Earnings on Pause: Fed Interest Rates Back in Focus

While everyone largely agrees the Fed won’t raise rates this time around, this press conference may reveal new insights into what policymakers are thinking. Furthermore, my previous analysis indicated Fed events often, but not always, coincide with major turning points in the market.

Read here: What Will Drive the Market Rebound This Time?

According to experts and currency markets, it’s very likely today’s FOMC statement and conference will turn out to be a non-event (aka the market doesn’t do anything). However, in my view, the potential for a sharp swing in either direction – more so to the downside – remains a possibility.

There are two reasons for this:

1. Run-Up Risk: Fed events are known for surprises – that usually means selling – and the market is heading into this following nearly a 10% run-up from its most recent September 29 lows ((SPY A-) returns as of October 27, 2015). This leaves the market vulnerable to profit-taking pressures, regardless of what Federal Reserve chairwoman Janet Yellen says is “good” or “bad.” Many traders have been sitting on handsome profits over the past month, and they won’t hesitate to lock in gains if Fed commentary even slightly deviates from expectations.

2. Certainty Risk: Just like that, the Volatility Index (VIX), also known as the “fear gauge,” has dropped considerably since peaking on the August 24 market crash. The risk lies in that if investors feel more certain now, even minor changes to expectations about the future could inspire feelings of uncertainty and lead to another spike in volatility. While I’m not suggesting another August-like crash will transpire, it is probable the market has to fall from current levels before staging a healthy advance higher.

As such, traders and investor alike may want to take advantage of any volatility in the market. Consider the following, depending on your approach:

There’s a plethora of ETFs to choose from when it comes to trading Fed-related events. Consider the following:

• ETF Trading Cheat Sheet
• 50 ETFs Day Traders Love

No matter what product you’re trading, always remember:

• 7 Rules for Day Trading ETFs
• How to Take Profits and Cut Losses When Trading ETFs

See also the Technical Trading FAQ for additional reference

Today’s event, or even the next one, really shouldn’t trigger any major buy or sell decisions in your portfolio, unless they have been pending for a while. The bottom line is that making allocation decisions around potentially volatile days in the market – albeit very rewarding at times – more often than not is stressful and risky.

There’s no shame in sitting on your hands when the market is whiplashing; of course, if you can muster up the conviction to buy when there is a sell-off, that’s even better.

In light of the market’s run-up and the all-too-quick return of “certainty,” there’s the potential for volatile trading later today if the Fed drops any unexpected hints. No matter if you’re a trader or more of a buy-and-hold investor, don’t forget to utilize limit orders when buying or selling; for active traders especially, be sure to set stop-losses on inverse and leveraged products.

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