FED Meeting Sept. 20-21

    FED Meeting Sept. 20-21

    federal-reserve-building

    WHAT SHALL INVESTORS DO IF FED RAISES RATES OR KEEP THEM THE SAME ON SEPT 20-21 MEETING?

     

    Approach #1: Buy stocks before FED meeting

    Approach #2: Wait for FED decision

    Approach #3: Go all cash prior the meeting

    Based on CME Group 30-Day Fed Fund futures prices, the CME Group FedWatch tool shows the probability of interest rate to move higher is 88 percent.

    Unlike CME, according to Goldman Sachs, there are 55-percent odds for a hike at the Fed’s Sept. 20-21 meeting and 80-percent odds by the December meeting.

    What I will try to show here is what eventually would happen after FED’s decision, how it will impact the regular investor like me and you, and what could do to benefit from these changes or minimize the potential risk.

    Apparently, there are two possible hypothetical setups to consider here as follows:

    SETUP A: FED raises the interest and SETUP B: FED keeps the same interest.

    I see three possible approaches to check here.

    Approach #1:

    You have no shares at this moment, so, for example, you decide to buy some high-quality growth and relatively low debt companies like [[AGX]], [[ALG]], [[AVGO]], [[HD]], [[MKTX]], [[ROST]] just prior the meeting at a discount, close to Sept 14 th low price ranges;

    You already have some shares but want to add more to your positions prior the meeting.

    Approach #2:

    Wait for the meeting and do nothing before FED’s decision.

    Approach #3:

    Go all cash prior the meeting.

    Consequences SETUP A:

    If FED raises the interest, the stock prices will likely correct to their previous May 19 th-June 27 th low price ranges that are equal to around 2040-2000$ for S&P 500 E-Mini Futures Prices or go even lower. This will create buying opportunities for cautious traders and will allow adding in a upscaling manner (the lower the price go, the more shares need to purchase) to their positions or add new stocks to their portfolios. This will provide a lower average price for the particular stock at the end of the downtrend. Going all cash will work fine if prices continue to fall below May-June low levels and then start purchasing in a downscaling manner ( the higher the price go, the fewer shares need to buy). However, it will be a losing strategy if markets recuperate quicker than expected. The reason for this is because it will be difficult to re-purchase all sold positions for a short time due to implied pressure of the institutional traders that will rush to fill positions and thus will push prices higher in a blink of an eye before an investor can even react.

    In order to demonstrate an example of the potential interest changes, I use an S&P 500 E-Mini Futures chart, in which you can see the possible price movements depending on the Fed’s decision.

    (click to enlarge)

    Consequences: Setup B

    If the Fed keeps the interest, stock prices will likely rally to their August 15th high price levels, which are approx. $2,193 for S&P 500 E-Mini Futures, or even higher to new historical highs. This will create buying opportunities for cautious traders and allow them to add to their positions in a downscaling manner or add new stocks to their portfolios, for instance, the ones I mentioned above. Going all cash will likely be a losing strategy since markets will probably not fall below the current support level of $2,120, and selling will only create problems for repurchasing all the stocks.

    (click to enlarge)

    Stocks to buy

    Since I have already mentioned some high-quality growth, relatively low-debt companies such as AGX, ALG, AVGO, HD, MKTX, ROST, I will explain some of the fundamentals behind my selections, which you might like, without going into details now. Although often, there is no rational explanation for the market’s movements, I do rely on balance sheet information and the technical indicators, especially when fundamentals support them. So, as long as the momentum is strong and share price is moving up most of the time or at least in the preliminary planned investing term, I would rely on my research and experience, trust in my choice and stick with my plan, until the price develops and I reach my target.

    Let’s have a look now, and I will talk about more stocks and reasons behind their selections in my next articles.

    (click to enlarge)

     

    Conclusions

    So what is the best approach?

    Approach #1: Buy stocks before the Fed’s meeting. This approach has better potential in case the Fed does not raise the interest but will still work if the Fed raises the interest because it will allow purchasing stocks at the present discount prices close to the September 14 lows. I think this approach will fit more aggressive traders but will also help conservative ones relax before the meeting.

    Approach #2: Wait for the Fed’s decision. This approach has potential only if the FED raises the interest. Otherwise, it will be easy to miss the upward correction. Personally, I have done this many times and can assure you that the feeling after this happens is worse when compared with a wrong direction trade!

    Approach #4: Go all cash prior to the meeting. Similarly to Approach #2, this approach has potential only if the FED raises the interest. Otherwise, it will be easy to miss the upward correction.

    What approach you select at the end depends on your personality risk tolerance. As for me, I like more Approach #1 and will try to open positions in some of the stocks I mentioned herein.

    Good luck!