Wall Street made a reasonable job of reassuring investors that the economy wasn't as bad as feared last week. Blue chip companies such as Apple and American Express beat earning expectations and Google continued its meteoric rise says Betonmarket's Michael Wright.
The stock market extended its recovery last week after plunging on Friday October 19th. Wall Street had sold off for five straight sessions ending that Friday as worries about the credit market's effect on the economy escalated. Several blue chip companies offered sluggish outlooks and S&P downgraded more mortgage-backed securities. Higher energy prices and a weakening dollar are also hanging over the market. Treasury Secretary Henry Paulson said in a speech that China must allow its currency, the Yuan, to gain in value more quickly. This will help counter imbalances in the economy and make monetary policy more effective in responding to inflation.
Rumours circulated mid-week that the Federal Reserve, which is scheduled to meet next week might be lowering interest rates before then or be doing so by 50 base points again. The central bank has also been adding a substantial amount of liquidity to the financial system over the last couple of weeks.
"Once people hear about a rumor, they tend to cover their shorts. Even though it's just a rumor that's out there" said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. Short-covering is when traders undo bets that predict the market is going to fall. "There was a lot of bad news this week. It's pretty clear Wall Street wants a rate cut and wants it soon."
With the possible rate cut coming, most traders have already placed their trades to take advantage of the cut. Should the FOMC decide not to cut rates then the market might then be set up for a dramatic retreat. Most traders would unwind their trades, and others might reenter the short positions that were closed out in anticipation of the rate cut.
What does this mean for the short term outlook of the SP500?
The only think that we can possibly be confident in happening is that volatility will pick up, while we aren't sure in which direction, Betonmarkets.com allows us to take that guess out of the equation with a up or down bet.
An up or down bet compensates the trader if the index touches either a higher or the lower trigger. This type of trade is useful when you don't know in which direction the index is going to break out to, but you are confident it will break out somewhere.
An up or down with a 45 point trigger in both directions, with a 20 day term on the SP500 returns 8% ROI. This means that the S&P 500 has to rise 45 points in either direction over the next 20 days for you to win.
How to trade when you don't have a clue
