This past week‚Äôs slate of economic data that crossed the tape was of a more encouraging tone that kept the market‚Äôs bullish sentiment fully intact while triggering some much awaited profit-taking in the bond market. In what has been a relentless stream of fund flows into Treasuries from all corners of the globe, stronger reads on producer prices, manufacturing and retail sales triggered a fierce round of selling pressure that took the bond prices gapping lower, while the yield on the 10-year Treasury Note jumped from 1.33% to 1.60%.
It seems the Fed is finally getting what it wants, a hint of inflation and a more confident consumer, some of which might be correlated to the recent decline in gasoline prices and the 11% spike in home mortgage refinancing data thanks to record low rates for mortgages. For bond yields, both here and abroad, we might have just seen the lows for the cycle. Last Wednesday, Germany became the second G-7 nation to issue 10-year bonds with a negative yield, following Japan. It would stand to reason that rates in Japan and Europe will stay persistently low until there is a sequential uptick in hard economic data, but the U.S. economy is in the early stages of seeing growth in gross domestic product (GDP) pick up. As such the recent rotation into cyclical market sectors is gaining validity.
What is key for market sentiment is that the big banks (JPMorgan, Citigroup, US Bancorp and Wells Fargo) all reported second-quarter financial results that came within target estimates and thus didn‚Äôt really disappoint, as many had predicted. The fact that the financial sector got through the week without derailing the recent rally bodes well for the bulls going forward. The major averages are technically overbought, however, so I expect the market will consolidate its gains in a sideways fashion, giving little ground, and then resume its upside bias. This is a classic upside market breakout that should broaden out and include all 10 sectors of the broad market over the next few weeks.
This is also a classic investing landscape for putting to work a high-performance bull call spread strategy where investors buy Long-Term Equity Anticipation Securities, or LEAPS, on big name stocks and sell short term out-of-the-money call options against the underlying LEAPS positions. It‚Äôs the bread and butter of my latest advisory service, Instant Income Trader, that is in its second week of existence — and we‚Äôve already got bull call spread strategies at work for us in names like Lockheed Martin, Northrop Grumman, Constellation Brands and Clorox, all of which trade well in excess of $100 per share.
LEAPS are an excellent way for a longer-term¬†trader¬†to gain exposure to a prolonged trend in a given security without having to roll several short-term contracts together. The ability to buy a call option that expires one or two years in the future is very alluring because it gives the holder exposure to the long-term price movement, without the need to invest the larger amount of capital that would be required to own the underlying asset outright. For stocks that would tie up $15,000-$25,000 to own only 100 shares, we can buy a LEAPS contract that controls that same 100 shares for the next 18 months for as little as $2,000 and have a strike price that is well in the money compared to where the stock trades.
I‚Äôm putting out strategies that, if the parameters of the trade pan out according to plan, pay out an average of close to 10% per month just on the selling of the calls against the LEAPS. This is pure unadulterated monthly income in its finest form because when you sell a call option, it credits to your account immediately. It is in its purest form ‚Äúfree money‚ÄĚ and is why an effective synthetic bull call spread strategy, the kind of which I created, is arguably one of the most powerful income tools a trader/investor can utilize. And now with the market breaking out, call option premiums just expanded, meaning the selling of call option premiums just got more lucrative. How fat is that? Pretty fat. Check out¬†Instant Income Trader¬†by clicking here or my traditional covered call service Quick Income Trader at this link¬†and we‚Äôll get you all set up to rake in an income stream that comes with bragging rights.
In case you missed it, I encourage you to read my e-letter column from last week¬†about how last week’s job report benefited high-yield equities. I also invite you to comment in the space provided below my¬†Eagle Daily Investor¬†commentary.