Fundamentals Be Darned: Fed Expected To Affect Every Trade This Week
It was a tough week for the bulls and ended on a sour note. However, Friday's results could have been much worse as the indices rallied into the close to trim the losses down to -0.82 percent on the DOW, -0.61 percent on the S&P, -0.49 percent on NDX and -0.36 percent on the small-cap RUT.
The week was a clear win for the bears, as the markets sold hard and with fear followed by two failed bounce attempts. Thursday brought a decent bounce. Unfortunately, there was no follow through on Friday. The bulls sustained psychological and technical damage this week. There was good news from the small-caps behaviors -- they flipped on Friday from leading down to outperforming, finishing the week green.
Market expectations are spread wide, so sentiment is more important than ever. There is big money on both sides of the fence. The open interest shows clear levels that mirror last week's set ups. Most slower traders should sit out the week, meaning that it would be wise to avoid risking too much on the March expiration option trades. It's best to use out-weeks and farther from current prices. Why?
The Fed event (rate decision) makes the outcome of next week binary on Wednesday. Binary is more of a coin toss, which makes tight trades more gambling than investing. Markets will be looking for the word "patient" from the Fed. Here are possible reactions:
- 1) If the Fed removes it, then the market will assume a rate hike is coming within two months and markets may sell off.
- 2) If they remove the "patient," but also specifically say that this doesn't necessarily mean they raise rates in two months, then markets will react down on the news and rebound.
- 3) If the Fed leave the "patient" word in, then markets will rally. This will likely be a relief pop and shortable because the basis of the rally is that something bad did not happen. Delaying the rate hike doesn't change the macro thesis as the hike is still coming.
- 4) If the Fed says or opens the door for more QE given the bad data they are seeing (retail sales, etc.) then markets will rally really hard.
Will we bounce into the monthly expiration?
It's a coin flip since it all depends on the Fed. There are other heavy U.S. economic news, but the Fed takes center stage on Wednesday.
So how do traders get ready for this week prior to FOMC meeting announcement? The Fed event could affect every trade this week, so fundamentals be darned.
Is it a pause for more downside or rest for more upside? There is big money on both sides of this argument, which makes for an iron condor environment; the meander scenario with elevated premiums can reward spread sellers.
- Rate Hike/Fed: There are thee potential major market moving events: 1) when the Fed actually takes out the "patient" word; 2) When Fed actually sets the date for the rate hike (which will probably happen the following statement); 3) When rate hikes actually kick in.
- The drop response to rate hike is not just psychological. It changes the bull thesis.
- European QE: Started March 9. Open ended - data dependent.
- Could it end early? Sure -- data dependent means cuts both ways, so good Euroeconomic news is bad news for euro markets.
- Oil broke down again and lost 45 for a while.
- TLT: Still in breakout territory/mode (bad for markets).
TNX: Can't hold above resistance.
Ranges: All the ranges are playing out within expectations with regards to open interest and trends. Update to follow.
SPY: Sill in danger of losing a long-standing trend (green dashed line), so much rides on the Fed on Wednesday.
QQQ: The bulls are hoping that the 104/105 area that was resistance becomes support.
IWM: Silver lining with relative outperformance last week. It's only inches away from all-time high.
The Apple (NASDAQ: AAPL) event fizzled and resulted in a bad week for this gem. It needs to hold the thin green rectangle or it could revert to trading the white-dashed ascending channel. Puts have recently paid and may continue to pay. Fed event can change this on coin flip.
Google (NASDAQ: GOOG) sold off to close almost exactly at $547.50 (547.32). It is showing vulnerability, so puts here can also pay.
Priceline (NASDAQ: PCLN)did not disappoint and many booked profits in this name.
From here, trades all depend on the Fed event, so it's reasonable to sit out until then before adding major positions.
Exxon Mobil's (NYSE: XOM)doom scenario is unfolding as outline.
Watch the video below for a full outlook on this week's options market:
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