ChooseDay: The day the Federal Reserve decision will be announced. Evidence of how unwise it is to attempt to predict which direction the market will move after the announcement was apparent to any avid CNBC viewers prior to the Bernanke’s first big rate cut some months ago when Jim Cramer went out on a limb and claimed that whether no rate cut, a quarter point rate cut or a full point rate cut was announced the market would have a massive selloff. Needless to say the market surged massively and poor Jim had egg on his face. So we are not about to predict which way the market will move following the announcement but we will take a look at some interesting charts.
Notably many of the financial stocks were up today as was the Financial Select Sector SPDF (XLF). The XLF gained a full 2.12% while Bear Stearns gained almost 5% and Morgan Stanley did creep over the 5% marker. This is of particular interest because it may well portend a broader bullish move. Prior to the last big announcement you may well remember our comments about institutional buying ahead of the announcement and we viewed the capital inflows as representing ‘smart money’ getting in ahead of the crowd.
As with all uncertain events we encourage at least a modicum of hedging. As Sage pointed out yesterday the worst the can happen if a big bullish move occurs is that you don’t make as much money as would otherwise have been the case but the worst that can happen if you have no hedging is profits that may have taken months to accumulate are wiped out. Paying attention to the risk as much as the reward leads to an obvious choice regarding whether to hedge ahead of the event.
While the movement of the financials boded well for the market reaction following the announcement, the leaders were notably absent from substantially partaking in any rally today: Google rose just 0.5% and Apple dropped very slightly. The movements of these stocks alone was enough to convince us that hedging is still warranted.
The S&P 500 and NASDAQ are still in bullish chart patterns and today’s action in the Dow did nothing to dampen hopes of a year-end rally that could well last into the new year if the catalyst cut is announced.
An interesting stock of note is EMC. EMC was trading slightly below its current level when VMware came public some months ago. In the interim VMware popped substantially all the way to $120+ and EMC rallied to $25+. But VMware corrected down to $70 or so and then rebounded most recently to $90+ while EMC has remained relatively stagnant below $20 per share. We believe long-term opportunities abound for EMC position. LEAPS calls are a standard way to play a bullish expectation and we already have some hedged positions open.
Whatever happens tomorrow, plenty of opportunities exist to make money after the event so if you are hedged and don’t see wild account swings it usually means you are trading carefully. The journey is long and when traversing a windy road up a cliff face, it’s best not to go full throttle because the precipice awaits. Slow and steady wins the race.
Have a Tremendous ChooseDay!
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