Bullish Specs Could Get Flushed Out Ahead of the Fed. Use SPY $199 As Your Guide

September 12, 2014
Author: Peter Stolcers, Founder of OneOption

Posted 9:50 AM ET - Yesterday, the market probed for support early in the day. Buyers stepped in before SPY $199 was tested and stocks rebounded. Everything hinges on the FOMC statement next week and we are likely to chop around in a tight range until then. If the Fed keeps the phrase "considerable time" in their statement, the market will rally. I believe this is the most likely scenario. They will end the bond purchase program in October and they will try to get through that meeting without spooking the market. Bond Managers will sell bonds on strong economic releases. They know that tightening is right around the corner and they will not wait for the Fed to change its rhetoric. I believe interest rates will gradually creep higher, but they won't spike. Central banks (ECB, BOJ and PBOC) are easing and global rates remain low. Furthermore, when emerging markets decline, we see a flight to safety and global investors buy US bonds. In conclusion, US bonds will be very resilient. A gradual rise in interest rates would be bullish for the market as long as economic conditions continue to strengthen. Corporations are lean and mean and any uptick in demand will go straight to the bottom line. We will hit the debt ceiling in a few weeks. Republicans will stay out of the headlines ahead of the November elections and they will raise the ceiling at the last minute. HMOs will announce premium rate hikes and that will initially weigh on the market. Businesses will ask employees to share in the expense and this will reduce discretionary spending. September and October are seasonally weak months. We need to get through the next few weeks and I am expecting a retest of the 100-day moving average. Once support is established we should see a nice year-end rally. If the FOMC removes the "considerable time" phrase from its statement, all bets are off. This will signal that the Fed's tightening timetable has moved forward. The market will decline and we could see a 10% correction. Again, I don't see this as a likely scenario. Janet Yellen has noted structural unemployment issues and the need for accommodative monetary policy. If I see a sustained round of intraday selling, I will buy puts if we trade below SPY $199. This will flush bullish speculators out of call positions and we could hit a small air pocket. I will cover my shorts before the FOMC statement. Unfortunately, the more likely scenario is choppy trading within a range. If this price action prevails, I will watch from the sidelines. If you are long calls, use SPY $199 as an intraday stop. . . image

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