Hey There Income Hunters,
Let’s get ready to rumble!
The Fed’s decision coming up on Wednesday regarding its QE taper program and/or raising interest rates is sure to ignite a powerful move into the year’s end.
This message is by far J-Pow’s most important. The world is waiting to see if the central bank will begin decreasing bond purchases and possibly even hint at raising rates.
Here is the bottom line …
A slow QE Taper will not rock the boat into the end of 2021.
However, if J-Pow does not clearly articulate the Fed’s intention to taper and not raise interest rates at this time, the stock market may sink into a Christmas Massacre sequel to the original in 2018 when a reeling Dow plunged by 653 points on Christmas Eve.
Today, I’ll spell out what I think the Fed will do and what to expect next …
Current Risks Put Powell on the Hot Seat
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- The bond market is already pricing in many more rate hikes than the Fed forecast
- Many central banks have hiked rates and cut bond purchases (taper)
- Geopolitical risks, supply chain problems and China’s slowdown complicate the decision
- Bond market volatility is soaring, showing signs of investor confidence in the Fed waning
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The last point is not a good sign when the Fed’s mandate is price stability.
The bond market is meant to be a safe haven, so when it becomes this volatile the Fed is usually to blame.
The Need to Seperate Taper from Rate Hikes
At the last Fed meeting in September, Powell went out of his way to make the distinction between taper versus rate hikes.
The bond market has still priced in much more aggressive rate hikes than the long-term projections implied by Fed members themselves.
Divergence Between Short- and Long-term Rates:
The Treasury yield curve is an extremely important signpost as a forecast for the economy.
Higher short rates relative to long rates implies the Fed is too hawkish and its policy will hurt economic growth.
If Powell doesn’t clearly articulate that the Fed has no intention of raising rates next year, he may cause a major correction in stocks.
Powell Will Do His Best Dove Impression
Powell must come on strong as dovish beyond his QE taper announcement so the market reverses the rise in short rates.
Here is why …
The US Treasury, headed by Janet Yellen, has been increasing its bond issuance in the shorter maturities because investor demand for longer-term, riskier bonds is dropping.
This is hugely important. Knowing this tells you the Fed must not let short rates rise because it will increase the interest cost on their $29 trillion in debt.
So, it should be a safe assumption that Powell will accomplish his goal and investors will buy the short maturities and sell the long-end.
Here is a low risk/high reward trade to capitalize on this synopsis.
Sell iShares 20+ Maturity Treasury Bond ETF (Ticker:TLT)
TLT is showing signs of rolling over with a close below the 50-day moving average. Another close below 146.88 may attract selling into the Fed’s meeting on Wednesday.
Then, if Powell convinces investors that rate hikes are not on the table, longer-term sellers may liquidate positions in the long-end and buy shorter maturities.
This money flow could take TLT back towards the recent lows.
TLT Trade
I currently have a few spreads on TLT.
I am betting on a quick drop in TLT into next week with a chance to expire them below the lower strikes and hit a home run.
I will stop the trades if TLT closes back above the 50 DMA.
This strategy is an awesome low-risk/high reward play. If I am right this trade will return 183%.
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- Net Profit 1.5 – .53 = .97
- Return = .97/.53 = 183%
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Bring It Home
Remember, being a consistently profitable trader requires:
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- Finding high probability trades where the fundamentals and technical meet.
- Optimizing risk/reward.
- Proper risk management maximizes return on capital at risk.
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Live and Trade With Passion My Friends,
Griff
