The table is set for a drop or a year-end rally. Here’s why.
PRE-OPEN MARKET COMMENTS FED-DAY – Today the Fed will hike interest rates by 75 basis points and they will outline their plans for the next meeting. I can make equally compelling arguments for the market moving higher or lower so I am just going to wait for the reaction.
On the bearish side of the equation tech stocks were pounded after earnings announcements and weak guidance. US Treasuries have an inverted yield curve which signals a recession. Global economic conditions are deteriorating. The US is still treading water, but activity in Europe and China is weak. The most recent market bounce came on light volume and that is a sign that the buying conviction is low.
On the bullish side of the equation we are heading into a seasonally strong period and Asset Managers are sitting on the largest pile of cash in 21 years. They have a long term perspective and if they feel the market will be higher in a year, they will start dipping their toe in the water. Corporations are poised to buy back $1.1T of stock this year and buybacks are expected to hit $5B per day in November now that they are out of the blackout period.
There is speculation that the Fed will soften their tone to instill consumer confidence ahead of the holiday. They don’t need to change their policy; they just have to change a few words. They have used this tactic before and it is very low hanging fruit in my opinion. This possibility explains the recent light volume bounce. If the Fed fails to do so, the market could fall quickly. If they give investors a “warm fuzzy” we could see a nice year-end rally. This backdrop sets us up for a big move after the announcement.
GDP and durable goods orders were better than expected. The price deflator came in a 4.1% and that was lower than feared. Friday the PCE came in a .3% and that was in line with expectations. The Fed uses this to gauge inflation. This morning ADP reported that $239K jobs were created in the private sector during the month of October and that is a solid number.
Yesterday swing traders were stopped out of the long SPY position for a $5.00 gain when it closed below our stop at $385. We will wait for the FOMC reaction and then decide if we want to get back in. The open tomorrow is of greater interest to me than the close today. I am leaning towards a bullish reaction, but I am not trading it ahead of the release.
Day traders can expect choppy trading before the statement. The S&P 500 is flat before the open and you should keep your activity to a minimum. I would not trade the initial reaction to the FOMC statement. There is a press conference 30 minutes after the statement and we could see a big move off of that event. Waiting for it will also give the market time to settle down. If the market surges through the 100-day MA, I will be inclined to join the rally. If the SPY falls below the 50-day MA I will be inclined to short it. Watch for stacked candles of a single color with little to no overlap and go with that direction.
Support is at the 50-day MA and resistance is at the 100-day MA.