Mortgage applications in the United States dropped for the week ending January 23, decreasing from 14.1% to -8.5%. This drop relates to challenges in the housing market, where interest rates are fluctuating, and there are ongoing economic concerns. Higher borrowing costs are making it harder for potential homebuyers to enter the market. Analysts think this trend will continue as the Federal Reserve keeps interest rates unchanged after three cuts.

Expectations for the Federal Reserve Meeting

The upcoming Federal Reserve meeting is highly anticipated, with many curious about its impact on lending rates and the economy. The Fed’s comments on the economic outlook will be closely scrutinized by various groups. In summary, the Mortgage Bankers Association noted a significant drop in mortgage applications, highlighting the difficult conditions in the housing market amid rising interest rates and economic worries. The results of the Fed’s next meeting could greatly influence the market going forward. The sharp decline in mortgage applications to -8.5% indicates a cooling housing market, presenting opportunities for bearish strategies. We should consider purchasing put options on homebuilder ETFs like ITB and XHB, which are directly affected by slowing buyer interest. This approach responds to recent data showing buyer hesitation.

Pressure on the Federal Reserve to Change Policy

This weak housing data puts pressure on the Federal Reserve to adopt a softer tone in its upcoming meeting. While an immediate rate cut is unlikely, the market may begin to factor in a higher chance of cuts later this year, which could lower bond yields. We are buying call options on long-duration treasury ETFs like TLT to take advantage of this potential sentiment shift. The current economic climate supports this outlook. Preliminary GDP figures for Q4 2025 showed sluggish growth of just 1.2%. In addition, December’s CPI report indicated that inflation has decreased to 2.8%, giving the Fed more flexibility to adjust its policy. We are preparing for a market reaction that expects future Fed support as the economy slows down. With a major Fed announcement on the way, we expect increased market volatility. We are buying VIX call options with February expirations to protect our portfolios and benefit from this anticipated uncertainty. Additionally, we are considering a straddle on the SPY ETF to capture significant price swings in either direction after the Fed’s comments. This slowdown is reminiscent of the market’s reaction to the aggressive rate hikes in 2023. During that time, a similar drop in mortgage demand preceded a downturn in housing-related stocks. We are using that historical period as a guide for our current bearish sector strategies. Data from that period showed that the financial and construction sectors lagged behind the broader market for two consecutive quarters after the initial drop in applications. Create your live VT Markets account and start trading now.

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