Posted 9:30 AM ET – This is one of the most anticipated FOMC statements in recent memory. This will be the first rate hike in years. Traders are expecting a 25 basis point increase and language that supports similar increases at the next 3 meetings. Asset Managers typically reduce risk ahead of tightening and that explains the selling pressure the last two months. They want to gauge the impact of higher interest rates on economic growth. If economic growth is stable, they will start to buy in a few months.
The Fed grossly miscalculated the magnitude and duration of inflation. They are way behind the curve and many analysts believe that a 50 basis point increase is warranted. This would spark selling initially, but it could give the Fed breathing room. It would also signal that they are confident that our economy can shoulder the increase. Interest rates are near historical lows and this first rate hike is minor.
It is futile to guess the market reaction to a 25 point or a 50 basis point rate hike. Watch the price action and go with the flow. Know that more rate hikes are coming.
From a fundamental standpoint, inflation is going to plague the market for another year. Covid-19 is spreading in China and this will add to current supply disruptions.
China’s growth has been decelerating and large property development companies are close to default. China is a greater concern (longer term) than inflation, higher interest rates and the war combined.
Putin says the negotiations are going well and Xi said that he is going to end the tech crackdown. I believe these two leaders as much as I believe Jussie Smollett. In any event, the S&P 500 is adding another 40 points to the big gains from Tuesday. I believe this is a relief rally.
Swing traders should wait on the sidelines. The downward sloping trading channel on the SPY is still intact and we have spent a month below the 200-day MA. Asset Managers are not ready to dive back into the market and there is no reason for them (or you) to believe that this is the last chance to buy stocks at this level. Earnings growth projections for the S&P 500 are being lowered and we should not expect a quick market rebound. If the SPY is able to close above the 200-day MA for a week straight, we can consider getting long. Until then, we will assume that the trading channel will remain intact and that it will ultimately be resolved with a selling climax and a capitulation low.
Day traders need to be very careful jumping on this rally. Consecutive stacked candles with little overlap would be an early sign of strength/weakness and you can get behind that move. I view this as unlikely (20%). The more likely scenario is a gradual and choppy drift lower with mixed candles that fill in some of the gap. THIS IS A GREAT DAY NOT TO TRADE!! I wanted to make sure you got that message. The reaction to the Fed will be wild. If we get stacked candles, reduce your size and join the move after 15 minutes. The move higher this morning is going to test horizontal resistance at SPY $430. That level has been tested twice this month.
Support is at SPY $420 and resistance is at $430.