Trading The Fed? Here Are 2 Scenarios
All I can say is that I am glad that it is time for
another morning session of trading. There can be little doubt that
the “trade ’em and get the hell out of here” crowd is in full force. Summer (or
lack of, due to the lousy weather) on the Hamptons is too much of a draw for
Wall Street heavies during the summer. However, we may have a respite — the
FOMC meeting. I was discussing the FOMC
meetings for the last couple of years with my colleague yesterday — actually it
was more of a reminiscing, remembering the big fat trading days on the heels of
the FOMC meetings. Like all things, change is inevitable, and the lay-up trades
of old simply do not exist.
The one thing we did agree on was that this meeting just may be different.
For the first time in recent memory there is not only major disagreement on how
much the rate cut will be, but more importantly, a very intelligent debate as to
the merits of the cut. Some argue that it will do nothing, the bulls argue it
will be an insurance policy on sustaining the recovery. Frankly, I could care
less as to the final outcome (although a rate cut in my opinion is dangerous),
but I think that the outcome could, temporarily at least, offer up some good
volatility for us HVT’ers. The rate-cut
debate is simply too polarized to result in anything else.
So how do we play it? Ahh, the ultimate question. Like all things in trading,
there are no absolute answers, rather scenarios that one must envision and then
trade according to the scenario that unfolds. For the most part, the scenarios
are pretty consistent:
1. No rate cut – this would be viewed negatively on first blush, but
may be seen as a positive since perhaps Easy Al sees the economy improving more
than is widely assumed.
2. A rate cut, of either 1/4 or 1/2 point, BUT with very strong
language indicating that that is it, no more. This is highly unlikely given the
Fed’s comments at the last meeting (inflate at all costs), but this is where the
sweetspot would be seen from a trader’s perspective.Â
OK Dave, that is great, stating the obvious, but which way to I pull the
trigger, long or short? Well, an announcement that falls within what the market
expects should never be traded on the first move, that move is far too emotional
and often incorrect. In this scenario, do nothing, play the counter-trend
bounce or sell-off.Â
A “curve ball” announcement, like Scenario #1, would in all likelihood need
to be shorted right away for a quick pop to the downside. Nonetheless, you never
want to get too greedy, let slowing momentum on the thrust lower be your guide
to exit. Remember, this scenario may ultimately be viewed positively.
In the meantime, you know what is most important? Avoid the afternoon
session. For the most part the afternoons have been a waste of time as price
action is more a spectacle of a snail marathon; ahead of an FOMC meeting the
snails may even be under the influence of sleeping pills. If, and that is a big
if, the weather is good in your area, turn off your monitors and get the hell
away from your screens and get ready for Wednesday.Â
Referring back to Monday’s column regarding Fade The Gap Trades, they
continue to be the best performers in this market. While the charts may not be
real conclusive, go back and look at the opportunities for a quick HVT in
Tenet Healthcare (THC) and
Fannnie Mae (FNM) from yesterday.
Finally, I could not resist using this quote from Richard Russell’s
Dow Theory Letter:
Bill Clinton is getting $12 million for his memoirs.
His wife Hillary got $8 million for hers.
That’s $20 million for memories from two people who
for eight years repeatedly testified, under oath, that they couldn’t remember
anything.
God Bless America
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Mark your calendars! Today, Tuesday, June 24th at 1 PM EST, I will be
interviewing someone who plays an integral part in my day to day trading, Ben
Lichtenstein. Ben calls the action each day from the S&P 500 pit on the
CME. I can tell you this, I feel lost when
I do not have him on while trading. Join myself and Ben as we talk about the
current state of the markets and how you can gain that spilt second edge with
audio commentary from the S&P Pit.Â
Click here to sign up.
As always, feel free to send me your comments and questions.
Dave