Trading the Turn: Positioning for a Dovish Fed
Why JP Morgan’s rate forecast may be more accurate than the Fed’s own projections.
Hello Pulsers,
This week, I’m diving into why I believe the Fed needs to start cutting rates. From rising delinquencies to weakening consumer credit, the data is pointing to a slowing economy—and I’ll walk you through how I’m trading this view.
🔍In This Issue
Here is what I am covering:
Fed’s Funds Future
Consumer delinquencies
Valuations and high rates
📊On Markets
Let’s start with how rate cuts are being priced in today.
According to the Fed Funds Futures, the market is currently pricing in a 95% chance of a pause, and only about a 5% probability of a cut—despite clear signs of an economic slowdown in sales, housing, and more.
The chart below shows market expectations for cuts by December 2026. Based on the OIS market, rates are expected to fall by roughly one percentage point next year, putting the Fed Funds Rate around 3.5%.
JP Morgan, however, is forecasting a deeper cut to 2.5%, factoring in economic weakness and longer-term deflationary forces like AI and tech.
I'm aligned with the JP Morgan view, and I’m expressing this thesis by going long the October 2025 ZQ futures. More details on this trade below.
⚠️ Rising Delinquencies & Credit Risk
The chart from the New York Fed shows a clear rise in delinquencies across credit cards, auto loans, and student loans—all above 2019 levels.
Higher borrowing costs also increase the risk of credit rating downgrades, particularly for companies in the Russell 3000. As shown in the chart below, each downgrade typically compresses valuation multiples by ~10%. If interest coverage ratios keep falling and financing remains tight, we could see a broader contraction in valuations—and potentially, a market sell-off.
Meanwhile, short interest in equities is trending back to pre-COVID levels.
💼On Positions
Here’s how I’m positioned this week:
Covered Calls on $SPY:
I hold over 1,000 shares of SPY. I’ll be selling 0.25 delta covered calls this week to generate income and hedge in what’s likely to be a range-bound market.Selective Adds to $TLT:
I’ll continue adding to TLT positions on weakness as part of a longer-term play.Earnings-Based Options Plays:
Still executing strategic trades based on earnings setups using my well-tested playbook.
While the broader trend for equities remains up, the combination of slower economic data, tariff headlines, and persistently high rates is likely to act as a headwind. I’ll continue to sell calls against SPY as a way to earn income and manage downside risk in this environment.
Make sure to follow along here: https://bit.ly/3KPN2lJ
Last Words
As many of you have seen, most of the charts and analyses I use are from Interactive Brokers. Interactive Brokers provides some of the best commission structures, yields on idle cash, and, more importantly, one of the best tools for active trading. As an active options trader, I can only imagine myself trading with the tools that they have provided.
If you are still deciding, check out their free simulator and everything else they provide to help you get started.
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Disclaimer
The opinions provided in this newsletter are mine and mine only and do not represent any firm or other affiliation.
You understand that NO content published and discussed during this newsletter constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person.
You further understand that I will NOT advise you personally concerning the nature, potential, value or suitability of any particular investment, security, portfolio of securities, transaction, investment strategy or other matter.
This presentation and the content provided are for educational purposes only.
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