The Fed has Spoken

We realize this week’s alert is coming to you a little later than usual but we wanted to wait for the latest message from Federal Reserve Chair Janet Yellen and her colleagues at the U.S. central bank. Coming into this week’s Federal Open Market Committee (FOMC) meeting, we believed the Fed had limited time to execute its desired two rate hikes this year. If the Fed intended to hike rates in June, it would have to signal that in its statement today.

What we got today was a message that was slightly more hawkish than Yellen’s speech in March, even if it was within what the market was expecting. More interesting is that this meeting failed to attract more policy dissenters. Such dissenters sometimes can signal that policy changes are ahead. The early read from both the equity and bonds markets indicate today’s Fed statement was a bit of a non-event. However, beware. Things can change quickly overnight.

Our current open positions feature two exchange-traded funds (ETFs) and two options trades that will benefit from a market pullback. One ETF is focused on gold miners. The other features an options strategy on oil to capitalize on an increase in volatility.

One options trade is designed to collect income while the market meanders in a range. We have seen a lot of complacency in the market as investors have covered shorts and begun to get longer. However, this transition is due primarily to repositioning rather than a change in fundamentals. Thus, investors are buying risk assets in the hopes that there will be more buying behind them. This kind of low-conviction buying generally leads to volatility when things get tough.

With valuations stretched and global uncertainties ahead, including elections and a potential for a British exit from the European Union, risk to the downside remains. Thus, we remain confident in our short side positions, as well as selling an upside call to collect premium in this time of uncertainty. Besides, it is nice to be able to pay for your full subscription with the proceeds from one trade.

With regards to oil, we are paying close attention to our positions. Volatility has picked up markedly over the last few days and we are preparing to opportunistically exit one option at a time to close out the trade completely.

Given today’s price action in oil and the digestion of information that occurs around Fed meetings, be on the watch for special alerts in the coming days. Such special alerts could come in the next day or so if the prices remain in our favor.

Best,

Doug and Tom