Ah, Fed Day—full of sound and fury…. It truly is “a tale told by an idiot”, and I don’t mean Ben Bernanke. Mr. Market is the mentally impaired character in this metaphor, and he can make life quite a challenge for those of us trying to think and act reasonably. We’ve seen wild swings already today, first up, then down (after news of—surprise—a drop in new home sales), then back up—and now down again.
Our plan, as always, is to assess risk based on the profit/loss profile of our portfolio, as well as of our individual positions; use that information along with our trading rules to determine a price point where we action is called for; and follow through with an adjustment if necessary. Our current portfolio-level risk-management threshold is SPY $108.90, and we’d usually wait for next-day confirmation of a closing price below that; however, as I noted yesterday, a number of risk factors have come together to make that $108.90 level especially critical. Add in the risk of volatile trading around the FOMC policy statement this afternoon, and navigating the market waters today could be difficult, indeed.
At the moment, we have two possible courses: 1) pare back our risk ahead of the Fed announcement, even if SPY is trading above our adjustment threshold, or 2) wait for the post-Fed fallout and make a move only after a decisive drop below $108.90—possibly without waiting for a closing price. In the latter case, we’re facing the likelihood of extreme, unpredictable price action and bid/ask spreads even wider than they are with the announcement less than two hours away. All things considered, managing our risk before the risk event seems like the most prudent course.
Unless the bulls stage a surprise rally in the next few minutes, I’ll be putting out a trade alert as soon as I find out where we can get filled.