The Fed’s Bloodletting Means That You Must Follow This Strategy To Profit

But it works both ways. The market is thin in both directions. And there’s just not enough cash around anymore to sustain bull moves for long.

Frankly, I was even a little surprised that this rally ran out of gas so dramatically when it reached the doorstep of resistance at 2800. In a matter of 4 hours today (Tuesday, December 4) the S&P 500 dropped 80 points and ended the day losing 90 while the Dow dropped nearly 800. And of course, it was only a few days ago that the Dow jumped 600 points in a day. The wild volatility in both directions is symptomatic of an increasingly illiquid market.

This can’t end well because, for the foreseeable future, liquidity will be a one-way street. Down. There will be less money, and that means there will be less demand for securities. The market will at the same time need more money to be able to absorb the massive flow of new Treasury supply coming its way, without forcing prices down. The fundamentals of supply and demand tell us that when there’s more supply and less demand prices must fall.

Fed Policy Means There’s Only One Strategy

There can only be one strategy in this environment. If we want to make money, we need to sell rallies short, because they can’t be sustained for long. Eventually, prices will make new lows. I continue to like the tactic of buying near in the money SPY puts with about a month to expiration whenever the market pokes its head up to chart resistance. Keep a mental stop just above resistance. Take some off the table when the market tests support. And let the rest ride as a bet that support will break down.

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