Market Reaction To Rate Hike

June 16, 2022

Traders have digested the news and they do not like it.

PRE-OPEN MARKET COMMENTS THURSDAY 9:30 AM ET – The Fed gave the market what it expected and it hiked by 75 basis points yesterday.  Furthermore, they paved the way for a 50-75 basis point rate hike in a month. The BOE will raise rates 25 basis points and Switzerland raised rates by 50 basis points overnight which was a surprise. The S&P 500 did not have much of a net gain/loss after the statement, but it is down 70 points before the open and we are likely to test the 52-week low today.

An interest rate hike is an interest rate hike no matter how you slice it. The Fed is aggressively tightening and they did not suggest otherwise or candy coat the statement. They plan to continue on this pace and they acknowledge that they underestimated inflation. Asset Managers are not going to aggressively buy until they see the impact on economic growth and that could take months to play out. Keep an eye on initial jobless claims. It is a current number and it ticked higher this morning. If we start to see it inch higher, the market will decline. One of the reasons the Fed felt confident hiking 75 basis points was the strong employment backdrop in the US. If the Fed hikes 75 basis points in July it is going to leave a big void in August when DC goes on holiday. We will get earnings at the back end of July and soft guidance could add to nervous jitters.

China reported that industrial production increased .7%. That was instantly dismissed by analysts. I know this will come as a shock to all of you (not), but analysts suspect that they are padding their numbers. All other metrics analysts gather point to contraction. China’s retail sales declined 6.7% (-11% last month) and I have not seen numbers this weak since I started tracking them many years ago.

Swing traders should remain sidelined. I outlined the reasons why at great length yesterday. For more information, please visit those comments.

Day traders should wait for some of the volatility to subside. The S&P 500 was down 95 points and now it is down 70 points. We can expect some wild swings early and triple witching will fuel some of these moves. The big gaps down in the last week have established an early low and then we have compressed. Given the overnight price action, I believe we could see some decent moves both ways. If you play the long side, do not overstay your welcome. Set passive targets and be more selective. You do not have the latitude to carry losers overnight because the trend is lower. The low from the week will provide some support. If we get a decent bounce this morning with mixed overlapping candles, watch for a test of SPY $370. That will be the best trading scenario today.

Support is $370 and resistance is at $380.

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