Options Insights: Markets After the Fed Meeting

Markets begin to point in a lower direction ahead of the FED meeting:

The price action on the S&P 500 is beginning to take the shape of a symmetrical triangle,  where we see a bit of consolidation forming higher lows and lower Highs at the same time.  This can be often followed by a breakout in one direction or another.  

Although I was hoping for a breakout to the upside, Friday’s price action Illustrated that we may have some more downward pressure on markets going into Wednesday’s FOMC meeting (see below)

I am telling my traders that I work with to be cautious going into this week sticking to the range bound or sideways type of trade strategies that have been working so well over the past two weeks.  Unfortunately, this  type of market is a momentum trader’s nightmare. 

I would even consider leaning my portfolio to the bearish side adding some vertical put spreads along the way.   Using closer strikes together while decreasing overall position size in choppy markets like this allows you to stay in a trade for longer and handle some of the back and forth that might go on. Please see bearish trade possibilities in HALO below:

A couple of good bearish candidates can be found in the semiconductor space since they have broken from their highs and have quite a bit still left to fall.   AMD is a good example of this (see below).  

If a bounce does occur after Friday’s negative price action one of the strategies I often deploy that is bearish, but allows time to continue our bear call spreads, where you would short a call where you believe the stock is heading lower and you buy a call on top of it at a higher strike price in order to protect you from a rip to the upside.   

A trade like this allows time to work on your side as the bearish thesis plays out, without being super-concerned about directional movement.   

With a slightly hot year-over-year CPI number coming in last week, the ECB raising their rates a bit unexpectedly, the Fed finds itself in an interesting situation.  They are very far away from their target inflation of 2%,  and a lot of the  economic numbers have been coming in somewhat heated.   

That being said,  with layoffs starting to increase and unemployment low but layoffs ticking higher,  oil prices up 20%,  and wage growth being stagnant,  the consensus is that they will leave rates unchanged at least this time around as a sort of wait and see approach. 

That would be the prudent thing to do since monetary policy often has a 9-month lag with actual results.   In the meantime as traders we are stuck with no higher highs and with no lower lows.  In order to trade a “consolidation”market like this you certainly have to have a game plan in place.

So here is mine:  On the short side I will look to do credit spreads like I mentioned earlier where time would be on my side as direction eventually plays out.   I will also be very sector specific,  selecting areas of the market that show relative strength or relative weakness.   

That will give me an edge as with more directional markets this may be a little less important.  Where we stand now though it is very important here to be in the right place at the right time.

With semiconductors and a lot of the market on the short side, there are good opportunities on the long side as well both in energy and of all places hotels and lodging.   HLT and IHG which I listed last week and moved higher are good examples of this (see below).  

Lastly, with inflation turning a bit higher and not quite under control yet, gold has actually held up fairly well. Since oil names look a bit overextended right now, I will look to potentially add a mining name to my bullish basket.  GOLD  is a likely candidate (see below).

I will be looking to add into any pullbacks in oil names, and short into any bear rallies in semiconductors as the “soft-landing” trade seems to be unwinding right in front of us.