What’s The Fed To Do?

Marketwatch posted a good article this morning explaining the situation the Federal Reserve is in.  The first thought for many would be for the Fed to cut rates again since the economy seems to be in dire straights.  That’s what they do, cut the cost of borrowing and stimulate the economy, right? 

Well, maybe rates are low enough already.  Thinking more than on the surface makes me wonder if any more of a cut would benefit us.  If the current, historically low, rates don’t act as a stimulus, how much will another 1/2 point do?  Will the risk of greater harm by going too low again outweigh the risk of some help?  I’m certain nobody knows that answer and that explains the big volatility in the markets lately. 

VIX broke above 30 yesterday and that’s a bullish sign that fear has finally re-entered the markets.  That might be the only bullish sign right now, but it has a good track record.

I went to bed last night, after losing $6500 on paper yesterday, thinking that I should go ahead and sell calls on my naked puts that will be assigned soon.  I could cut my losses some before I take those losses.  I didn’t do that in the beating I took last week and by the end of the week I made back the $7500 I had lost earlier in the week.  I continue to wonder if we’ll get another rally to bring me back up or if I’m just gambling at this point. 

If I’m waiting for a day to two of a dead cat bounce to bring me back up, I’m gambling.  If I think we’re oversold and due for a sustained rise, I’m investing more for the long term.  Once I saw the potential for a Fed rate cut today it made me change my thinking again that maybe this could be the stimulus we need and then again a rate cut could mean that we are in a worse state than we’ve all wanted to admit fully.  Maybe the worst case scenario isn’t built into current prices like some of us have been hoping for.

For this morning, I’m sitting tight and not trading [that changed].  After 2:15 today I could change my mind, cover my long positions and naked puts with more calls.  This will either reduce my costs and lock in my losses at reduced levels or it will just reduce my costs while the underlying equities continue to fall and I chase them.