Well, the markets are trading higher today and rebounding from the August “sell-off”… and all seems to be fine in terms of macros… for now.
Treasury yields are rebounding – stymying fears of a possible recession… and the U.S. agreed to extend its temporary ban on doing business with Chinese telecom giant Huawei.
Not only that, Trump came out and said, “I don’t think we’re having a recession.”
But I’m not playing that he said, Xi said game.
I’m looking for actual data points that could affect the market… ways that can make me money in all this volatility.
You see, we still have some conflicting signals in the market right now… but we’ll get some clarity this week, as we will get the minutes from last month’s Fed meeting – when it cut rates for the first time in a decade.
Not only that, we’ve got the Fed’s annual Jackson Hole Economic Policy Symposium taking place Aug. 22 – 24.
We’ve seen Fed Chair Jerome Powell has moved markets before… and he could move them again this week.
All eyes will be on Powell this week, as he will speak for the first time since the bond markets were sent into a frenzy – sounding the recession siren – which spilled over to stocks.
So what am I looking for specifically in these Fed events and how can we take advantage?
Table of Contents
All Eyes on Powell and The Fed
Sure, we’re getting a bounce in the market to kick off the week… but there is one man who can change it all – Powell.
First things first, we’ll get a recap of last month’s Fed meeting… and we should see some language clues that will let us know exactly where the market is headed. Either way, the market is headed, you can use this simple options strategy to potentially double your money, week after week.
We’re still seeing signs of economic strength. After all, inflation and retail sales picked up in July.
However, we’re still in the midst of the U.S. – China trade war… and even though there are signs of optimism, that can all change with a tweet from Trump, or comments from Xi.
With that being said, there is a lot of conflicting data… and that is one of the few reasons that caused all the back and forth action in the market.
The big questions now are how the Fed is going to adapt and what’s the monetary policy going to look like?
If you recall, Powell gave the market what it wanted last month… but it confused the market because the message was muddled. Powell didn’t give the markets too many clues about future rate cuts…
… after the initial pop, we saw markets convulse and sell off into the close on the Fed meeting day.
If you look at the hourly chart in SPY… it looks like the Fed actually sparked all this back and forth action.
Right now, I’m going to be looking closely at this chart, as we’ve got some key levels to watch. The $294 level is going to be a heavily-watched level. We’ve seen SPY try to break back above it three times already.
It’s quite clear the bears aren’t backing down here. I’ll be watching my money pattern and the $294 resistance level very closely, which will allow me to uncover opportunities in this back and forth market.
But where do we go from here?
The one thing that could actually make or break the market right now is the language changes in the Fed Minutes.
We saw a 25 basis point cut, upbeat sentiment about the economy, as well as a confusing press conference.
In the Fed meeting minutes, there are a few scenarios that could happen:
- The minutes show that the Fed is leaning more on the dovish side and looking for more rate cuts as an “insurance” policy for the Trade War risks
- The Fed remains prepared, but will wait for economic data points before they make any monetary policy moves
- The Federal Reserve shocks the market and uses a more hawkish tone – potentially causing the market to sell-off
Some specific language clues include:
- “Patient” – We’ve heard the Fed use this word a lot, and we’re going to see if it brings it back into play.
- “Transitory”
- “Is rising at a moderate rate” – We’ve seen the Fed change this a few times. For example, back in June, the Fed changed its language from “… the economic activity rose at a solid rate” to “… the economic activity is rising at a moderate rate”
- “Growth”
- “Have been soft”
- “Declined”
- “Uncertainties” or “risks” about the economic outlook
- “The Committee will monitor implications of incoming information”
- “Will act as appropriate”
- “Mid-cycle adjustment”
This is going to be one of the most important Fed minutes of the year because we will get more details as to how the Fed will make moves during the fourth quarter of 2019 into 2020.
Not only that, we’ve got the Fed’s annual Jackson Hole Economic Symposium, and that is where Powell will speak on the economy, which can give us even more clues as to where rates are headed.
Right now, we’re seeing traders looking for a no-rate-change decision in the Fed’s next monetary policy meeting in September.
Traders are pricing in a 95% chance of no rate changes… and just 5% for a 0.25% basis point cut…
… and it seems like they’re all waiting for what Powell will say this Friday before they make any moves… because as we all know, anyone comment could change the direction of not only the interest rate and bond markets but the stock market as well.
So what can we expect in Powell’s speech?
Is Powell Going to Bend the Knee to the Market?
Federal Reserve Chair Powell will have a lot of material to pull out of his grab bag of topics. On Friday, there is going to a special speech on the challenges for monetary policy right now.
Of course, there are a lot of risks on the table… the Trade War which has sparked a deglobalization shock, low interest rates indicating a potential recession, a massive amount of global debt ($16.7T in negative-yielding bonds).
Not only that, we’ve got some geopolitical tensions going on throughout the world… something the Fed cannot influence whatsoever.
The market has been calling for lower interest rates… and the big question is whether Powell will bend the knee and fold to the market… and actually look for more and bigger rate cuts down the road.
However, it’s not a zero-sum game for the Fed… it’s a lose-lose situation.
If they cut rates when the economy is strong, everyone will know that the Fed has caved in to the pressure from Trump and the market.
On the other hand, if it doesn’t raise rates, it could actually cause the market to crash as traders have been pricing in rate cuts for quite some time now.
We really don’t know what Powell can say or do… but he will likely focus on the different monetary policies in different countries and how they can affect the overall market.
What I do know is that I’ll be looking closely for clues as to whether the Fed will reconsider its interest rate cuts as an “insurance” policy. I’ll also be looking for their comments on external risks… which can cause contagion risk and potentially spark a massive crash.
You’re probably wondering, Jeff, how are you going to play this?
I’m going to stick with my bread-and-butter… something that has worked for me when there are big Fed events.
With SPY, we’re really in no man’s land still. There is a big resistance level at $294… and until we get above that, there is still a risk of the market pulling back to the Death Line… and if Powell says anything “negative”, it could pull the market back to that level.
Not only that, I’ll be watching the iShares 20+ Year Treasury Bond ETF (TLT). Right now, the money pattern is setting up in TLT, and I’ll be watching this very closely.
Why do I just stick to a few names when I’m looking to trade around the Fed?
It simplifies trading for me… and I’ve actually been successful trading these names.
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With the Fed having two big events this week… all eyes will be on them this week, as it’ll give us clues as to where the market is headed. No matter what direction the market goes, I’ll be ready to use my alpha-generating strategies.
Source: WeeklyMoneyMultiplier.com | Original Link