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Off the news: How will Yellen, the Fed pull it off?

Davis MartinDavis Martin ·

The news: There is a Fed meeting coming up and all eyes are on it, which explains light volume and flat trading Monday. Some observers say the recent hurricanes wiped out any chance for a rate hike through at least the end of the year; others say the need to increase is so great that it’ll be hard to let more time pass.

The back story: The stock market works in three phases: 1) uptrend, which is where we are right now, 2) crash, when everyone wants to cash in and protect themselves and savvy traders try to profit on the move down, and 3) cash comes back into the market to send stocks up again.

That third phase, creates a “buy the too-big-to-fail” opportunity, which I’ll be taking advantage of the next time the market gets there.

The problem: In the past, to help turn the market from crash to rebound, the Federal Reserve has had to lower interest rates by 3 percent to create the economic stimulus needed to create a true spark. Right now, the Fed can’t make cuts that big without going negative; it needs to push rates above 3 percent in order to be effective if there’s ever another crash.

Fed chair Janet Yellen recently said that’s not a real problem because we won’t see another Phase 2 in our lifetimes. She might be talking about her lifetime – because she’s old – but younger people recognize that as a total lie, something said to comfort investors and the lemmings watching CNBC.

How I’m playing it: I’ll have my finger on the trigger for October’s at-the-money call options on GDX and TLT (VanEck Vectors Gold Miners and iShares 20+ Year Treasury Bond, respectively) which are historically the ETFs that move as a result of Fed meetings. Janet Yellen will tell me what to trade; not directly, of course, but her message will tell me if it’s gold, bonds or nothing at all.

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Davis Martin is the head trader at Dailyprofitmachine.com. He trades SPY calls and puts and swing trades individual stocks and stock options. At the time this article was published on RagingBull.com, he had no shares, options or open orders in GDX or TLT, though he was prepared to trade them depending on the outcome of the Fed meeting.

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