Yesterday, we finally got some clarity on Fed policy, something the market had been anxiously anticipating…
The Fed raised interest rates another 75 basis points … no surprise there.
But how traders are interpreting Chairman Jerome Powell’s speech varies widely…
Bears are latching onto something Powell said: “Incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected.”
Meanwhile, bulls are latching onto a different comment: “Our decisions will depend on the totality of incoming data and their implications for the outlook for economic activity and inflation.”
So, on the one hand, Powell suggested rates will need to go higher than previously expected.
On the other hand, he’s saying that their decisions will depend on the incoming data, a slight change in tone from his past comments when he suggested the Fed would stop at nothing to bring inflation down to 2%.
While this may sound like a glimmer of hope to anyone hoping for looser monetary policy, I think it’s far from the “pivot language” many bulls were hoping for.
And the immediate market reaction said as much…
After a short pump following the release of the rate decision, the S&P 500 ETF Trust (NYSEARCA: SPY) absolutely tanked once Powell started talking and didn’t stop until early this morning when it hit an intraday bottom of $368.79.
Then, the index started pumping again, reaching an intraday high of $374.20 at the time of writing.
All this to say … we’re in the middle of a ‘chopfest.’ And when stocks are this choppy, there are some unique factors to consider.
Keep reading and I’ll show you what I mean…
Let the Market Absorb the Move
Yesterday’s Fed decision was one of the most hotly-anticipated events in recent market history.
When these unique moments happen, there’s often a lot of choppy price action in the immediate aftermath of the event.
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It makes sense if you think about it…
Traders have been positioning themselves for weeks leading up to the FOMC meeting.
Once the catalyst occurs, millions of dollars in calls and puts are bought and sold because the uncertainty has finally passed.
Then, there’s a new game in town — positioning for the extended reaction. And that’s what we’re seeing now.
This often leads to ugly price action that’s hard to gauge. The risk/reward tends to be terrible on days like these as options premiums get more expensive and market makers do anything they can to burn them.
So right now, I’m choosing to sit on the sidelines and wait for things to get less choppy.
In other words, I’m letting the market absorb the move before making any of my own.
But speaking of options, if you examine the major index chains today, there’s even more to learn…
Pay Attention to SPY Option Volume
Whenever a huge market catalyst occurs — like the FOMC meeting — the SPY options chain gets crowded.
The $370 puts have traded 250,000+ contracts at the time of writing.
Meanwhile, the $375 calls have traded 140,000+ contracts…
That’s INSANE volume, even for the often-crowded SPY chain.
So … Why should you pay attention to this?
This volume is important to note because it gives incredible incentive to traders on both sides of the chain to slam the index in their direction.
This is exactly why we’re seeing such up-and-down, unpredictable price action.
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And also a big reason why I’m sitting on the sidelines for now…
When trades get as crowded as the Fed-SPY trade is today, it’s extremely difficult to nail direction and timing simultaneously — the two most important factors of successful options trading.
And if you don’t get both exactly right, you’ll get smoked.
My advice? You probably shouldn’t follow hoards of clueless retail traders into overcrowded SPY trades.
I think the better move is to wait and see how this week closes out, then potentially play a more confirmed directional move next week.
There’s no way to spin it, Evolvers … this market is ugly.
When the risk/reward is this skewed, it’s time to sit on the sidelines.
Watch the charts and study hard, then return next week ready to strike.