The Fed walks into a bar.

The bartender doesn’t ask the Fed what it wants, because nobody can afford to go drinking anymore since all their money isn’t worth a damn, even as prices for just about everything are going up, and therefore the bar is closing down.

“A glass of Minervois,” the Fed says darkly. The bartender, surprised that it drinks wine, still picks up on the hint. Out of a job anyway, he converts his meager savings to euros, moves to the Mediterranean coast of France, and lives a mediocre life.

Comment

What, you wanted serious Fed commentary? Fine. The Fed cut rates again, for no good reason. Stock indexes didn’t particularly like the decision at first: the Dow dropped 100 points right away. Then, everybody changed their minds, and the Dow closed up 137 points. Bonds, still the closest thing we have to adult supervision, moved the 10 year Treasury up 2%. When bonds are up and stocks are up like this after an announcement, the safer bet is to go with the adults, and expect that stocks will either tread water or move back down in the immediate aftermath.

This isn’t a macro blog, and we don’t have the energy for a long discussion at the moment. Suffice to say that there’s a double entendre in the title of this post: besides the stupid thing above, there’s also the sense that the Fed is just yanking our chain (how could they seriously believe a cut was needed?), and that this particular joke is decidedly unfunny.

In other news, our open positions are in fine shape, thankyouverymuch.

Finally, deliberately stealing a page from Bill Luby’s tradition of VWSI wine pairings: for a silly Fed rate cut and an increasingly precarious economic environment, we recommend the liquorice notes of Domaine La Tour Boisée (the Minervois, of course), and, if you need some music to set the mood, The Reminder by Feist.

The Fed speaks ex cathedra on Wednesday. How to deal with this fact?

Simple: on Monday, Tuesday, and early Wednesday, sit on hands. Post announcement, let everybody else freak out in whichever direction, i.e. continue to sit on hands. [Optional: if you're an aggressive trader, fade the freak out before the day's close.]

Resume normal behavior a day or two later. Thank yourself, and us, for not overtrading the event and making everybody but you (like your broker, market makers, and the exchanges) rich. The end.

FYI: Interesting directory we found the other day:  GetFolio.com The GetFolio.com Portfolio Manager is a remarkable investment tool for individual investors that includes all the features (and more) that a money manager would use in building and managing a diversified portfolio.

If you caught our Bonus Trades post on Thursday night, you got some free picks that could have made you a very happy camper by Friday afternoon. Let’s see how we did:

• CELG Nov 70 calls: in at $0.65, closed Friday at $1.00 for a one day gain of 53.8%
• CELG Nov 60/65 put vertical: sold at $1.85, closed Friday at $1.00 for a one day gain of 45.9%
• CELG Nov 55/60 put vertical: sold at $0.45, closed Friday at $0.20 for a one day gain of 44.4%
• BIIB Nov 80 calls: in at $0.85, closed Friday at $1.05 for a one day gain of 23.5%
• BIIB Nov/Dec 80 calendar spread: in at $1.75, closed Friday unchanged.
• We didn’t pick a specific entry on MSFT/AAPL, but MSFT started the day at 36 and sold off from there, closing at 35.03, so shorting the open and sitting on your hands would’ve yielded you a 2.85% one-day gain on that stock. AAPL was up 1.05% on the day, which is a nice move for some stocks, but might as well be treading water given how how Apple has been recently. Our assumption is that all the Apple traders were out of the office Friday buying copies of Leopard.

At this point, we’re supposed to say something like:

“And those are just our bonus trades, imagine what the real picks are like for our members!”

Well, not quite. We’re actually a lot more conservative than these trades suggest: iron condors are risk-defined by definition, have limited profit potential, and according to some people are inherently unsexy. We disagree: if you’re not content with average returns of 24% for a measly 27-day holding period (on average), then you’re probably trying to get rich quick or something. Good luck with that: there are some people we’d like you to meet.

