Trade Should Weather Short-Term Risks Around Fed Announcement
Yesterday, the Federal Reserve finally gave investors — and the market — a bit of what they’ve been looking for…
At its press conference, the central bank officials confirmed that they were on track to raise interest rates in March. According to The New York Times…
Jerome H. Powell, the Fed chair, said officials no longer thought America’s rapidly healing economy needed so much support, and he confirmed that a rate increase was likely at the central bank’s next meeting.
“I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so.”
Powell also made clear that the current economic expansion is a different beast than what they’ve dealt with in the past. He described the current environment as having “higher inflation, higher growth, a much stronger economy — and I think those differences are likely to be reflected in the policy that we implement.”
That’s certainly true. A recent Labor Department report showed the consumer price index rose 7% in December from a year ago. That makes it the fastest increase since June 1982, when inflation hit 7.1%.
The Fed’s plans — and how they’re implemented — are central to the volatility that’s been swirling through the market since December.
It’s interesting to see how the policy changes announced Wednesday compare to what we saw in the mid-December statement and then later in the meeting minutes, which were released in early January.
Back in mid-December, a set of economic projections showed Fed officials expected to raise interest rates three times in 2022 and wrap up its pandemic-era bond-buying program early in the year.
But in Wednesday’s press conference, Powell made it clear that the Fed could unwind its balance sheet both sooner and faster than expected. He used the same words to describe the potential interest rate hikes we could see in 2022.
Before Wednesday’s announcement, the market was largely anticipating at least four quarter-percentage point hikes in 2022. Some analysts were even predicting a fifth or even sixth hike before the end of the year. That would be the most aggressive rate hike schedule since the calendar flipped into the 2000s, when then-Chair Alan Greenspan was working to tamp down the dot-com bubble.
Federal Reserve Plans To Take Away The Punch Bowl
Following Powell’s comments, the consensus is now largely expecting five rate hikes.
To be clear, Powell declined to give a direct answer to the number and pace of the coming hikes, saying the Fed was “going to be led by the incoming data and the evolving outlook” and that it was important to be “humble and nimble.”
Wall Street really, really didn’t like these answers.
The three major indices had been enjoying a nice rally for the day. But they turned down after the press conference and ended things in the red.
You see, the Federal Reserve’s job is to take away the punch bowl just as the party gets going… And Powell has said that’s exactly what he’s about to do.
And just when it looked like Powell’s party-pooper announcements were going to put a damper on the end of the trading week, the indices took a turn for the better on news that U.S. gross domestic product (GDP) had grown 6.9% during the fourth quarter — the fastest rate since 1984.
Investors cheered this news at the open, sending the S&P 500 up nearly 2%, but I think their excitement is a little short sighted. Evidence of a strong economy seems like more fuel on the fire for the Fed’s aggressive monetary policy. And I’m not the only one who thinks so.
“The fourth quarter, especially the back half, was marked by Omicron somewhat blindsiding investors and consumers, but with GDP coming in strong, it’s encouraging to see the economy took the challenges in stride,” said Mike Loewengart, managing director of investment strategy for E*Trade Financial. “So while all eyes are on the Fed, better-than-expected Q4 growth coupled with a drop in jobless claims adds more wind under a now-hawkish Fed’s wings.”
Inflation like we haven’t seen since 1982…
Economic expansion like we haven’t seen since 1984…
A rate hike schedule like we haven’t seen since 2000…
Does anyone else feel like they just fell into a wayward time machine?
UHS: A Stock Prepared To Handle The Short-Term Risks
The market had a strong reaction to the Federal Reserve’s plan.
As I’m writing this, the major indices have given up most of their early gains, with the S&P 500 down 0.2% and the Nasdaq and the Russell 2000 both firmly in the red. All of this tells me that we still have a lot of risk ahead of us in the short term.
But we’re prepared to handle these risks. We just have to stick with our plan and follow our risk-management strategy. And today’s trade in Universal Health Services, Inc. (UHS) does just that.
There are two main reasons behind this week’s trade. First, the stock is on an Income Trader Volatility (ITV) “buy” signal. Second, this opportunity passed all of my safety checks.
In the chart, we can see that UHS has already endured its bear market. Shares fell about 20% below their August high before stabilizing.
Over the past seven weeks, the stock formed a base pattern, trading in a range between $120 and $135. That’s an indication that selling pressure has eased. Since then, the stock has remained above its lows, even after the Federal Reserve’s announcement.
Even so, I want to add protection while the market continues to be volatile. So, I’m picking an expiration date that is only a few weeks out. I’m also picking a strike price that gives us an additional 20% cushion from current prices.
Overall, the technicals suggest we have a low-risk buying opportunity. And ITV suggests there is a low-risk income opportunity in the stock.
How I’m Trading UHS Stock
Interested in this trade? You could buy shares of UHS and hopefully catch some more upside.
But I found a better trade… One that allows my subscribers and I to collect 3.1% in income in just 23 days. That’s a respectable 49% annualized. And all without buying a single share of the stock.
How are we doing this at Income Trader? By using a high-income, short-term put option on CVX.
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