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Random Thoughts: Trading The Fed


The Street gauges the upcoming FOMC meeting.

  • Does anyone else feel like the market is holding its collective breath? We've been talking about S&P 1405 for a mighty long time-it's where we broke down, it's the right shoulder of (bullish) reverse dandruff, it's a zone that alotta reactive traders are focused on-and we're right there, right now, as traders posture and primp in front of the FOMC.

  • There are two schools of thought here. The first is that the tape has spent the last two weeks collecting the energy necessary to break on through to the other side. The other is that sideways action under resistance is textbook churning and the ten percent rally (that peeled 45% off the VXO) emboldened enough bulls to facilitate the next leg lower.

  • I'm not viewing these two as mutually exclusive dynamics. In fact, a pop & drop (through 1405 and back below after the FOMC) may indeed be the path of maximum frustration. The simple truth is that there's no way to know and we must allow for all scenarios as we shape our risk profile. And that, Mon Frere, is what I'm attempting to do as we waddle and wade through this overcast day.

  • What, you don't have enough levels to look at? Toss GLD $86 and Merrill (MER) $50 on your radar. The former is a play on the less aggressive Fed and the latter is a noodle on the dilutive transactions in the financial space.

  • I do believe there will be a rotation trade in the offing this week as a function of the higher dollar (less aggressive Fed). I also believe that the market, as a forward-looking discounting mechanism) has already started to price that in.

  • One of the reasons I view the drillers and miners as vulnerable through the above lens is that oh-so-many retail traders use them as vehicles for the commodity exposure. Given the geopolitical risk (and the gut sense that "something" will happen in Iran prior to the election), I wanna define that risk with option plays.

  • Does the battle for Newsday help our newspaper thesis? It certainly doesn't hurt.

  • Television's JeffMacke® recently vibed that Microsoft (MSFT) was worthy of an upside shot. That planted a seed that, thanks to the beauty of being A.D.D., lied dormant until I just revisited the thought in my crowded keppe.

    Pulling up a chart of the big fella (Microsoft, not Macke), the Redmond Redhead has pulled back to support at $29.50. I've dipped my wick on the long side via options as 1) there is market risk and 2) there are "extraneous items" (a la Yahoo (YHOO)) that could render technicals obsolete.

    Click to enlarge

    Either way and anyway, I'm operating through defined risk on two fronts. First, option premium and two, technical levels). There is headline risk (both ways) so keep that in mind if you're sniffing a bit.

  • Seems Like Old Times! It sure feels like folks want to be told what to do rather than learn how to do it. This, despite that the shelf-life on "gurus" continues to shorten. It remains my view that until people embrace the notion of financial literacy, quick fixes and short cuts will do more harm than good. Food for thought as we saddle up and punch some doggies.

  • What's the bottom line?

  • I have some 'core' longs in the newspapers (Gannett (GCI) and McClatchey(MNI) are both 3% higher on the session), a spate of puts in Merrill (MER) (as it nestles up to resistance at $50), a slab of Microsoft calls and some tertiary downside exposure in the drillers. I've also got plenty of dry powder such that I can pounce on opportunities like white on rice when I see 'em. All in all, I like how I'm postured in the context of proactive patience.


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Positions in MNI, GCI, MER, MSFT
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