“Everybody has a plan until they get punched in the mouth.”
This quote, one of former heavyweight champion Mike Tyson’s most famous, is always relevant when investing.
After countless hours of research, diversifying portfolios and strategies, investors feel confident about weathering a market storm — until they are punched in the mouth.
Today, we are going to take action, making that proverbial punch a nonfactor…
Last week, I explained how I expect stocks to be in for a short-lived rally that you want to ride higher. I still believe that will be the case.
But, in the middle of this week, the Federal Reserve ends a two-day meeting that has the possibility of creating turbulence in the market. You don’t have to step into this ring unprepared; I have a trade to protect your portfolio against a possible punch, even if it’s from Mike Tyson.
To do this, we are going to use iPath S&P 500 VIX Short-Term ETN (VXX). I will give you all the trade details in a minute, but first let me explain why the trade makes sense this week.
Fed Watch
On Wednesday, the Federal Reserve will release a statement around 2 p.m. EDT. I am not expecting any radical changes, but neither is anyone else — which leaves plenty of room for the Fed to stir up the markets.
The reality is that the Fed is coming increasingly close to the end of the year — a time Janet Yellen continues to emphasize as a time frame for the initial rate hike. That means the Fed needs to begin changing the language in its press releases from dovish to hawkish, signaling an imminent rate hike. And those changes could begin as early as this meeting.
With no press conference to follow this meeting, Janet Yellen will not get to reiterate her dovish stance if Fed watchers take the press release as hawkish — it will be left up to market participants to decipher her tone.
Personally, I don’t see the Fed raising rates this year. After doing countless hours of research, a rate hike just doesn’t make sense for the Fed yet. And when the Fed does raise rates, it won’t be considered much of a hike.
