Fed week & chill
25 or 50?
Hello traders,
It is the week we have all been waiting for. The FED week. Jerome Powell is all but certain to cut rates this Wednesday and the markets did show that they love it this past week. The canary in the coalmine would be a 50bps cut but more on that later.
But first a small recap of last week:
As always, many thanks to don7spy for chronicling the trades on the days he actively trades, really saves me time.
Also a few trades for X followers that did decent this week.
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Moving on,
In the current economic landscape, we are confronted with a highly unpredictable Federal Reserve, exacerbated by escalating government deficits and the added uncertainty of upcoming elections. These factors contribute to an environment where markets may experience heightened volatility, and investors need to be tactical in their approach.
Given these conditions, the question arises: Can you effectively hedge your gains while still leaving room for further upside? While markets have enjoyed a significant run, the potential for a pullback remains, especially as we head toward the end of the month. In this context, a prudent strategy would be to consider some degree of downside protection, particularly in high-beta sectors.
One way to express a short-term bearish outlook is through purchasing puts on the (QQQ) index, which provides exposure to tech-heavy growth stocks that are likely to experience heightened sensitivity to any market correction. Complementing this with targeted beta puts on semiconductor stalwarts like Nvidia and Broadcom offers an added layer of sector-specific hedging. Both companies have enjoyed strong momentum, but given their high valuations, they could be vulnerable in a broader market sell-off.
For broader market exposure, specifically in the S&P 500 (SPX), a put debit spread—such as the 5400/5200 spread expiring end of October—presents an attractive risk-reward profile. At around 22.3 net debit, this trade gives you exposure to a potential drawdown while capping your maximum loss. Given the current market setup, this could be a measured way to position for a moderate decline without exposing yourself to excessive risk.
In terms of portfolio allocation, limiting exposure to roughly 200 basis points of NAV for these downside protection strategies would likely be the optimal risk tolerance. While these hedges can provide a valuable buffer against short-term volatility, over-leveraging or "betting the farm" on such positions could lead to unintended consequences. It is essential to strike a balance between protection and exposure to continued upside, as markets, while potentially due for a pullback, may still be underpinned by broader macroeconomic or corporate earnings trends.
In sum, navigating the current environment requires a well-calibrated approach that balances defensive positioning with a readiness to capture further gains. The use of targeted puts and spreads allows for tactical downside hedging without overcommitting to a bearish outlook.
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Levels for the week:
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