How To Trade The FOMC Decision!

Today the stock market will present an oppotunity and you should put your option trading on hold for a day. It's the calm before the storm. Every analyst is predicting a .25% rate cut. The Fed’s rhetoric will be the driving force today. Traders want to know if future rate cuts are a possibility. If the Fed makes "dovish" statements, there is a chance that we will see a rally to SPY 154. If the Fed makes "hawkish” statements, we are likely to see a decline to SPY 149. If the Fed makes balanced statements, we are likely to see choppy back and forth action. Under this scenario, the market will settle down before the close, posting a marginal gain/loss for the day. I believe this is the most likely outcome. The Fed will point out economic weakness and they will express inflation concerns. The will leave the door open for future rate cuts, but only if needed. The bigger move might actually come tomorrow once traders have digested the news. Later in the week, retail sales, the PPI/CPI, and earnings from Lehman are likely to have a greater influence on the market since this rate cut is priced in. My gut tells me that the economic conditions have deteriorated and that overhead resistance is building. The bears have been squeezed and I don't think short covering will fuel this market as it did last week. I also feel that the rate cuts are not packing the same punch. LIBOR rates have not come down (as they normally do when we cut rates) and that is the true cost of capital. There is a great day trading opportunity today. Line up your strong STOCKS (not options because the bid/ask is too wide) and line up your weak STOCKS. Before the announcement, place conditional orders to buy or short those stocks based on the market’s reaction. You need to give yourself a little room so that you do not get head faked into a position. If the SPY trades above 152.50 (today’s high, I would go long strong stocks. If the SPY trades below 150.80 (yesterday’s low), I would short weak stocks. Use conditional orders so that the trades are executed the instant the level is hit. You won’t have time once the event happens and your entry prices will be much worse if you try to enter the trades after the news. These orders should be staged and ready to fire! If the SPY crosses back over your trigger (152.50 or 150.80), consider covering. If the Fed’s statement seems too hedged, you might also want to tighten stops since the trading could get choppy and directionless. As I mentioned, this is a day trade. It is hard to tell what the market will do day-to-day and holding an overnight position is risky after a big announcement.

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