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FOMC Rate Decision: How Will You Trade the Taper?

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The ultimate danger for any investor is in thinking that he or she has it all figured out and can correctly predict the market's response to a potential catalyst.

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So today is the big day when we're supposed to expect some sort of clarity from the FOMC about its plans for paring back its massive $85 billion per month bond-buying program. Or at least, that's what the financial media would have us believe. The issue is ripe for hyperbole, and the Internet is littered with articles from the forex folks, the ETF folks, the options folks and the equities, um, folks pumping up expectations that something big is about to happen. I'm seeing terms like "rock the market," "seismic shift," and "critical decision," but it's really no wonder. The flow of created-from-the-ether zero percent money has been the mother's milk of this market for years now, and market participants are extremely sensitive about what might happen when the Fed takes this market off its meds.

Which brings us to the question of the day: How should you trade the FOMC interest rate decision? It amuses me to no end that folks seem to think they know what the market is going to do. One writer implies in the title of an article that's getting a pretty high page ranking this morning that she's going to give you a playbook for the day, but spends the first 350 words saying nothing and then asserting with some level of authority at the end that any talk of tapering will send the market lower. Gee, thanks.

However, there are some good bits of insight out there. Gary Gordon over at ETFExpert.com suggests that investors look toward some of the less interest-rate-sensitive defensive groups like consumer staples and medical devices should The Bearded One choose to engage in the time-tested tradition of vague Fed-speak. Meanwhile, Rob Hanna at Quantifiable Edges has done some invaluable research over the years on "Fed days."

The ultimate danger for any investor is in thinking that he or she has it all figured out and can correctly predict the market's response to a potential catalyst. There's a myriad of possible combinations of outcomes, and positioning ahead of any event (whether it be a Fed day or an earnings report or whatever) is basically a gamble. Number one rule: Don't ever think that you're smarter than the market. Just ask the folks who have been shorting every uptick since January.

All we can do is be prepared to react as the action develops, and it could take a couple of days before the dust settles, so there's a big danger of getting whipsawed. What we do know right now is that the broader trend that began in November is in place, that important support levels held twice in the past couple of weeks, and that the indices pushed past some short-term resistance levels on Tuesday. The market needed a correction, and it got one, but so far, the bears have yet to do any real damage.

That leaves my firm in the bulls' camp, and there are some names out there that we like, including YY Inc (NASDAQ:YY), ValueVision Media Inc (NASDAQ:VVTV) , Ambarella Inc (NASDAQ:AMBA), and Renewable Energy Group Inc (NASDAQ:REGI), which we'll look to add to in the near term, but we suspect that we'll be doing some hand-sitting as the day progresses. Ultimately, though, we'll be keeping an eye on the 1,595 area in the S&P 500 (INDEXSP:.INX). The sellers have some work to do before we get there, but if that level is breached, we'll head quickly to the sidelines.

View anyone who says they know how the market will react to any piece of news with a healthy dose of skepticism. Don't think you're smarter than the market. React; don't anticipate.

(See also: Bernanke May Have One More Fed Revolution Left Up His Sleeve)
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Positions in YY, VVTV, AMBA, and REGI
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