Here are some trade ideas for your Friday morning. Normal “bonus trade” disclaimers apply: these obviously aren’t part of the iron condor strategy that we trade with our members, and they could completely blow up in your face. So trader beware.

The first two picks are some biotech names that have taken a hit recently:

1. Part of the problem with Celgene (CELG) is that they sit around all day playing with models of molecules (pictured, from their site). Actually, they made the inexcusable error of not doubling sales of their key product over the past 12 months: in fact it only boosted sales by 97%, and apparently that warrants an 8.5% decline in the stock. False. So the first thing to say is that this is a good time to grab some shares if you’re into value investing. But more importantly, this name is due for a recovery of some sort. The Nov 70 calls are $0.65. Even better, it bounced right off the 200 DMA today at 60.26 and stayed up from there, so selling the Nov 60/65 put vertical for $1.85 doesn’t look super risky, and offers a 58% return on capital risked in just 22 days. You could be a bit more conservative and sell the Nov 55/60 put spread for $0.45, as it would take some pretty heavy selling to break through that $60 support.
2. Biogen (BIIB) has also been having a tough time of late. You could gamble on a bounce naked by buying the Nov 80 calls for $0.85, or cover yourself and save us all the embarrassment by buying the Nov/Dec 80 calendar spread for $1.75. After all, if things go really well, you can always roll your short Nov calls up or out.

Weird things going on in tech today, not the least of which was a new all time high for Microsoft (MSFT), on a day when Apple (AAPL) is down 1.7%. If you’re an Apple fanboy like we are, you won’t mind shorting Microsoft here and buying some Apple shares. Microsoft’s 2-day RSI is above 98, so some profit-taking soon is likely, though be careful about that $0.11 dividend coming up. You could maybe do this as a 3:2 ratio of MSFT:AAPL if you want to take a more short-term approach.

Oh, and you should not sell iron condors on any of these stocks, ever!

Weekends are for resetting our biases.

In that spirit, here are some reasons the market may be short-term oversold - reasons to take a hard look at any short positions you have come Monday morning:

1. 2-day RSI levels: Dow at 0.090, SPX at 0.81, RUT at 0.90; NDX is the only index with RSI room to fall, at 9.61. But that (relatively) higher number is really just due to continued tech leadership. Some members were asking last week why we use the 2-day RSI rather than the traditional 14-day setting. The reason is that the 2-day gives you a more dynamic reading, and makes it into more of a leading (rather than lagging) indicator. In short: the 2-day is good for giving contrarian signals (overbought/oversold), while the 14-day is good for giving momentum confirmation signals.

2. VIX mean reversion - the CBOE Volatility Index tracks the volatility of options on the SPX, for those of you living under a rock. Like anything else in the universe, it tends to revert to the mean, and at the current reading of 22.96, it is well above its 10, 50, and 200 day moving averages. (And its 2-day RSI is at 96.10, if you care.)

3. Earnings - Lots of big names reporting next week, including AAPL, MRK, T, AMZN, BA, DOW, COP, BIDU (full list). Some decent earnings news will boost markets, and at least so far we have little reason to expect any sort of disastrous quarter.

Sell Your Fear to Somebody Else

For some of our newer readers/members, days like Friday trigger inevitable reactions like, “This is scary, I’m outta here!” and “Can iron condors really work in such a crazy market environment?” The answer to such fears is that environments like this are the best time to trade iron condors. As we’ve noted before, the whole point of our strategy is to grab volatility while we can, and that means being calm when everyone else is fearful. Sure, you can panic along with the crowd, and stampede your way into mediocre or sub-par returns, or you can learn to sell fear when everyone else is scrambling to buy it.

Historically, the implied volatility of an underlying index is almost always higher than its actual volatility over a given period. That means that selling volatility (fear) when others are buying it has generated statistically significant superior returns. So get your emotions out of the way and let the mathematics work its magic.