Today the Federal Reserve cut the benchmark rate 50bps in a “surprise” move. After a G7 summit this morning, nothing was announced. Then at 10:00 EST they did a random press release to say that the rate will change; weird at best. The effect was very brief – generally speaking the markets hated it.
On Sunday I wrote a piece about how I expected the Fed to cut rates this week, and they delivered. My forecast of the reaction was quite incorrect for the timing, and as a result my plans to trade it are a bit off kilter and I’m adjusting accordingly.
Yesterday, after the nice bounce in the major indexes, I sold a few near the money call verticals on the SPY. These were quickly closed after the Fed announcement (for a loss) as I expected the market to rally hard and hold for a day or two. Unfortunately that forecast was way off and today turned out to be another 50+ down move in the S&P’s which is driving my slightly positive skewed portfolio into some serious red territory.
Those SPY short call verticals would have been very nice given the sell off today. I checked the pricing right around market close (because everyone likes to understand what they missed out on) and I had roughly 50% gains in the bag (woulda, coulda, shoulda – didn’t).
At this point, it’s time to trim positions that have little to no hope of recovering given my current market forecast. I’m rotating through some positions and realized losses on UVXY spreads that are unlikely to come in over the next week, also closed out some deeply breached ITM put spreads. With vol continuing to expand, /VX continuing to rise, the market totally shrugging off a Fed rate cut and COVID-19 cases growing exponentially I just don’t see a near term bullish case that makes sense.
The rotation of new positions are mostly bearish in tilt. I’m picking a few equities, but going more towards 16 delta calls on indexes to give plenty of room for volatility and allowing things to get deeply out of the money for quicker profit taking on drops. I’m holding some longer term short vol positions for a bit; we’ll see how those play out.
We may get a few relief bounces in the next few days as we grind lower – however I’m not interesting in letting my existing ITM put spreads go any deeper ITM given the short amount of time that is left on them. I’ll take the residual value and use it for some profitable trades instead 🙂
Coming back to the rate cut for a bit. The cut today puts the fed in a really awful scenario at their March policy meeting. They cut, and it didn’t do anything in terms of helping the market. The market is basically demanding another cut with the price action and the fed is almost obligated to do another 25 bps (minimum) at the March meeting. It doesn’t really do anything to help the actual problem, it is largely symbolic at this point. Possibly buffering potential demand shocks as a bit of early insurance against them – but that remains to be seen.
In 2008 credit conditions were actually messed up. We had real financial problems in the economy and monetary policy was an appropriate tool to aid in addressing the problems. Given a growing potential global pandemic, rate cuts don’t do much if anything to offset supply shocks. Possibly expanding the balance sheet, offering lending facilities directly to firms and other market operations have some impact; but lowering the funds rate, I just don’t see that being meaningful. Most of their tools address the demand side of the equation.
Furthermore, the Fed just shot their bullet. They really only have a few of them before we hit the zero bound on the funds rate – and unless the US is prepared for negative rates, it’s time to start getting creative with monetary policy.
Maybe this is a play to say to the policy makers – we did our part, now you do yours. I wouldn’t be surprised to see stimulus packages come to play later in the year as we continue to experience economic drag due to COVID-19.
Stay safe out there and keep your risk in check! The markets are whipping all over the place and you can lose your shirt in a heartbeat if you don’t manage your risk appropriately!