Posted 9:30 AM ET – PRE-OPEN MARKET COMMENTS FRIDAY – The market will remain volatile until the FOMC meeting in March and we are likely to trade between the 100-day MA and the 200-day MA. This is a very tough trading environment for short term swing traders, but it is great for day traders.
The CPI came in at .6% yesterday and that was higher than the .4% analysts were expecting. The initial reaction was to “sell the news”, but the 20 point gap down in the S&P 500 was instantly gobbled up.
The bond market is pricing in a 1% interest rate hike by July and there is a 60% chance that the Fed will raise rates by 50 basis points in a month. That pricing is consistent with Bullard’s (voting Fed official) comments yesterday and this is a dramatic change in tone from September. Goldman Sachs did not project any rate hikes in 2022 a few months ago and now they are projecting 7 rate hikes this year. The market does not like “shocks” and central banks are way behind the curve. They viewed inflation as temporary and they were wrong. Now they are playing catch-up.
The first wave of Fed tightening is never received well by the market and we are seeing those nervous jitters. In time, Asset Managers start buying when they confirm that tightening did not stifle economic growth. Some of the biggest market rallies have come during periods of rising interest rates. Ideally, the interest rate hikes are the result of strong economic growth and not inflation. That is a bit of a new twist this time around since inflation has not been this hot in 40 years.
Putin continues to conduct military exercises on the western boarder and more troops have been deployed. Biden has advised US citizens to leave the Ukraine. I am not discounting the humanitarian significance of this, I am only commenting on the market impact. In general, wars only have a temporary impact on stock prices.
Swing traders should have a full SPY position on from the $435 level. We are using the 200-day MA as our stop on a closing basis (the index has to close below this level and we check the price 5 minutes before the close). This is my only position and it will be easy for me to exit. Earnings season has been excellent and with real yields (interest rates less inflation) deeply in negative territory, Asset Managers are willing to bet that interest rate hikes will not stifle economic growth.
Day traders need to stay flexible. I have stressed the importance of not marrying one side of the market or the other. If we get a directional move and it stalls, expect a reversal. This type of market is when 1OP shines. It is your guide. After a big drop like we saw yesterday, there will not be a meaningful rally until the downside is tested. Support needs to be confirmed before buyers step in. 1OP will start the day in a bullish cycle. I want to see how big the bounce is. If we can’t get off the deck early, it will be a sign that sellers are aggressive and that the first bearish cross will at minimum test the low from Thursday. That could be a nice shorting opportunity. If the market bounces early with stacked green candles it will be a sign that buyers are getting numb to the fact that the Fed is going to tighten and that their appetite for stocks is strong.
Support is at the 200-day MA and resistance is at the 100-day MA.