I’ve given a considerable amount of thought as to whether it is a good idea to carry our short position into the Fed announcement or not. As always, there are two sides to the debate. Here are the arguments for staying short:
1. As I said last night, “I believe that regardless what the Fed does or does not do today, the market will fluctuate wildly after the announcement, primarily because of a lack of unanimity of thinking as to the significance of their actions, whatever those actions are. Does a ¼% change in the Federal Funds rate really mean anything significant? I don’t think so. Nor would postponing a decision to do so. Nor would increasing the rate and giving clues that additional rate hikes in the near future were unlikely. I think a lot of yesterday’s and Tuesday’s strength were a function of scared bears wanting to cover before the upside momentum grew larger, and under invested bulls rushing to do the same. I don’t know what the Fed is going to do, and I do expect a lot of volatility in the few minutes after their announcement, whatever it is. But when the dust settles, a lot of people will end up thinking, “Big deal; so what?’ I cannot think of any set of circumstances where the decision of the Fed, whatever it is, it going to inspire the market to new heights.”
2. Also as I said last night, “The news-neutral daily model is bearish today. My news-neutral index models for the Nasdaq, SPX, and Dow are modestly bearish. And while it is a certainty that there will be news today, making “news-neutral a bit irrelevant, as I said in the prior paragraph, I cannot think of any set of circumstances where the decision of the Fed, whatever it is, it going to inspire the market to new heights.”
Here are the best arguments for not staying short:
1. It’s scary. If the market likes what it hears, it could go higher.
2. It’s scary. Even if the market doesn’t like what it hears, avoiding “scary” feels better.
Here are the arguments for going long:
1. Recent momentum has been strong. If “strength begets strength”, then unless the news is downright bearish, the market should continue higher.
Counter arguments against “not staying short” and not “going long”.
1. Courage is not about lack of fear; it is about acting appropriately even when one is fearful.
2. One MAJOR reason why most investors underperform the market most of the time is their tendency to buy when the market is euphoric and sell when it is scary. Doing the opposite of that has usually been profitable and has outperformed the market over the long term.
3. Over the long term, positive news surprises and negative news surprises balance out. So, logically, the best way to act is to ignore news (which only serves to encourage buying euphoria and selling fear.”
Here is the best counter-argument of my counter argument:
1. Over the short term, the market is sometimes not “logical”.
PRACTICAL ADVICE: For TOT Daily Model followers, our stop is in place and should remain so. For those who cannot trade intraday, I believe the arguments for being short outweigh those for not being short. That may be more true for the Nasdaq 100 Index than for other indices.
All market choices (including the choice to stay out) involve risk. Today is no different.
Thanks for the opportunity to be of service, and I’ll email you again prior to the close if we are not stopped out of our TOT daily trader position; otherwise late tonight.
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