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FOMC Medicine
Author: Ravi Prakash (info)
Website: http://www.optionstradinglessons.com/
Posted: September 6th, 2007 at 12:36 pm EST
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The Market continues to remain volatile making it hard to determine Market direction. The upcoming FOMC meeting is being viewed by some as the possible cure to what ails this Market. I think it would behoove traders to not depend on the FOMC too much. It would also be prudent to not expect a drop in the Fed Funds interest rate. The current feeling on Wall Street right now is that a 0.25% drop is in the bag, maybe more. My experience over many years of following financial markets is that any kind of assumption can lead you to make some bad trades.
What If…
What would the Feds do if there were no credit problems in the Real Estate sector?
I think they would do nothing with a bias to raise the Fed Funds interest rates. There are many reasons; but the most compelling reasons have a lot to do with our national debt and the weak US Dollar. Our national debt is probably bigger than the black hole in the universe, and it seems to be growing bigger as the years go by. As long as the Government borrows billions a month, they have to make sure that our debt is attractive to foreign buyers. Therefore it is important that the US Dollar remains relatively stable (definitely not weakening against major foreign currencies). If the US Dollar gets too weak, then the Feds are forced to a) Buy a lot of US Dollars in the open markets to prop it up and/or b) Raise interest rates. Option “a” is temporary and does not last long. That leaves option “b”.
However…
Since there is a credit crunch and it is getting more difficult and expensive for firms to borrow money on the cheap. A drop in the Fed Funds interest rates would be well received by many in the Market. It will take a little time to seep into the economy, but it would help consumers who wish to refinance home loans. However, the real fear right now is not just restricted to consumers. Nobody wants to see any more hedge funds and mortgage firms go under. That sort of thing will only cause panic in the Market.
Having said all that, what is the best thing to do as a trader right now? It depends on your appetite for risk. If low, sit out the current drama. Just watch from the sidelines and you will surely see a good opportunity sooner or later to re-enter with a good trade. However, there are some who just cannot sit quietly on the side lines. In that case if you are an options trader like me consider option spreads and strangles as a way to trade right now. An out right CALL or PUT could make you some money if your timing is excellent, but the chances of being caught on the wrong side of a trade are very high. In the mean time I am waiting for the Market to pick a direction and stay with it - Up or Down!
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Authors, Ravi Prakash, Stock Market
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