Fed Takes Away Punch Bowl-So What Should You Do?

I try to avoid all news but I usually get some via osmosis. My fratello italiano Emilio Tomasini (https://www.emiliotomasini.it/) was visiting last week. He asked me what does “taper” mean? I asked him to use it in a sentence and he said “The Fed will taper off…”

So, the Fed is going to take away the punch bowl. The fear of this is that this is the only thing that has been propping up the market. And, it might just be. However, you can’t act on the news in and of itself. And, besides, if the market overreacts, the Fed will likely say, “just kidding”—but I digress. It’s the reaction to the news and not the news in and of itself.

And, so far, the reaction has been oxymoronic: pretty ugly. The Ps and the Quack are now well below their 50-day moving average. There’s nothing magical about that average but it is well watched and worth watching. Also, in general, it will help to keep you on the right side of the market.

Forget about the Fed. Plot your charts and trade accordingly.

All the recent uglyiness mentioned has come to fruition. Foreign shares, especially emerging markets imploding. Ditto for bonds and anything interest rate sensitive. On a net net basis, prices are unchanged for weeks. And, most sectors have rolled over or, at the least, have lost momentum. See the newsletter archives. What’s concerning is that there seems to be no place to run, no place to hide. Even gold, which often gets a little flight to safety reaction, has been imploding. This suggests a liquidation type of market where cash needs to be raised—and fast.

If you have been reading this newsletter, you should have some shorts on based on the aforementioned weakness. I’m not saying this to be smug but as a lesson on paying attention to market action. I did not know that we would definitely sell off. I did not know that the Fed would do some jawboning. I DID see some deterioration and think they I better pull in my horns a bit and think about the short side. I’d much rather get stopped out of all my shorts and have the market rally but I’m forced to trade in reality.
So what do we do? It’s too late in the current short-term cycle to establish new shorts. Manage existing shorts. Take partial profits as offered and trail your stops lower. Honor your stops on existing longs. Yet again, letting the ebb and flow of money management and portfolio management can help to keep you on the right side of the market/in the right issues—especially in questionable conditions.

Futures are getting hit hard t to firm pre-market.

See your Monday!

Best of luck with your trading today!

Dave