the financial sector is that in a rising rate environment, such as I expect later this year, net interest margins and hence profits should improve.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long TSLA convertible bonds — although positions can change at any time.
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