For those of you who don’t already know the Fed decided to lower rates by a quarter-point to 4.50%. It was the second straight reduction this year. As expected, immediately following the announcement the market experienced several violent whipsaws only to finish the trading day substantially higher. The S&P (SPY), Dow (DIA) and Nasdaq 100 (QQQQ) finished the day higher 1.0%, 0.8%, and 1.4%, respectively.
Did you notice how the bond market responded to the announcement? The benchmark 10-year Treasury note spiked after the news and advanced over 2% by the end of the trading day and 4.4% since late Tuesday.
Historically, when we see the S&P up over 0.5% and the 10-year Treasury notes up over 1% following a Fed announcement the market has a tendency to struggle over the short-term (1-5) days.
Couple the aforementioned historical tendency with the benchmarks we follow (found below) nearing an overbought territory and you can see why the market could struggle to advance over the next few trading days.
SPY Diagonal LEAPS Strategy
The strategy continues to make strides up $1,681 or 8.4% in our test account. The fact that we begin each expiration cycle long one LEAP allows the strategy to take advantage on any significant upside moves. We begin the cycle long one LEAP contract because we want a hedge just in case the market rallies significantly over the course of the expiration cycle. I would like to see some bumpy roads ahead so that we can see just how the strategy reacts during adverse conditions..
Overbought/Oversold for October 30, 2007
S&P (SPY) – 65.2 (neutral)
Russell 2000 (IWM) – 60.5 (neutral)
Dow (DIA) – 63.8 (neutral)
Nasdaq 100 (QQQQ) – 73.5 (neutral)
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Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com