By Nicholas Santiago on February 19th, 2010 3:24pm Eastern Time
Yesterday after the market closed the Federal Reserve Bank announced that they have raised the discount rate(short-term interest rate charged to banks that borrow directly from the central bank) by 0.25 basis points from 0.50% to 0.75%. This move by the Fed is being viewed by many as a vote of confidence by the U.S. central bank, however, I'm not so sure about that. I find it rather odd that they did it ahead of a Friday that is options expiration. Please note during options expiration a lot of games are played by the institutional money to move stocks away from the popular strike prices that the small contract trader or retail trader are betting on.
Since the January 2010 pullback in the market many small traders have been buying puts in the market looking to capitalize during this expiration. Since February 5th, the market made a sharp low and has rallied higher ever since. Therefore, it is understood that the institutions needed to take care of business and keep this market above or near the 111.00 strike price on the SPDR Trust(NYSE:SPY) into the weekend. Options expiration is always a time to be very short term trader and really try not to do more than that.
Many can remember back on January 22nd, 2008 when the Federal Reserve Bank lowered the discount rate by 0.75 basis points. This stunt was pulled before the open of the market on a Friday that was also options expiration. If anyone recalls when this occurred it caused a massive short squeeze and a rally for couple of weeks. These guys are very calculated and very smart. Many financial stocks are flat and holding up today. For example, Goldman Sachs Group(NYSE:GS) is positive today by 0.50 cents and J.P. Morgan Chase and Co(NYSE:JPM) is trading slightly down on the session by 0.35 cents. This is not bad behavior considering the Fed punchbowl is being taken away or at least implied that it is coming to an end.
Please remember the major market moves occur as very strong forces pull and tug in different directions. One should never underestimate the power of the U.S. central bank called the Federal Reserve Bank. These guys are very calculated at all times especially like to surprise traders around options expiration.
Nicholas Santiago
Chief Market Strategist
IntheMoneyStocks.com
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