The market is exhaling.
And that’s OK.
After a massive move after the US election, we’re seeing a correction. Remember, corrections can manifest three ways: price, time, and momentum.
It’s very possible that we see a correction through time, that is rotational in nature.
Meaning that one sector will sell off, another sector will rally, and the market will maintain a balance.
The one major event we have left for this year is the Fed meeting. They’ll probably raise, and it has already started to get priced into the market.
How do we know this? Look at rate sensitive assets like TLT, or IYR. These areas of the market have remained soft but will probably not see continued downside momentum.
Contrast that with areas that do well when rates are rising: XLF and KRE are the best examples. These areas continue to stay bid as we head into the meeting.
Odds are that the rotation will come from that theme. It’s a “buy the rumor sell the news” event headed into the Fed meeting.
Trade #1: GS
Goldman Sachs has been one of the market leaders since the beginning of November. The main driver behind this appears to be twofold- a better regulatory environment next year and a yield curve that’s helping banks as a whole.
Yet it’s starting to get ahead of itself… again.
The stock is currently 33% above it’s 200 day moving average. Over the past 5 years, this has happened only once back in 2013.
Now can it head higher? Yeah. Will it be a ripper into the Fed? Probably not, and it’s getting priced in.
GS earnings is on Jan 18th, so there will be earnings risk in this trade. Ideally we’ll be in and out before we have to deal with it.
Trade Setup:
GS Jan 240/245 Bear Call Spread
Tier 1: Enter @0.60, Exit @0.20
Tier 2: Enter @0.90, Exit @0.60
Tier 3: Enter @1.20, Exit @0.90
Trade #2: V
On the other side of the coin, Visa (V) is not doing well.
Here’s why: there are two kinds of credit card companies, and their performance (for now) is tied to the rate environment.
So while Visa and MasterCard are not doing well, Capital One (COF) and American Express (AXP) are continuing to rally.
The way volatility has started to expand, V will probably have 75 act as a magnet all the way down to 73… That’s the support from the July lows, and that’s where we want to start initiating a new position.t
Trade Setup:
V Jan 70/67.50 Bull Put Spread
Tier 1: Enter @0.35, Exit @0.15
Tier 2: Enter @0.45, Exit @0.30
Tier 3: Enter @0.60, Exit @0.40
Trade #3: CAT
Industrials have been running hot post-election, and while they aren’t properly overbought we want to look for an opportunity to buy the dip if it comes.
If CAT tests the gap open at 90, that will be a good place to initiate some bull put spreads.
Trade Setup:
CAT Jan 80/77.50 Bull Put Spread
Tier 1: Enter @0.35, Exit @0.15
Tier 2: Enter @0.45, Exit @0.30
Tier 3: Enter @0.60, Exit @0.40