Dead Till the Fed. Take Profits and Wait For the FOMC Reaction.

September 17, 2013
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market challenged the all-time high. Larry Summers withdrew from the Fed Chairman race and Janet Yellen is the clear front runner. The appointment will likely be made after the FOMC meeting. Traders are bracing for a $10 billion reduction in bond purchases by the Fed. This is an important development because it marks a change in policy. This news is already priced in, but the actual event could spark profit taking. It is important to remember that the Fed's monetary policy is still accommodative. Janet Yellen is considered to be a better communicator and that could result in better transparency. Her economic forecasts have also been excellent. Apart from that, the policy would not have differed much from one candidate to the other. Politicians will start to address the debt ceiling. The rhetoric will get ugly, but the can will get kicked down the road at the last minute. Consequently, the market tends to discount this event. Asset Managers will not chase stocks at an all-time high ahead of a major FOMC policy change. We are likely to see very quiet trading today and tomorrow. I sold all of my calls near the open yesterday and I am in cash. If I see weakness today I will day trade from the short side. Otherwise, I will remain in cash. I locked in excellent profits during the last two weeks and it would be foolish to risk those gains ahead of a major event. If the market pulls back on the news, I will wait for support and I will aggressively buy calls. The bid is strengthening and any decline is likely to be brief and shallow. If the market rallies on the news, we will make a new all-time high. I will buy on strength and I will use SPY $171 (previous all-time high) as a stop. I will be less aggressive buying into strength. Global economic conditions continue to improve and the market will embrace higher interest rates if accompanied by growth. Corporations are flush with cash and they are using it for M&A's and buybacks. The macro backdrop is bullish and I believe we will have a nice year-end rally. Be patient and wait for this change in monetary policy to play out. . . image

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