Surprise! That was the reaction to the Federal Reserve’s decision to maintain current policy and continue with its economic stimulus program. 

Many of us who pay close attention to the Fed and every breath it takes, had our calendars marked for the September 18 FOMC meeting. Many felt that this would be the day where the Fed showed its hand and told us when it would start tapering its $85 billion a month asset buying program. Some Fed watchers were looking for a gradual cut, $10 billion or so. Others were looking for a timetable for when the program would cease operation all together. On Wednesday we didn’t get either.

MARKET REACTIONS

The equity markets reacted to Wednesday’s statement by pushing up to new all time highs. Investors, who had been on the side waiting to hear how much the stimulus program would decrease, jumped back in with both hands, realizing the Fed hasn’t turned the faucet off yet. Metals were off to the races as well, gold jumping nearly $30.00 following the announcement. A sell off in the dollar may have contributed to a climb in commodity prices as well.

DON’T FIGHT THE FED

You can guess, argue, and debate, why the Fed decided to maintain current policy. But one thing is certain; it’s sticking around for a while. Wednesday’s actions (or inaction depending on your view) are causing me to think about a phrase I learned a long time ago; Don’t Fight the Fed.

I’m not going to mess with the bulls, but I don’t necessarily want to run with them either. Let’s call it a jog. I like a continued move to the upside, but the Fed still has a few bullets (continued economic data) to fire if they want to change policy.

E-MINI CALL SPREAD

I like buying the Dec E-Mini S&P 500 1775-1800 call spread at 6 points ($300.00) or better. Maximum potential gain is only 25 points, but risk is limited to the cost of entry plus fees and commissions. If new data surfaces that causes a change in market sentiment, I would look to exit at a 3 point loss. Should the bulls continue to run, I would run with them as close to expiration (12/20/13) as you are comfortable with.

BOTTOM LINE

The marketplace is often full of surprises. Wednesday the Federal Reserve surprised the market. Stay on top of your own risk management so surprises aren’t costly. 

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Contact Weyer directly with questions or for more information.

RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT.  WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.