FOMC Will Not Show It’s Hand Today – Market Will Try To Rally – Get Ready To Sell Call Spreads

Posted 11:30 AM ET - Yesterday, the market bounced off of the 200-day moving average and it ran up to the 100-day moving average. The run from one major MA to the other in a single day demonstrates the price compression we are currently going through. Tuesday, traders were front running a favorable FOMC statement and good news is priced in. The Fed will not show its hand today and the market will rejoice. Commodity prices (including energy) are falling and inflation is not a concern. During a six-week recess, the Fed will have two jobs reports and economic numbers from China to evaluate. They do not want to spook the market when conditions are fragile so the statement will be benign. We are likely to see a rally, but the gains will be hard fought. I will wait for signs of exhaustion and I will sell some out of the money call spreads. I see two scenarios unfolding in the next six weeks and neither of them would spark a breakout to new highs. Economic conditions in China could stabilize and their market could find support. In this scenario, the S&P 500 will chop around in the upper end of its range. If the official PMI's are consistent with the flash PMI's, China's market could struggle next week. Retail sales, GDP and industrial production will be posted in a couple of weeks. If these numbers are soft we will see more selling in China and profit-taking in our market. August is typically quiet and the summer doldrums set in while politicians go on vacation. A few years ago we saw a nasty decline when Greek credit issues surfaced. There was no one around to calm nerves. The market bid will be light and any selling could spark a nasty little sell-off. Investors will also prepare for a possible rate hike in September. This will add to the selling pressure. My first strategy will be to sell out of the money call credit spreads once this rally exhausts itself. I will wait for Chinese economic releases and if the SPY closes below the 200-day moving average I will buy puts. If I had to put a probability on these two events, I believe the first scenario has a 40% chance of materializing and the second has a 60% chance of materializing. Our market has completely discounted the significance of a Chinese market crash. This destroys confidence and it could easily spread to the real estate market in China where many people have exposure. We will be dead till the Fed. It is very unlikely that the Fed will set a September timeline for a rate hike. If this happens, we will see a sharp decline. I am expecting a sluggish rally after the FOMC statement. Good news is priced in. . .

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