Every once in a while, a world-shattering catalyst occurs that completely shakes the market up.
A single positive headline can make stocks surge, while a solitary piece of negative news can send the market into a bearish tailspin.
This has always been the case as the sentiments of traders are closely tied to the stories they’re reading…
But it’s been even more true since 2020. The pandemic changed the stock market forever, forcing traders to pay even closer attention to the news than they had in prior years.
Additionally, traders had to start paying attention to the new sheriff in town — Federal Reserve Chairman Jerome Powell.
Powell is the most powerful person in the global economy right now. He has traders in a chokehold.
By setting the pace of the Fed’s interest rate hikes, Powell has more influence on the direction of the economy (and thus the stock market) than anyone (or anything) else on the planet.
And this week, a particular Powell comment is causing the kind of major market shake-up I mentioned earlier.
With that in mind, keep reading and I’ll explain how Powell’s recent comments are affecting the markets.
Then, I’ll lay out my game plan for trading this ultra-volatile moment for stocks…
Powell Gets Hawkish
Yesterday, the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) was down as much as 1.65% intraday — a massive dump for the biggest index in the world.
If you weren’t paying attention to the news, you might’ve been left scratching your head yesterday, wondering why the vast majority of stocks were red…
But the answer as to why the stock market dropped so much yesterday is simple…
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in comments to the Senate Banking, Housing and Urban Affairs Committee yesterday morning.
He then got even more specific, hinting that the Fed might go back to a 50 basis point hike for the March meeting, after several meetings of 25 basis point hikes, according to analysts at Morgan Stanley.
Nothing has affected stocks more than interest rates over the past year and, considering these remarks, you shouldn’t expect that to change anytime soon.
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Why do interest rates have such a profound effect on the stock market?
For the past decade or so, corporations — especially pre-profit (or unprofitable) early-stage companies — have relied on their ability to borrow money cheaply.
But once it became clear that inflation was running rampant in 2021, Powell quickly put an end to the free-money party by raising interest rates at a faster pace than we’ve ever seen in the history of the U.S. economy.
Since then, the question on traders’ minds has been ‘how high will interest rates go?!’
Well, yesterday, Powell couldn’t have been more clear that the answer is “higher.” And that puts enormous pressure on a wide variety of companies in the SPY.
Additionally, Powell’s comments sent the 2-year treasury yield to over 5% for the first time since 2007. Yikes!
All this to say, the negative catalysts are starting to pile on top of the stock market … which is exactly what I’ve been predicting for the past several weeks.
Just don’t say I didn’t warn you that this might happen!
How I’ve Played My Recent Trades
Over the past few years, we’ve all heard the warning: “don’t fight the Fed!”
I think this is sound advice in the current market environment, which is why I’ve been avoiding going long on anything right now.
Since my lucky crypto puts play last week, I’ve bought puts on several names, but a certain psychological problem prevented me from cashing in big.
On Monday, I bought Apple Inc. (NASDAQ: AAPL) 3/10/23 $152.50 Puts for $0.91…
But I didn’t have the patience to hold through such volatility and exited the position later that day (basically at breakeven, prior to Powell’s comments Tuesday morning).
Even more disappointing was my follow-up trade on Nvidia Corporation (NASDAQ: NVDA)…
On Tuesday morning, I bought NVDA 3/10/23 $235 Puts for $3.50.
And I made the same mistake I did with AAPL, selling the NVDA puts just 90 minutes later at essentially breakeven.
I was 100% correct on my thesis for both of these trades, but I didn’t have the patience required to see them through.
Now, I find myself in a spot many other traders have been to before. I have a choice…
I could sit here and beat myself up with negative self-talk about my missed opportunities…
Or, I could put all of my energy and focus into nailing an even better play than the ones I squandered.
I bet you can guess which path I’m taking…
Yesterday, I bought ProShares Bitcoin Strategy ETF (NYSEARCA: BITO) 3/10/23 $13.50 Puts for $0.20.
My thesis is this — If the overall markets continue to nosedive, Bitcoin (BTC) and BITO will likely follow suit.
I got lucky trading this name last week. Now, let’s see if I can nail a BITO play with an airtight thesis this week.
But you’ll have to tune in later this week to hear how my BITO trade ultimately played out.
Powell’s hawkish comments are putting a bearish tint on the entire stock market.
If the March Fed meeting leads to a 50 basis-point hike, look out below!
Trade accordingly. Avoid speculative long plays in this market and have patience with your short positions.