Sunday, November 17, 2013

The Week Ahead: 'Flation

This is prices week in the land of economic reporting, when traders get to see two report cards on how much stuff costs.

The consumer price index will be published on Wednesday at 8:30 a.m. New York time, and will be followed on Thursday by the producer price index at 8:30 a.m.

Traders take an intense interest in the subject because these reports measure inflation, the risk of inflation determines monetary policy, and monetary policy determines whether returns on stocks are attractive or not.

So everyone talks about, and fears, inflation, but there is another sort of 'flation in the inventory of possible futures: Deflation, such as the world experienced in the 1930s and Japan since the early 1990s.

Reuters did an analysis on the question last week: "Deflation threat in Europe may prompt investment rethink".

Bottom line for me as a trader: Having retired my crystal ball to the attic long ago, I try not to assume either inflation or deflation, but simply try to hit each pitch as it comes.

Other influential reports planned during the week: Two on Wednesday, retail sales at 8:30 a.m. and existing home sales at 10 a.m., and on Thursday, the Philadelphia Federal Reserve survey of business conditions in the mid-Atlantic region, at 10 a.m.

The Federal Open Market Committee minutes of its Oct. 30 meeting will be made public at 2 p.m. Wednesday.

Fed Chairman Ben Bernanke delivers the Herbert Stein Memorial Lecture at the National Economists Club annual dinner at 7 p.m. Tuesday. Sometimes he makes news, sometimes he doesn't, but I always find his speeches to be totally fascinating.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday. 

Other reports of interest:

Monday: The Treasury international capital report, which tracks money flows into and out of the United States, at 9 a.m., and the National Association of Home Builders housing market index at 10 a.m.

Tuesday: The employment cost index -- paychecks and benefits -- at 8:30 a.m.

Wednesday: Business inventories at 10 a.m. and petroleum inventories at 11 a.m.

Thursday: The PMI manufacturing index flash just before 9 a.m. Thursday.


Aside from Bernanke, six Federal Open Market Committee members take to the podium: New York Fed Pres and committee Vice Chairman William Dudley on Monday and Wednesday, Chicago Fed Pres. Charles Evans on Tuesday, St. Louis Fed Pres. James Bullard on Wednesday and Thursday, Fed Gov. Jerome Powell on Thursday, and Kansas City Fed Pres. Esther George and Fed Gov. Daniel Tarullo, both on Friday.

Two FOMC alternates have scheduled appearances, both on Monday: Philadelphia Fed Pres. Charles Plosser and Minneapolis Fed Pres. Narayana Kocherlakota.

Analytical universe

This week I shall be analyzing new bull and bear signals among 2,374 stocks and exchange-traded funds that have some analyst interest. They are traded both on the major U.S. exchanges and over-the-counter. My universe is selected from mid-cap stocks and larger, defined as market capitalization of $1 billion and greater.

Trading calendar

By my rules, I'm trading December options for the short legs of vertical, diagonal and calendar spreads and covered calls, and for all legs of butterfly spreads and iron condors. I'm trading February options for single calls and puts as well as straddles. Shares, of course, are good at any time.

Good trading!

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