Thursday, September 17, 2015

Fed Gameplan

The gameplan for today depends on one very unlikely scenario and one likely scenario.

1.  About a 5% chance of raising rates today.  It could happen, but extremely unlikely.  Under this scenario, you just short and hold short and watch the delta hedgers gonna  go nuts as the market plummets for the rest of today and into the open on triple witching Friday.  Just remember what happened after the June 2013 FOMC meeting, when the market just got crushed.  There is no fade of the dip here.

2. 95% chance of no rate hike.  The 30 year bond is telling you all that you need to know about what the smart money thinks about the likelihood of a rate hike.  Long bond weakness is a hint that bond traders don't expect a rate hike.  Besides that, just the history of Fed dovishness, slow to tighten financial conditions, markets having been crushed in August, low oil prices and no inflation, and fear of spooking the markets.  Since this is what most of the smart money is expecting, most of the smart  money will be prepared for this outcome and were the ones buying this week ahead of the meeting.

After the announcement of no rate hike, we could just shoot higher and don't look back, or we could have a volatile 15-30 minutes where we chop in a volatile range, and then eventually rally higher into the close.  If we have that volatile chop, I would be buying any 5-10 SPX point dips.  Extremely unlikely that you selloff and sustain a selloff under the no rate hike scenario.  The fear of a Fed rate hike is removed and the sideline money waiting to act after the Fed gives the green light will be significant.  Don't believe the Fast Money gurus on CNBC who say we selloff on the Fed doing nothing.  That is exactly what this market wants and needs to go higher.

Bonds will be tougher to game as it often does its own thing and doesn't necessarily do the opposite of the S&P on Fed days.  A dovish Fed is usually good for bonds, but we are at a point in the cycle where the bond market wants a rate hike to weaken the economy, and a failure to raise rates would be deemed as building a stronger stock market and economy which is bad for bonds.  Thus, I am expecting a selloff (less conviction than a stock rally) when the dust settles today in bonds, especially the long end, if the Fed does nothing.

6 comments:

Sam Kang said...

When is the next meeting for the fed to hike rates after today's?

Market Owl said...

Next meeting is late October.

Sam Kang said...

Bonds rallying man.

Market Owl said...

No play on bonds, but I think stocks keep going higher and bonds will go down over the next 24 hours.

Sam Kang said...

I hope so. And hope crude goes to 70 too. That would be nice...

Market Owl said...

I am just talking about more rallying this week. After opex, lots of hedging will take place again or outright selling to reduce risk. We've rallied a lot over the past week. Looking for a pullback next week.