Sometimes trades hit their mark before options expiration. Sometimes it seems like the thesis will not play out as planned.
These are the tales of the two trades we suggest closing before options expiration. The first trade we suggest closing is IBM. This is a situation where our thesis played out as planned.
We thought IBM was an over-indebted stock with little growth potential trading like a growth stock. We felt it was only a matter of time before the world would come to see our side of things, which was the case. IBM fell from $141.86 when we suggested the bearish trade to $129.27. The catalyst was disappointing earnings. This made it clear that while IBM will make a buck, growth is not in the cards in the near term.
The second trade we suggest closing is the bullish TLT trade. TLT was starting to bounce. We interpreted this price action as investors preparing for the worst. We thought the equity market could crash, which would spark a big flight to quality move to Treasuries.
So, instead of stock prices falling, causing interest rates to fall, we see a short squeeze pushing higher share prices. The Federal Reserve will meet next week, and the consensus expectation is they will increase the target Fed Funds rate by 75 basis points. With a strong stock market at their back, we think there is a chance they will increase the target rate by 100 basis points. Put this all together, and we do not believe there is much upside left in the bond market, and it is time to sell.
On another front, with the stock prices rising in what we believe is a bear market bounce, we thought it made sent to look at how high the bounce could go before it ends and the bear market resumes.
Our interpretation of the charts suggests the bounce is in the 8th or 9th inning. That being the case, we think the bear market could resume at anytime. Do not get fooled by the bounce. The bear has more damage to do. Why? Inflation is not transient. Unless and until the Fed shows some muscle, the bear will continue to break havoc.
