Here’s What To Expect From the Fed

December 14, 2022
Author: Peter Stolcers, Founder of OneOption
Author
Pete

This is the last FOMC statement for 2022

PRE-OPEN MARKET COMMENTS FED-DAY – Yesterday the SPY broke through a major D1 trendline that started back in December and it blew through the 200-day MA. The CPI was better than feared, but that enthusiasm waned quickly. By the end of the day, the down trendline breakout was rejected and the SPY closed below the 200-day MA. This was bearish and it is a sign that sellers are nearby.

The FOMC statement will be released this afternoon. Analysts are expecting a 50 basis point rate hike and the Fed will pave the way for 25 basis point rate hikes in January and February. This is a slower pace than the 75 basis point rate hikes that we have seen this year and this news is priced in. We are likely to hear that inflation is still high. The Fed has been vocal about this and the PCE and hourly wages came in “hot” a week ago. We are likely to hear that inflation is starting to ease, but that prices will remain stubbornly high (keep in mind that slowing inflation is a far cry from deflation where prices actually come down). This will prompt future rate hikes and traders should NOT expect any rate cuts in 2023. Economic growth has been strong (jobs report and ISM services) and the “soft landing” scenario is plausible. The economy has been able to shoulder the rate hikes so far and that gives the Fed breathing room for future rate hikes. Everything that I have just mentioned is NOT new. The Fed has been very vocal about where it stands.  

The message above is mixed. The pace of the rate hikes is slowing and the economy is strong, that is bullish. The effects of the previous rate hikes have not cycled yet and the Fed plans to keep tightening, that is bearish.

No matter what the reaction is, media outlets will make it seem like new information has been introduced. We are going to get movement and some of that is due to the triple witch on Friday. The price action the last month has been compressing between the 100-day MA and the 200-day MA and I believe we will finish the year here. Yesterday we saw a clear rejection from the downward sloping trendline and that is a sign of selling pressure. During the last month we have seen multiple bounces off of the 100-day MA and that is a sign of support.

I believe that institutions are in “wait and see” mode. They will gauge the effect of higher interest rates on economic growth in Q1. If activity plunges, they will sell. If activity remains stable and the Fed stops hiking, the bid will strengthen.

Longer term swing traders should stay sidelined. I don’t know which of the two scenarios will play out and there is no need to have a lot of risk exposure into year end. I do like selectively selling OTM bullish put spreads on stocks with relative strength below major technical support levels. Don’t go overboard.

Day traders should expect dull trading this morning. The overnight action is flat. Expect dull trading and keep your size small. Wait for the reaction and the press conference. Go with the flow and look for stacked candles of a single color. My suspicion is that this could be a “nothing burger”. If we get a big move today, know that it can be reversed overnight.   

Support is at the 100-day MA and resistance is at the 200-day MA.


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