Fed Pauses, Market Drops

My Initial Reaction

By Bryan Bottarelli
Tuesday, August 08, 2006 4:40 PM EST
Tue, 8 Aug 2006 21:40:00 GMT

Dear Bottarelli Research Member,

Although I wasn’t quite sure what the Fed’s action would be, I did get the end result correct — a market sell-off.

After spending most of the day in the green, the markets opened up a broad-based sell-off after the Fed announced their decision to keep rates steady at 5.25%.

As I mentioned earlier, once the initial euphoria about the Fed finally pausing had subsided, Wall Street would then begin to digest the reason the Fed paused — which is due to a weakening economy (which, of course, carries a bearish overtone). That was my rationale for today’s downside prediction, which ended up coming true. But tomorrow, the story could be different.

You see, the fact that there was not a huge reaction (volume today as light) leads me to believe that investors were prepared for today’s news — which means we can now get back to trading without the risk of a Fed-induced counter-move. And to tell you the truth, I think the economy is actually stronger than many care to realize.

Case in point, Cisco (CSCO – NASDAQ) just reported a record quarter across the board. The worldwide leader in Internet networking reported Q4 net sales of $7.98 billion compared with $6.6 billion for the fourth quarter of fiscal 2005. That means you can add CSCO to the long list of other positive earnings reports — making it plain as day that there are still a lot of extremely strong companies hitting on all cylinders. The fact that Wall Street has failed to reward many of these strong earnings reports could open up plenty of new trading opportunities.

In the near-term, I’ll be looking to play companies that benefit from a temporarily halted interest rate environment — and the Utilities top that list. Plus, the fact that the utilities are hitting historic highs makes the case for upside calls that much easier.

On the flipside, I’ll also be looking to balance out any upside positions with puts on the weaker names I’ve been following over the last few days. And don’t forget, we could soon be taking another look at CAT and CSX for attractive entry prices — as each stock lead the Dow lower today.

In short, now that the Fed has made their decision, we can get back to some nice trading action — so gear up!

Until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

© 2012 CSR Group, LLC. All rights reserved. Published in USA.

Information, opinion, research, and commentary contained herein is obtained from sources believed to be reliable; their reliability, however, cannot be guaranteed. The maxim of Caveat Emptor applies — let the buyer beware. Bottarelli Research does not provide individual investment advice, act as an investment advisor, or individually advocate the purchase or sale of any security or investment.

Investments recommended in this service should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Bottarelli Research reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscriber’s initials will be used unless express written permission has been granted to the contrary.

CSR Group, LLC expressly forbids its writers from having a financial interest in any security recommended to readers. Furthermore, all employees and agents of CSR Group, LLC and its affiliate companies must wait 24 hours before following a published recommendation.

Bottarelli Research alerts contain time-sensitive information, and are published and distributed to members with urgency. Because of this, not all published materials can be adequately proofread, and an occasional spelling or grammar error may exist.


Other Options Alerts From August 2006