February 23rd, 2023

Never Fear, The Fed Is Here…To Mess With The Market

We got to peer into the soul of the Fed once again after the FOMC meeting minutes were released and for the most part, nothing new came to light. Most members agreed to the 25-point basis point increase and saw improvements in the economy, but recognized and reemphasized the “higher rates for longer” mantra.

Here are some of the highlights:
With inflation remaining unacceptably high, participants expected that a period of below-trend growth in real GDP would be needed to bring aggregate demand into a better balance with aggregate supply and thereby reduce inflationary pressures.

Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4½ to 4¾ percent.

Things like “below-trend growth in GDP” and “more evidence of progress” aren’t things that the investment world wants to hear. The market is now pricing in the likelihood that the federal fund rate will be higher than the mentioned “4 ½ to 4 ¾ percent” as some are now estimating 5 ¼ or even 5 ½ percent. Investment banks are now looking into the possibility of the Fed going back to half-point increases.

Combined with the market moving higher on a flood of retail traders, you get the mess we’re in right now.

But is it really that bad?

Here is the Nasdaq 100 (QQQ) weekly chart and you can see that we’ve had a period of higher highs and higher lows. That sounds like an uptrend, right?

Based on open interest of the 17 MAR options contract, I’m seeing support at the typical “big numbers” – those that end in 0 or 5. But the $293 put contract has 13,206 open interest, so I think we’re likely to find an area of support around that level.

We can look at the same chart, but using the daily periods. If we do trade lower than the shaded box, I’d look for a pivot at $280. If we fall below $280, the trend pattern is no longer valid.

Now, why might we rebound and trade higher if I just got done writing about the negative news from the Fed? Well, trading and the economy don’t always align. But it’s not going to be good news if the “riskier” Nasdaq falls apart from here. We could see a run back to the defensive stocks if that happens.

We will soon find out if the 2023 run higher is the start of something bigger or if this was just a bull trap that we’ve seen before.

Here’s a trade that you don’t see every day. Amazon (AMZN) has certainly fallen from its highs, but could this be the time to get back into the retail giant?

Someone bought 30,000 contracts of the 31-MAR $97 calls while simultaneously selling 29,000 contracts of the 31-MAR $92 puts.

That is an undefined risk trade, so most can’t do that in their accounts. They paid $1.4 million to place the trade.

Here’s the options chain showing their trade.

Here’s what the risk graph looks like for this type of trade:

Admittedly, there’s a lot going on, but you can add this to your trading platform if you want to get more information about it. It’s a combo strategy with unlimited profit potential, and the sold put reduces the cost of the long calls – that’s why you get that flat yellow line in the center. If AMZN falls apart from here, the bought calls will lose value and the sold puts will go into the money and lose value as well.

All said this trader is willing to put up a fair amount of cash, thinking that AMZN is likely to close higher than $98 by expiration. Sure, this trade could still make money in a few days with some movement higher from current levels. They don’t need to wait until expiration.

Do you think it’s time to get back into Amazon?

For anyone who thinks I cheated and didn’t give a trade idea for today – please accept my apologies, but I have a lot of work to still get done for this year’s Investor’s Blueprint Live event, happening in Las Vegas next week. I hope I will see you there!

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
Coach, Options Testing Lab

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