Trading Binary Events – The FOMC Announcement
It was an amazing reaction to the FED meeting on Wednesday. With so many different types of traders getting tossed into the trading ring when the markets react to a ‘binary event’ as they did on Wednesday after the FED announcement the ability to be amongst the chaos and not a part of it is critical to seeing opportunity.
As I suspected Wednesday started slowly with a downward bias. The markets were anticipating a reaction and in front of the actual announcement traders were positioned accordingly either short or long. The announcement comes and it is off the races and from the intensity it would appear that some were caught off guard or expecting something different.
So, what was the super trigger that brought on some serious buying at all time highs? Here is what was pulled from the newswires:
- FED REPEATS LOW RATE LIKELY FOR CONSIDERABLE TIME AFTER QE ENDS
- FED SAYS HIGHLY ACCOMODATIVE POLICY ‘REMAINS APPROPRIATE’
- FED TAPERS BOND BUYING TO $35 BLN MONTHLY PACE FROM $45 BLN
No surprises as to major changes to monetary policy. The FED is keeping its promise to continue to reduce quantitative easing, but if we read between the lines, the FED intends to continue to expand the monetary base at the current ZIRP (zero interest rate policy) at least through the end of QE and now it appears that could be ‘likely for a considerable time after QE end.’ The markets interpretation – if it isn’t broke don’t fix it. In other words so long as cheap money is available it will be in search of yield.
However, it doesn’t suggest that all is well as we are being led to believe. We are constantly being told that the recovery is moving forward as evidenced by the ever rising stock market, falling unemployment numbers, and improving corporate earnings. Reality is somewhat different though, and this is the important factor that the masses won’t believe.
Amongst all the “bullish” interpreted words from the FED cut their growth forecast for 2014 from 2.9% to 2.1%. Prior forecasts were as high as 4%. To buffer this ‘sticker’ shock, the FED made sure to include that economic activity is rebounding in the current quarter and will continue at a moderate pace, “The economy is continuing to make progress towards our objectives”, which happen to be full employment (not bullish – remember 2000 – 2001) and 2% inflation, which is the larger more difficult pill to swallow.
Ok, back to Wednesday when the announcement hits the news wires. It is at this point when market awareness and strategy are important. Binary events trigger large and often violent swings in the markets. Wednesday’s FED announcement in my opinion didn’t say anything new and merely sugar coated it to make it more palatable for the masses to swallow. The initial reaction was to sell, that proved very quickly to be wrong with the buyers stepping back in with a vengeance as the shorts got caught and the longs moved in for the kill. Add to the mix the skewed fair value calculations, as the futures rolls got jammed into high gear. All in all, the rally was strong persistent and unrelenting. As day traders we live for “the big moves” and binary events usually accommodate. However, in order to successfully trade the move all opinion needs to be checked at the door. It is essential to trade what the market is giving. It is important to follow your strategies and to make adjustments after assessing what the ‘market mood’ is. Easier said than done, I realize this, as old habits die hard – but to successfully trade a market such as Wednesday afternoons it is vital to plan strategy ahead of time so that it becomes automatic rather than second-guessing.
TIme for a chill pill – The markets remain extremely overbought and that reality can be ignored for a while but the inevitable will happen. I can’t stress enough that nothing goes up or down forever. To believe otherwise is a dangerous deception. With the broader indexes still at all time highs, overbought readings being registered across the board, volatility being sold at 52-week lows and at levels last seen in 2007 it becomes a matter of when and not if the markets will correct. There are many that will argue the validity of the rally and that there is much further to gain and that may be yet to come, but the markets have reached a critical juncture where reality will take over.
Steer the course and don’t compare yourself to everyone else. You are not they and they are not you. Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves. Don’t be swallowed up by the chaos and false emotions swirling around. Remember it’s just a number.
Trading the number remains key to being able to reduce and separate the “noise” from opportunity. This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.
Opportunity continues to knock on our doors. While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.