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The global financial markets are driven by expectations. Traders ask themselves questions like, “How strong is the economy going to be in six months?”, “Are corporate earnings going to be strong?”, “What are interest rates going to look like down the road?”, and then they place their trades based on what they expect the answers to these questions will be.
One of the key metrics traders are focusing on right now is expected interest rates. The Federal Open Market Committee (FOMC) raised the federal funds (FF) rate in December from a range of 0%-0.25% to a range of 0.25%-0.50%. Now the big question is, “When will the FOMC raise rates to a range of 0.5%-0.75%?”
In the meantime, we’ll move to anticipate negative market forces by establishing a new bearish position in the iShares Russell 2000 ETF (IWM). The major indices are at resistance and declining in pre-market activity this morning. While it seems unlikely that this resistance bounce will lead to the kind of selling we saw in January, a move back down to May’s lows seems likely. The S&P 500 has nearly completed a large, bearish divergence and we expect small-caps to lead the market lower. We recommend taking advantage of that decline with puts on IWM that give us direct exposure to the Russell 2000 small-cap index.
‘Buy to open’ the IWM July 116 Puts (IWM160715P00116000) for a maximum price of $2.85.
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