Buy Puts If FOMC Reaction Is Negative – The Second Shoe Is About To Drop

April 27, 2016
Author: Peter Stolcers, Founder of OneOption

Posted 10:00 AM ET - The first shoe has dropped. Apple missed earnings and the next big revenue generator is nowhere in sight. This mega cap tech stock will weigh on the market this morning. Later in the day the second shoe will drop and I believe the market will retreat. Global credit risks have subsided in the last two months. The Fed is likely to add the word "balanced" to its statement and that will be viewed as a hawkish. The market is addicted to easy money and this rally was the result of central bank money printing. Any hint of tightening will spook investors. Facebook will post decent numbers after the close. Mobile ad revenues have been a huge growth engine for them and that should continue. Amazon will post after the close tomorrow. It won't make much money, but it will have a number of cool initiatives. If I had to guess, the reaction will be negative based on valuation. Basic materials are grossly overvalued and this sector will weigh on the market. Industrials are fully priced and the macro backdrop is fragile. Financials don't have much upside in a zero interest rate environment. Retail has struggled for a couple of years and there are too many vendors competing for fewer dollars. I don't see the catalyst that takes us to a new all-time high. We are within striking distance, but this recent round of earnings releases had to spark excitement. It will be difficult for the market to advance without FANGs. Corporate cash flows are decreasing and Q1 announced buybacks have not been this low since 2012. This was a powerful force and it created a natural bid to the market. I believe we are poised for a nice pullback to $202 in May. Today I am scouring the market for bearish stocks. I am looking for stocks that are near the high of the year, have compressed in a tight range and are breakdown below horizontal support. If accompanied by a sell signal from my trading system and heavy volume, I know I have a good short. I will purchase puts before the FOMC on a handful of these stocks. If my analysis is wrong and the market rallies, these stocks should remain weak. They will move higher, but my losses should be minimal. I will buy S&P futures and gradually unwind my put positions. I use the futures because I can instantly hedge my risk. If my analysis is correct and the market sells off, these stocks will tank. I would like to see the SPY close below $207. If it does, I will add to the positions. I am not looking for a massive sustained decline, just a soft patch for a few weeks. A decent dose of selling will put us into a trading range this summer ($202 - $208). It will take time for this top to form and a more sustained decline is probably a few months away. Watch for signs of market exhaustion today. Take some overnight short positions if the FOMC reaction is negative. Take the free trial and see what I find in the chat room today. . . image

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