Pro Breaks Down History’s Largest IPO

“Take some time and catch this limited replay of Ben Sturgill covering the ARAMCO IPO. I love how he breaks down his processes into easy-to-digest bites.” – Jeff Bishop

“You don’t want to miss this replay. You asked for it! Ben is delivering!” – Jason Bond

The FOMC (Fed) Moves the Markets With Comments

by | Jan 31, 2019 | Bishop's Corner

With so many catalysts the last few days- U.S. – China trade talks, corporate earnings, and macroeconomics… one man stole the show yesterday, Jerome Powell, the Fed Chief.

All he had to do was remove the reference of further gradual rate increases, and that was enough to push stocks significantly higher.  

It doesn’t matter that earnings have been mixed or any of that stuff. It’s Jerome’s world… we’re just living in it.

That said, stocks are trading higher… but I’m not going to chase stocks here… I’m going to wait until I see my setups. However, one thing I can tell you, the market is primed for small-cap stock traders. In just one month, Jason Bond has doubled his $200K trading account. Now,  if you aren’t following him, you should.

As for me, I trade large-cap stocks, ETFs, and typically do it with options. My ideas are generated by looking at catalysts, marco-variables, and volatility. And I use crossover pattern (aka “the money pattern”) to help me pick my entries and exits.

That said, there is plenty to go over, as well as, look forward to in the coming weeks.

FOMC Taking A Dovish Stance

Just as we expected here at Weekly Money Multiplier, the Federal Open Market Committee (FOMC) was very dovish and left interest rates unchanged. When the Fed is dovish, it means policymakers favor a low-interest rate environment to stimulate the economy. Conversely, a hawkish Fed indicates there could be interest rate hikes in order to keep inflation in check.

Generally, the market favors a dovish Fed… low-interest rates allow companies and consumers to borrow money, creating a ripple effect. In turn, it could drive revenues and earnings growth. That said, the market priced this in pretty quickly.

The move to leave rates unchanged was bullish for the markets – with the SPDR S&P 500 ETF (SPY), Invesco QQQ Trust (QQQ), iShares Russell 2000 ETF (IWM), and SPDR Dow Jones Industrial Average ETF (DIA) closing up 1.53%, 2.54%, 1.05%, and 1.71%, respectively.

There is still a lot going on in the markets… Inc (AMZN) is reporting tonight and traders are expecting the stock to move nearly 100 points. The at-the-money straddle on AMZN, or the $1705 strike price calls and puts, are implying a move of 5.6%.

This could potentially move the markets, and if AMZN disappoints… it could spark another market selloff, leading the Fed to take on an even more dovish tone.

Now, holding options into AMZN is a gamble. This thing is so wild that if you’re on the strong side, you could lose all of your premium. However, there is one way you could make money from Amazon actually. If you’re interested in learning about how to build an eCommerce empire using Amazon, check out this webinar here.

Getting back, the Fed said a mouthful yesterday, and there’s a lot of ongoing changes.

The FOMC is Back to its Old Ways

But what’s next?

With the market selloff into the FOMC meeting back in December 2018, it spooked policymakers. Consequently, the Fed adopted a “patient” approach to monetary policy. The FOMC is back to its old ways… using a “wait and see” approach, rather than being proactive.

You see, when the FOMC doesn’t know what it wants to do, policymakers are very general with their terms and remove the specifics. When there is uncertainty in the markets, they typically vote to leave interest rates unchanged. Unsurprisingly, there was a unanimous decision to leave interest rates unchanged.

Federal Reserve Changes Language in Statement

There was one important note in the January FOMC statement:

“The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

That said, it’s clear that the Fed is more worried about “global economic and financial developments” now than it was back in December. If you read between the lines, the Fed also noted it “continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.”

The Fed is worried about global economic and financial developments, but still, sees sustained economic growth. Moreover, Federal Reserve Chair Jerome Powell stated, “The case for raising rates has weakened somewhat.”

Back to its old ways… flip, flop… not giving traders and investors specific details, leaving us to break it down for ourselves. The FOMC will most likely leave rates unchanged until they actually see “strong” economic growth with little-to-no global economic, political, and financial risks.

Here’s a look at the probabilities for expected rate hikes this year.

