Portfolio Diversification Strategy During The Fed’s Rate Hike Cycle

By | December 11, 2015

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Summary Where the Fed, analysts and the market see the Fed funds rate and when. What we’re trading and how to capture the move higher in the Fed Funds rate. How to experiment with any potential outcome for this fully disclosed Fed Funds Trade. HCB Stocks & trading strategy, which I believe will offer a superior return on risk during the rate hike cycle. I believe diversification and objective risk control will be essential during the next 36 months as the Fed gradually hikes rates. My objective of this report series is to introduce new sectors and strategies to capture the major market moves being generated by current extreme economic fundamentals. As opportunities develop in metals, energies and currencies I’ll share what I’m doing in these sectors and how. I encourage your comments on sectors and trades your in with similar or higher returns on risks. The goal of this report series is generating POSITIVE dialogue among fellow TRADERS who share the objective of finding the most effective solutions to the problem of making money. It’s not set up for tradeless academic master debaters who can subjectively criticize but can’t offer objective facts to support their opinion or a solution. In this report I have provided strategy to capture the move higher in the Fed Funds rate over the next 13 months . I’ve also included 11 HCB stocks (high cash buffers) that could benefit from higher rates and included defined risk strategy on how to trade them during the rate hike cycle. The first rate hike in 10 years is on deck in 5 days (16 December 2015). Using this fully disclosed strategy even if the Fed is wrong about the Fed Funds rate the Fed sets, there is no hike on 16 December 2015, this position is structured to maintain and capture any future rate hikes over the next 9 FOMC meetings through 31 December 2016. Last objective guidance where Fed Chair Yellen sees the Fed Funds rate and when (video 1:59) Source Federal Reserve What the move is worth Current contract value = $552 (cash market 0.1325%). Fed projection by December 2016 = $7,500 (1.8000%). Fed projection by December 2017 = $13,125 (3.1500%). Probability = 85.30% for 16 December 2015 . Source Chicago Mercantile Exchange Click here for more information on what this rate is and how it’s set. One simple trade to capture the move higher in the Fed Funds rate through 31 December 2015 . Trading the Fed Funds rate higher requires establishing a short position in the underlying futures contract . To convert the contract price into the rate it represents Take 100.00 – the contract price = the rate. Example 100.00 – a contract price of 99.46 = a rate of 0.54%. Each 0.01 change in price = $41.67 change in contract value. Position Short at 99.46, the December 2016 CME futures contract (ZQZ16) Trading this rate higher from 0.54% Contract value = $2,250 Objective The Fed’s target by 31 December 2016 Contract price = 98.20 Rate = 1.80% Contract value = $7,500 Click here to enlarge the rate, price, valuation chart below Current chart and quotes To experiment with any potential outcome for this trade. Click here and open the interactive risk reward spreadsheet Watch the 5 minute video linked below on how to use it As this position appreciates we’ll update its performance and share hedging strategy/updated spreadsheest showing you how we’re locking in gains. This trade was originally posted on Seeking Alpha 12 October 2015 . Federal Open Market Committe meetings schedule & Fed statements The last tightening cycle from 1.00% June 2004 to 5.25% June 2006 Stock diversification strategy during the rate hike cycle Below are 11 companies that have built sizable cash buffers and links to monitor them on SA moving forward: Apple (NASDAQ: AAPL ), Microsoft (NASDAQ: MSFT ), Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ), Pfizer (NYSE: PFE ), Cisco (NASDAQ: CSCO ), Goldman Sachs (NYSE: GS ), Moody’s (NYSE: MCO ), Oracle (NYSE: ORCL ), AT&T (NYSE: T ), AbbVie (NYSE: ABBV ) and JPMorgan Chase (NYSE: JPM ). From past ratios and what I’m seeing between interest rate hike expectations through December 2018, relative to stock price change, it appears rate hikes might actually fuel these stocks higher. I’m trading these stocks using “collars” to define my risk on all trades and for the duration of every trading period. Example of a “collar” to define risk: Own 1,000 shares of GOOGL at $745 Write the $800 call collecting premium (1,000 shares) Using the collected premium buy the $700 put (1,000 shares) Trade outcomes 1) The market stays the same, if you set the trade up right you should be collecting approximately as much time value on the $800 call you’ve written against your $745 long position as you’ve spent on the purchase of the $700 put to hedge the position. In some scenarios you’ll actually have a credit. 2) Market sells off hard to $500, your loses below $700 are negated by the put you’ve purchased at $700. At $500 you can offset the put for a $200 profit and reestablish a new hedge by buying a new put at $500 lowering your entry cost by $200. Your new average entry price has now dropped from $745 to $545 making recovery more obtainable. 3) The market continues to move higher and the position is called away at a profit at $800, you can always reestablish it. Click here for more on Seeking Alpha on why we’re trading these high cash buffer (HCB’s) stocks and how. Scalper1 News

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