The rally that began in mid-October was a fairly strong one that was backed by massive oversold conditions that existed at the time. By the time it got to 3900 (400 points off the lows), it was a bit vulnerable, and when Fed Chairman Powell made some very negative comments, the market quickly gave back 200 points. After that FOMC meeting, the market remained rather leery of the CPI data that was to be released early in the morning of November 10th. So, it traded in that 3700-3900 range while it waited. The CPI data was modestly encouraging (although it remains to be seen what the Fed thinks of it), and the market exploded to the upside as many traders and investors think that interest rates have peaked.
This article was originally published in The Option Strategist Newsletter Volume 5, No. 3 on February 9, 1996.
While speaking at two locations last week — Futures Magazine's "Futures South" and Option Vue's Seminar — it became apparent that traders and investors want guidance on money management. Not only do they want trade recommendations, but they want some guidance in the realm of how much to invest in a position, and how to properly place stops.
The oversold rally that began in early October was proceeding at a good pace, and was strengthened by a breakout over 3900. However, the comments by Fed Chairman Powell after the FOMC meeting knocked the market down significantly. We have often referred to the fact that the current market bears great similarity to the bear market of 1973-1974, and this is yet another example. Back then, Fed Chairman Arthur Burns would speak, and the market would tumble.
The bulls are attempting to extend the rally that began in mid- October. Whether this fits in the broad category of October being a "bear killer" or not remains to be seen, but the breakout over 3800 on the $SPX chart this week was a positive development. As long as the Index holds that level, it is significant.
This is a topic that has been so long-forgotten that it seemed like it might make a good article now, or at least provide a “refresher” for those who might remember it. Now that interest rates are actually high enough to “matter,” traders who need to put up collateral margin can benefit from the old technique of buying T-Bills with the cash in their account. If the T-Bills mature within 6 months, the trader can use up to 99% of the value of the T-Bills for collateral margin purposes, while earning the T-Bill rate on their cash. The 90-day T-Bill rate right now is about 3.75% (annual), which is more than any brokerage firm is paying you on your cash balances. The best rate at a brokerage firm is probably Interactive Brokers (IB) which is paying 2.58% on the cash balance in excess of $10,000 in your account.
Deeply oversold conditions have spurred another rally attempt over the past week. $SPX made a trading low near 3490 on Wednesday, October 13th, and then early this week a strong rally took place. This rally generated some buy signals from our oversold indicators, but there has been no follow-through. The rally peaked at 3760 and has fallen back. There is fairly heavy resistance in the 3750-3800 area, which is where the most recent "island reversal" (circles on the chart in Figure 1) took place. Furthermore, the rally exceeded the declining 20-day Moving Average by a small amount, and then began to struggle. That is the classic action of an oversold rally.