Moving on, the Fed made some comments about its $4T balance sheet.

The Fed’s Balance Sheet No Longer Set to Autopilot

Now, what may have been overlooked by the markets was the Fed’s comments on its balance sheet. If you don’t know, the Fed’s balance sheet mainly holds Treasury securities (like U.S. Treasury bonds) and mortgage-backed securities (yes, these are the same instruments that caused the market turmoil back in 2008).

Why is the Fed’s balance sheet so important?

Well, even though it’s Jerome’s world… the Federal Reserve has to buy securities on the open market just like everyone else. When the Fed buys more securities (like government-backed securities and mortgage-backed securities), cash is injected into the financial system. In turn, more cash is available to banks. Moreover, this stimulates the economy since interest rates tend to be lower. This is just one of the Fed’s many monetary policy tools.

That’s exactly what the Fed did back in 2008 during the global financial crisis.

Here’s a look at the Fed’s balance sheet between 2008 and January 2019.

Now, the Fed only had around $900B on its balance sheet in 2008. However, that figure has ballooned to $4T.

If the Fed wants to reduce its balance sheet, they could put it on autopilot. You see, since the Fed owns government and mortgage-backed securities, those assets essentially “dissolve” on the maturity dates. In other words, all the Fed would need to do is stop purchasing securities, and its balance sheet “automatically” shrinks.

Fed Chair Jerome Powell Comments About Balance Sheet

Back in December 2018, during the Jerome Powell’s speech, there was an interesting exchange:

“Heather Long : Hi, Heather Long from the Washington Post. Today, the Fed lowered its expectations for interest rate increases. Given that, I’m wondering if the Fed has had any discussion of altering the course of balance sheet normalization and if you could give us any insight on what might lead the FOMC to alter that balance sheet normalization in 2019.”

Powell responded with, “Sure. If you go back some years, I think we—people who were working at the Fed in 2013 and ’14 took away the lesson that the markets could be very sensitive to news about the size of the balance sheet, the pace of asset purchases, the pace of runoff, and things like that…”

So we thought carefully about this, on how to normalize policy, and came to the view that we would effectively have the balance sheet runoff on automatic pilot and use monetary policy, rate policy, to adjust to incoming data. And I think that has been a good decision. I think that the runoff of the balance sheet has been smooth and has served its purpose. And I don’t see us changing that. And I do think that we will continue to use monetary policy, which is to say rate policy, as the active tool of monetary policy.”

Well, that’s a far cry from what the Fed noted in its January 2019 meeting…

“The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”

Basically, the Fed is saying the autopilot is switched off for now and could use other monetary policy tools to adjust the balance sheet based on catalysts, such as slowing economic growth. The markets were loving the fact that the Fed did not want to use the balance sheet as an “active tool.”

Break It Down and Focus on Specificity

But how do we take action on the FOMC? Well, I broke it down – made things much simpler – and am now focused on specificity.

  • The FOMC has become dovish, which is great for the markets.
  • Interest rates were left unchanged.
  • The futures market is signaling a low probability of rate hikes this year.
  • The Fed has adopted a “wait and see” approach and is remaining patient, which is reminiscent of when Janet Yellen served as the Fed Chair.
  • The Federal Reserve took its balance sheet reduction program off of autopilot mode, and it could use other tools to alter the size of the balance sheet.

Now, this pointed to signs that I should be looking to bond exchange-traded funds (ETFs).

Here’s a look at the chart that was sent to Weekly Money Multiplier members.

Now, I’ve been watching the iShares 20+ Year Treasury Bond ETF (TLT) for a few days, and I figured it was a good time to get involved. If you look at the blue encircled area, the hourly moving averages started to converge, and there was clear support around the $120 area.

Well, we figured the FOMC would be dovish… so we actually got in ahead of the event. Keep in mind, buying options into an event could be risky, and is best left to experienced traders.

Here’s what happened with TLT.

Now, if you want to learn how to spot patterns and trades like this, check out this option trading guide.

Tomorrow we start a new month… I’ll be up early to see what happens with non-farm payroll numbers. You’ll be getting updates on that, and the jump on the week, so stay tuned for that.

To your success!


Jeff Bishop

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