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How Traders Prepare For The Important FOMC Announcement

How Traders Prepare for the Important FOMC Announcement by Market Authority

Similar to today, the economic upheaval of the 1930s included a wide range of economists with drastically different solutions to the financial crisis. Allowing a country's currency to freely float (and not be a fixed price to gold) was a precursor of Central Bank-led financial engineering witnessed today. John Maynard Keynes, the father of Keynesian economics, was widely criticized for offering various opinions and solutions to combat the economic malaise of the Great Depression.

John Maynard Keynes

Lord Keynes is the original hipster flip-flopper.

Winston Churchill once joked, "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which you get three."

To which Keynes offered this apocryphal response, "When the facts change, I change my mind. What do you do, sir?"

Keynes demonstrates a remarkable attitude too often lost on investors. An essential mark of great traders is the ability to change their mind as conditions change. Traders must have a sense of what will happen in the future, however, if conditions change - that sense should be flexible to change with the environment.

The worst mistake you can make as an investor is to rationalize new information in the face of unfavorable price action. "It can't be"… "If only"… "No way"… "This is ridiculous"… are dangerous phrases in the investor's lexicon. The market usually follows the least expected course, therefore you will find yourself using these phrases more often than not. My old boss at Salmon once told me, "If you find yourself hoping things to be in your favor, sell half!"

In a previous post, I argued that an end to the taper means nothing to the market. Yes, we will experience some short-term volatility but the long-run bull trend since 2009 will still remain intact. As Bill Gross of Pimco contends, "The US is the cleanest dirty shirt." We have an aggressive Fed, a banking system with mostly-repaired balance sheets, and a corporate sector flush with cash. These positive market catalysts won't change with the taper.

However, as traders we need to be opportunistic and concerned about the short-term. And in the short-term around the FOMC meeting on Wednesday, caution is the name of the game. This is the first FOMC meeting where the outcome will seemingly defy the expectations of everyone. Simply because these expectations look like a Christmas grab bag at a holiday party where nobody likes each other. The expectations vary from "no taper" to the polar opposite, "no more QE". Since it's anyone's guess, you can imagine the market response will have a few whip-saw reactions to the FOMC announcement.

As you can see on the 3 month chart of the SPY, the market hasn't gone anywhere since early November once we broke out of the government shutdown. We've been range bound from 178 to 182. After a solid run this year, it's ok that we're consolidating. It's normal for the market to digest the gains before preparing for another move higher.

SP500 Futures

The volatility pick up in the last few days has me thinking we'll see some downside after the FOMC meeting, which will lead to a nice Santa Clause and January rally. I'm looking at the 172-174 areas as support and buying opportunities if we do see a sell-off. On the upside, I'm a buyer on a breakout over 182. When the facts change, so does my opinion.

What do you do?

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