February 2nd, 2023

Fed Raises Rates But Bulls Are Still In Control

Ok, bulls. You win.  I will start lifting my bearish stance on the market.  Despite the final 10-minute market sell-off and a Dow that finished flat, you seem to be firmly in control of this market.

I’m not exactly sure what the bulls heard from the Fed to make the market reverse and close higher yesterday.  Maybe this is a case of both sides hearing what they wanted to hear.  The bulls heard inflation is easing and the Fed is reducing rate hikes, so that clears the way for more buying.

The bears heard more rate hikes to come, “ongoing increases in the (interest rate) target range will be appropriate,” which means the Fed is likely to raise their benchmark interest rate again.  More dot plots!  Both sides are sounding off saying, “see, I was right about the Fed announcement!”  But the bulls are clearly winning for now.

It seems that the market has priced in one more quarter-point rate hike and is expecting the Fed to reverse course and … dare I say, cut rates by the end of the year.

I guess that’s why trading works.  Everyone had access to the same information, and yet we have wildly different opinions about what it means for the future.   

Despite my bearish stance on the market, I did write an article the day before yesterday about watching the S&P 500 potentially hit 4137 after the Fed.  I was pretty close – the high yesterday was 4148 and we closed at 4119.  Here is my crude drawing from a couple of days ago.

Here’s how the day actually went.  We were sitting at 4142 with 10 mins left to trade.

While the bulls may have beaten me into submission, I am still waiting for some type of pullback. I’d like to see us retreat at least to the bottom of that trend line.

Here’s why I’m still waiting for a dip. Let’s look at another index for a second.

The Russell 2000 has gone up 13% in 34 days. Do you know what the past 3-year history of the Russell 2000 is? About 20%, or an average of 6.67% a year. We are seeing percentage gains in short periods of time that remind me of 2020 after we hit the covid bottom.

Ok, enough of that. Let’s see what trade ideas we can come up with today.

I have a counter-trend idea for today. As such, the risk is higher and I will be adjusting the contract size accordingly.

Here is a weekly chart of FedEx (FDX) and it’s clearly been in an uptrend since October. You can see that it’s also been trading in a channel. We are now resting at the top of that channel and the stock is already up over 7% this week.

If the market has a pullback and FDX follows its trend, I think it’s likely to go down from here, at least for a couple of days.

The 17-FEB expiration is only 15 days away and at the time of writing this, you’re able to get 1.03 ($103) in credit for 3.97 ($397) in risk. That means it’s offering a 25% return in 15 days.

SELL -1 VERTICAL FDX 100 17 FEB 23 210/215 CALL @1.03 LMT MARK

If you believe the move will happen quickly, you can also buy a put. Long options are relatively cheap right now since Implied volatility is so low compared to historical volatility.

The spread requires $397 in margin. The long put is about the same price, coming in at $395.

BUY +1 FDX 100 17 FEB 23 200 PUT @3.95 LMT MARK

The risk with the long put is that we only have a few days to expiration. You need the stock to move quickly since the time value of the option price will decay with each passing day.

Let’s say the stock moves down to $195 by next Tuesday and compare the two tactics. You would have about $300 in profits on the long put. Using the same capital requirement, you would only have $82 on the spread.

What if the stock doesn’t move from here and stays at $202 by next Tuesday? The long put would lose $91, while the spread would give you $22 in profit.

While I like spreads for the ability to profit from time decay, I don’t think FDX is likely to stick at this level. If it keeps moving higher up from here, both the call spread and the put will lose. So for the same money at risk, I’m going for a long put in this case, assuming it’s not trading higher than the trend line by the time I get to place the trade.

Yes, I wrote earlier that I would start being more bullish, but let me have this last one, ok?

Which trading strategy is better? What would you do differently? Let me know!

If you have any questions, comments, or anything we can help with, reach us at any time.
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Jeff Wood

Editor, Filthy Rich Dirt Poor

Trader, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation. 


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