Listen up, Evolvers!
The next two days are very important for the markets. Here’s why…
Today, the Federal Reserve begins a two-day monetary policy meeting, where it’ll decide how much further to hike interest rates in the wake of historic inflation.
Why is this so critical to pay attention to?
Because nothing has had a bigger effect on stock prices this year than interest rates and the market is already pricing in a 75 basis point hike this week.
In general, when rates go up … stocks go down. We’ve seen this happen already this year.
That said, at some point, this trend might turn around.
If the market feels like the hikes are starting to tamper inflation, or that we’re getting close to the end of quantitative tightening in general, the market could rip.
Will this happen tomorrow? It’s possible…
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Recent history suggests that we could see a near-term bounce followed by further downside in the wake of another interest rate hike.
With that in mind, let’s talk about what you need to be aware of heading into this week’s Fed meeting…
Examining the 2022 FOMC Meetings
To understand what might happen this week, we need to look at the recent Federal Open Market Committee (FOMC) meetings this year and examine how the market reacted.
January 25-26: The S&P 500 ETF Trust (NYSEARCA: SPY) rallied from $431 to $457 over the four days following the meeting before ultimately heading lower…
March 15-16: From March 14 to March 29, the SPY rallied from $417 to $461…
May 3-4: Between May 4 and June 17, the SPY dropped from $429 to $365. (This was the worst market reaction to a Fed policy meeting so far this year.)
June 14-15: Following the June meeting, the SPY found a near-term bottom and ripped from $365 to $390 in a month, leading us into the July meeting…
July 26-27: The July meeting led to a continuation of the bear market rally we’d been experiencing since mid-June. The SPY went from $390 to a high of $429 before hitting resistance in mid-August.
Exploring the Market’s Reactions
As you can see, the market’s reaction to Fed action has been a mixed bag this year.
There seems to be a trend of near-term bounces following these meetings, but so far, they haven’t sustained past a fleeting rally.
You should be aware of that heading into the rest of the week.
However, a 75 basis point hike is nothing to sneeze at.
If the predictions are correct and we get this hike tomorrow, that could have negative implications on a wide variety of sectors and companies.
Tech stocks, in particular, are vulnerable to notable earnings declines in the wake of big interest rate hikes.
Considering this, I’m leaning bearish as we head into the September FOMC meeting.
I’m still holding 9/23/2022 $11 Puts on the ProShares Bitcoin Strategy ETF (NYSEARCA: BITO) because it seems like crypto has tanked following every step towards quantitative tightening.
In other words, if the Fed raises rates … I expect Bitcoin (BTC) to dip hard.
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That said, trading around Fed policy isn’t something I would recommend to inexperienced traders.
If you don’t have a strong conviction about the FOMC one way or the other, you definitely shouldn’t be trading until the meeting has concluded and the market has implied a direction.
This isn’t a newbie play.
Having doubts? Sit on the sidelines and wait for a trend to emerge.
I have no idea what’s gonna happen this week. No one does.
All I can do is look at recent history, examine reliable chart data, and make the most informed decision possible.
And I’ve decided to hold the positions I have, play it relatively safe, and wait to see how the market reacts tomorrow.