Yesterday, while we were trucking through the muck, we asked the question: What happens when the FOMC "shocks" us with a rate cut? Our answer was simple””at a point, we fade the trade. We've seen this movie before, in 2001, and after a sharp Snapper, the conditional elements that precipitated the snippage were more important than the scissors itself.
Particularly when a (soon to be ex-) Fed Governor said the previous day that the FOMC wouldn't act before September unless there was an outright calamity. Nice poker face, Jane!
Listen, we get the credit seizure and understand that cheap money (or credit, as the case may be) makes the finance-based, derivative-laden, debt-dependent world go round.
And we further understand that this is the last thing the Fed wanted as they attempt to punch their way out of the Box. Dollar to donuts--metaphorically and figuratively, the Chinese can't be thrilled to see their dollar-denominated assets devalue further.
Was it an accident that the FOMC waited until expiration Friday before the shave and an ursine haircut? No shot””they know full well that expiration exacerbates volatility and wanted maximum bang for their cut to shore up psychology. What they may not know is that negative gamma works both ways.
I played the fray from the long side yesterday, buying into the abyss and sweating out the "worst case" scenario. It wasn't a blind bet””I set my stops below BKX 101.50 and loved the way they traded in the face of broader disgrace. And, consistent with the discipline that has kept me in the game, I flattened out into the bell. If a fool and his money are lucky enough to get together in the first place, GG, I was happy to hit it and quit it.
So, what now? Consistent with what I've been saying, I'm layering into my first tranche of S&P puts with a stop above S&P 1455 (200-day) and BKX 111.50 (from where we broke down). I'm not being a hero, I'm simply trading, fading and staying discipline. It may be too cute””nobody catches every move””but I will say this.
With self-proclaimed floppers suddenly saying that this panacea will spark a 1500 point rally in the DJIA, I'm willing to take the other side of that trade in a defined risk way. I've seen that movie before too and, well, the sequel promises to be quite a calamity.
Good luck today.
R.P.