Powell's taper comments coming-up: Potential scalp opportunities
I have set-out my logic in prior posts of how I am exiting the SP500 market from prior longs bought more than 18 months ago - by selling into rallies. If an infrastructure deal goes ahead and debt ceiling issues are dealt to successfully, I will reconsider my current stance.
However, I am happy to scalp particularly from needless / senseless market over-reactions for short term scalp trading opportunities.
We may see an opportunity coming up with Powell and the Jackson Hole meeting coming up.
My rationale set-out below:
- tapering is simply a reduction in the Fed's open market operations (OMO) whereby treasuries are purchased from dealers (secondary market) with the result being that cash from trader's is deposited into the Banking system. This cash is also known as reserves (Refer blue Histogram)
- The effect of this QE style OMO is to strip credit interest out of the non-government sector that would have otherwise been paid to holders of treasuries as one form of money (treasurites) is replaced with another form (Bank cash / reserves).
- the banking system is 'pull system' , not a 'push system'. Banks need capital to make loans; not deposits as the Fed, like all Reserve Banks, they act as lender of last resort. Stuffing the banking system full of cash does not benefit Banks, rather it makes regulatory capital management harder for Banks and produces scarcity of interest bearing securities, with downward pressure on rates.
- to offset some of this effect, reverse repos have been employed by the Fed as a 'temporary' measure - but is its like a senseless merry-go-round.
Why am I saying all of this?
- where you have record high fiscal growth supporting a market (risks looming in the background - debt ceiling), and potentially needless market panic regarding the word 'taper', which is actually positive not negative for the market, then that's a great short term buy opportunity to scalp back to the mean.
What level will I buy at: I would like to buy around the cost basis of swing traders which is marked on the chart and which represents around 20% market capitalization. I will be checking out my Market Risk indicator which looks at a range of factors including futures spreads for a potential long scalp trade.
Instead, call writing maybe your go-to strategy here instead but there's not much Vol to sell (yet!)
#MMT
However, I am happy to scalp particularly from needless / senseless market over-reactions for short term scalp trading opportunities.
We may see an opportunity coming up with Powell and the Jackson Hole meeting coming up.
My rationale set-out below:
- tapering is simply a reduction in the Fed's open market operations (OMO) whereby treasuries are purchased from dealers (secondary market) with the result being that cash from trader's is deposited into the Banking system. This cash is also known as reserves (Refer blue Histogram)
- The effect of this QE style OMO is to strip credit interest out of the non-government sector that would have otherwise been paid to holders of treasuries as one form of money (treasurites) is replaced with another form (Bank cash / reserves).
- the banking system is 'pull system' , not a 'push system'. Banks need capital to make loans; not deposits as the Fed, like all Reserve Banks, they act as lender of last resort. Stuffing the banking system full of cash does not benefit Banks, rather it makes regulatory capital management harder for Banks and produces scarcity of interest bearing securities, with downward pressure on rates.
- to offset some of this effect, reverse repos have been employed by the Fed as a 'temporary' measure - but is its like a senseless merry-go-round.
Why am I saying all of this?
- where you have record high fiscal growth supporting a market (risks looming in the background - debt ceiling), and potentially needless market panic regarding the word 'taper', which is actually positive not negative for the market, then that's a great short term buy opportunity to scalp back to the mean.
What level will I buy at: I would like to buy around the cost basis of swing traders which is marked on the chart and which represents around 20% market capitalization. I will be checking out my Market Risk indicator which looks at a range of factors including futures spreads for a potential long scalp trade.
Instead, call writing maybe your go-to strategy here instead but there's not much Vol to sell (yet!)
#MMT