Options Insights: Hawkish Fed Drives Market Lower 9-25-23

 A hawkish Fed drives markets lower. Where do we go from here?

The overall theme of chairman Powell’s  speech was fairly simple:  We are going to stay higher for longer with rates until a very stubborn inflation number gets tamed. 

That sent the 10-year Treasury soaring to 4.43%, the highest it has been since 2007 (see below). The most volatile part of the consumer price basket,  energy and  food, is unfortunately the one that is hurting us the most.  

I told our Traders to stay neutral to bearish going into this week and if you took my advice and perhaps got a bit more bearish on Wednesday, you’d be in pretty good shape for the rest of the week going forward. 

If you stick to the ideology of buying and holding or trying to just find bullish opportunities it may have been quite a challenge this week.  During Powell’s testimony in our Discord community I explained why I was entering a short position on NASDAQ using a very simple vwap strategy.   (See below).

VWAP is something I use intraday to determine overall institutional sentiment and when  price moves sharply in one direction, and you have the entire market behind you as well, it can prove to be a fairly reliable indicator of direction.  

What’s also good about this strategy as well is that if direction were to change, you would know relatively quickly, which would help avoid a large  unnecessary loss and just  end up being a small one. 

Based on the price action this week,  and what the chart is telling me, my sense is that we will continue to test lower levels since we broke the August lows this week. We will perhaps push lower as seasonal  

October volatility will help to move prices further to the downside. In summary: It’s time to get more bearish (see below).

One thing that you often get from down markets are big rally days to the upside.   These are opportunities to add shorts but also an opportunity to abandon bullish trades that may be break-even or small losses. 

I tell my traders that it is just as important to manage your losers as it is your winners. What to do is to be patient and to be balanced in your overall portfolio and never go 100% long or 100% short. In more bearish markets we short into rallies and take off bullish exposure.

With the VIX now spiking quite considerably and the one month contracts flirting with 18 (see below), it is now time to shift strategy slightly.  

A great thing to do in markets like this are bear call spreads where if the market were to rebound, you could still potentially profit from theta decay, but at the same time maintain a bearish bias overall.

A great example of this is COIN (see below),  where you can sell calls at the money and buy cheaper out of the money calls as protection.  

These types of trades are ideal in downward environments where we may bottom and have an up day or two. In situations like this you can still turn out a profit with a negative bias.

As far as what to do next I’ve been saying this for a long time that NASDAQ was vulnerable being up over 30% on the year. This may be the opportunity institutions are using to lighten up in that group and I wouldn’t be surprised if we saw some sector rotation into more value and Dow Jones names going into the end of the year.   

We will have to wait and see on that. As always,  I will let the charts determine that and not my opinion. Happy trading everyone!