Fed-Day. A Dovish Tone Is Expected

March 22, 2023
Author: Peter Stolcers, Founder of OneOption

The market has rallied 10% in the last week. Credit concerns are elevated and the Fed needs to ease fear.

PRE-OPEN MARKET COMMENTS WEDNESDAY – All eyes are on the Fed. Recent bank failures caught the attention of the Fed and the market is expecting dovish comments. A 25 basis point rate hike is priced in and that is down from the 50 basis point hike that was priced in two weeks ago. The market has rallied almost 10% in the last week and some analysts are expecting to hear the word “pause” today.

The Fed has been as hawkish as you can imagine the last few months. Typically you would hear a softer tone into year-end to brighten spirits during the holiday. That did not happen. A few weeks ago during his Congressional testimony Powell was as hawkish as possible. That is why a 50 basis point rate hike was expected. This has been the most aggressive tightening we’ve seen in decades. For these reasons, I don’t believe the Fed is going to be as “dovish” as investors would like and surprise favors the downside. This is nothing I would trade. I am going to wait for the reaction.

The Fed is going to soften the tone a little to avoid a market meltdown. A 50 basis point rate hike on the heels of SIVB and CS would send a shockwave through the market. The CPI/PPI came in a little better than feared and hourly wages increased at a slower pace (.2%) in the last jobs report. Energy prices have also come down so the Fed can justify a softer tone based on slower inflation. They will reassure investors that the banking system is sound and that there were only a “few bad actors”.

The market is likely to compress as interest rate hikes cycle through the economy and as banks “circle the wagons”. Stock valuations will improve with time as earnings stabilize and the comps from a year ago become easier to beat. If the Fed is dovish, the market is likely to compress above the major averages and investors will take comfort knowing that monetary tightening is going to end soon. If the Fed remains hawkish, the market will compress below the moving averages. Fear that they’ve gone too far will weigh on the market. Asset Managers will be cautious and the bid will weaken.

Swing trading is extremely difficult and the SIVB bank failure changed the back drop instantly. If the “second shoe” is going to drop, it will happen in the next few months. The temptation would be to chase a market rally on dovish comments from the Fed. I’ve been through this before. Everything looks great and the next bank failure blindsides everyone. This was the pattern we saw in 2008. The bottom of the market dropped out in a matter of weeks. It will take months for us to know if banks really are in good shape.  Typically, where there’s smoke there’s fire and credit is a game changer. For this reason, I believe we should stick to very short term trading. Valuations are “rich” so there is no reason for Asset Managers to buy aggressively here.

Day traders expect light action this morning. We will be dead till the Fed. Keep it light.

Support is at the 100-day and resistance is at the 50-day.

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