We have an official change of tune where since the financial crisis we've had oodles of helicopter money dropped into the markets. Yesterday, Janet Yellen officially did it. After nine years of Federal Reserve accommodation, she finally committed to a gradual & predictable reduction of the Fed balance sheet. Yesterday's announcement also included revised inflation expectations down from 1.7% to 1.5% and one less rate hike on the dot plot. Although the market was flat with little reaction, a bird’s eye view of financial markets does suggest that yesterday was a historic. If helicopter money truly does disappear from public markets, they can once again trade as free markets with volatility affixed to catalysts. This new program will begin by rolling off $10 billion in October and increase until it reaches a maximum monthly roll off of $50 billion by October 2018. In the aftermath of this policy shift, common sense expectations caution us to expect a double selloff in bonds and equities ...consistent with the forecast of former Fed Chairman Alan Greenspan. To prepare for such a possibility, our first response is to adjust a rebalancing of our long positions in certain areas & rotate some of that capital as a hedge with the use of SPY &/or QQQ put options. We want to start picking some of these up while we're in this top range. The market doesn't work in absolute lines in the sand" but we will heed certain momentum buy points before we officiate any SPY puts, QQQ puts, and maybe even TLT puts. Our SPY’s purchase point is being raised to any price below $248 from $243 and QQQ’s purchase point is being raised to any price below $143 from $145. TLT puts have already moved below our first momentum buy point of $127. We plan to purchase the first 5% allocation likely on the SPY puts to start some time before the close of the trading day today, September 21st.
In order for this trade setup to trigger, we need to see the SPY look to be closing anywhere under the $248.99. We're also getting negative bearish divergence on RSI values on both the SPY & QQQ on the daily chart. Take a look below:
Until this tune sings, there is no alarm being sounded off just yet. Be patient and do not panic. Market is still a feather away from all time highs. We still give the benefit of the doubt to the buyers. We are still in a bull market. Those are the facts as of right now. But we will be defensive about taking a small nibble on a hedging position and then reward that hedge if the thesis unfolds true to the analysis. Right now we have concerns about the market pulling back more than just a typical -3 to -5% pullback. We could see another -15% scale type pullback heading into the beginning of a fall. Followed by a massive bounce rally that would synch up nicely for the Santa Clause November to December rally for example. Doesn't that just feel reasonable? Feelings aside, we are watching for the triggers that could avalanche such a scenario. We are watching.
Stay tuned.