Profunds index and sector trading

[AnderL]

Here is the Fed trading system...

Trading a Fed Rate Announcement
http://www.daytradeteam.com/dtt/tradingtips.asp?id=358

So you know the Fed is going to announce a decision on interest rates, and you know that the market expects a hike of 25 basis points-- But what does it mean to us, the active traders?

First of all, we will make sure we understand what is happening. The "Fed" is short for Federal Open Market Committee (FOMC), which is headed by Alan Greenspan. The group meets several times a year, usually in pre-planned sessions to discuss the economy and make changes to Federal Reserve policy with the intention of producing a stable, growing economic environment. When people are talking about the upcoming "rate hike", they are predicting that the FOMC will raise the targeted "fed funds" rate, which essentially is the interest rate at which banks lend to each other overnight (on any given day, the actual rate may differ from the target rate slightly).

As the U.S. short-term benchmark, it influences market interest rates throughout the world.

So why does the stock market care about the fed funds rate?

Because when the Fed adjusts interest rates it usually has an effect on the entire economy. Lower interest rates for banks mean lower interest rates on loans to individuals and corporations, making more money available and increasing spending levels which therefore increases economic activity and growth. This makes investment in companies more attractive because it increases the chances that they will see earnings growth. The opposite is true in the case of rate hikes, which are often used to ward off inflation.

Another reason the stock market cares about the fed funds rate is that changed interest rates for banks also usually translate into changed bond yields for debt investors. When investors start getting different returns on their bonds, it makes investing in stocks (which could produce larger returns) more or less attractive. The result is many times a flow of funds from the bond markets to the stock market ? more buying means increases in stock prices (or vice versa).

The Fed cannot simply keep rates extremely low levels. The result would be an oversupply of money to the economy and high inflation would result ? doing much more damage to the economy in the long run then the lowered rates would help.

How to play the Fed as an investor or a trader:

There is an old saying out there ? "Don`t fight the Fed". In other words, buy stocks when the Fed is lowering rates (over the last year) and sell as the Fed increases rates. For longer term investors, this works a pretty good percentage of the time.

DaytradeTeam is for short-term traders though, so the game is much different. Here are a few ways to play FOMC meetings:

1. (when outcome is virtually assured) ? Buy the rumor, sell the news ? when the outcome of a Fed meeting is virtually guaranteed by all predictions, the result will usually be a reversal of the latest short-term trend once the announcement is made by the FOMC.

2. (Day Trading the Fed) Go against the knee-jerk ? for day trading, simply wait 3-4 minutes after the announcement (always shown on CNBC) and place your trade in the opposite direction that the market has moved in the past 3-4 minutes. Over 75% of the time, market knee-jerk reactions will reverse for the next 45-90 minutes.

3. (day trading the Fed when outcome is unknown) Place bet and bail or double down ? When the economic community is split over what the Fed`s move will be, simply place your trade in either direction before the announcement. If the market moves the way you want right after the announcement ? bail and take your profits. If market moves against your trade initially, double down and add to your position 3-4 minutes after the announcement.