FOMC Comments, Why It’s Different This Time
Stocks are up modestly today after yesterday’s FOMC announcement. As we are now entering that weird place in the market – where good news is bearish and bad news is bullish.
You see, stocks have rallied so much since the December lows that the market is now worried that the Fed might raise interest rates. However, the Fed remains “patient” after it downgraded its economic assessment to “activity has slowed from its solid rate in the fourth quarter”.
Now, I listen to what the Fed says, as well as, pay attention to current market volatility. This allows me to get a strong grasp on overall sentiment… And from there I’m able to take trades on ETFs like GDX, TLT, VXXB, and individual stocks.
That said… I’m not a bull or a bear…
… I’m an opportunist.
I let my money pattern decide which side of the trade I should be on (long or short)… and I use options to express my opinion.
That said, based on my sentiment reading and what the charts are telling me… I believe that with the help from the Fed this market will remain strong. Which creates a beautiful opportunity for selling option premium (volatility premiums drop when stock prices rise)…or…buy calls in select stocks when they dip (based on my money pattern).
Furthermore, I want to update you on some specific positions I have…some I’m looking to get into…and some more Fed comments. Click here for my thoughts and trades.
The Federal Open Market Committee (FOMC) did nothing extraordinary yesterday… in fact, it was what the market was expecting: no rate hike. However, there were some interesting notes in Federal Reserve Chair Jerome Powell’s speech:
- It’s a great time for the Fed to be patient, watch and wait for data points.
- Economic and market data are not signaling the Fed needs to move in any specific direction.
- U.S. tariffs are small, relative to the economy size.
- Brexit and U.S. – China trade talks pose some risk to the Fed’s outlook.
- U.S. jobs gains have been solid.
- The Fed plans to conclude its quantitative tightening policy at the end of September.
But how does this help us with our trading?
Well, if you think about it… no rate hikes this year would be good for the stock market… unless there actually is some data suggesting a potential crash. You see, when the Fed doesn’t raise rates, it makes money easier to obtain because banks and consumers are borrowing at a lower interest rate. In turn, this spurs economic growth.
That said, for the time being, I’m not really looking for short trades, or buying put options. However, I do like the idea of buying volatility with longer expiration dates. In other words, I’ll be looking for call options on VXXB – an exchange-traded note tracking the CBOE Volatility Index.
Bonds on the Radar
With the Fed’s no rate hike decision for the full year, we’re watching bond exchange-traded funds (ETFs), namely the iShares 20+ Year Treasury Bond ETF (TLT).
Here’s a look at TLT on the hourly chart.
Notice how TLT had a strong move up after the Fed? Well, that’s cause they’re not raising rates… and aren’t looking to raise rates. That in mind, when interest rates are stagnant, or fall, it actually benefits bond prices… in turn, bond ETFs rise.
That said, if the Fed continues with the same language and comments… I’ll be looking to buy on dips, if my money pattern shows up in TLT.
FOMC Comments Bolstering Mining Stocks
Now, the gold mining stocks have been snoozers up until yesterday. Again, the FOMC signaled it would leave rate hikes on hold… as there are concerns of a global economic slowdown.
You see, when the FOMC raises rates… investors will actually look to bonds and other asset classes that will help them generate higher returns. This is due to the fact that gold doesn’t offer any “yield”.
Well, with these comments… gold prices popped yesterday.
Here’s a look at the SPDR Gold Shares (GLD) – an ETF that tracks gold prices.
Now, I’m not invested in this ETF… but I do own call options on GDX, an ETF that tracks the performance of gold mining stocks.
Here’s a look at the chart I’m watching in GDX.
Notice how the stock broke above the green line – the 200 hourly simple moving average (SMA). Additionally, take a look at how the blue line (13 hourly SMA) looks like it’s above the cross above the red line (the 30 hourly SMA)… well, that’s a very bullish signal. In fact, GDX could continue much higher from here.
That said, my GDX options position had a very nice turnaround for me yesterday… I went from being down 20% in it to up 30% in just about a half hour after the Federal Reserve comments. Now, I’m planning on holding GDX for a bit longer… and I’m not thinking about selling until my money pattern tells me to.
That’s all for now. I’ll catch back with you over the weekend when I deliver Your Jump on the Week.
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