What to Expect from Rate Hikes.

By Jani Ziedins | End of Day Analysis

Aug 04

End of Day Update:

The S&P500 failed to reclaim 2,100 support after falling under this widely followed level Monday morning. Volume was light again as few traders chose to adjust their portfolios based on anything they saw or heard Tuesday.

Greece and China are ancient history as Puerto Rico, AAPL, July employment, and rate hikes dominate headlines. While the stories have changed, the results are the same; bearish headlines and resilient prices. The market is down eight of the last eleven trading sessions, but we remain within two-percent of all-time highs. Bears have plenty of reasons to criticize this market, but owners don’t care. When they don’t sell, supply is tight and prices strong.

Even though the broad market is holding up, AAPL sliced through its 200dma Monday and continued plunging Tuesday to the lowest level the stock’s been since January. This drop leaves many AAPL bulls perplexed because there isn’t a fundamental driver worthy of a 15% selloff, but that is how markets work. Prices go up and they go down, even when there isn’t an obvious reason. But there is always a reason, even when we don’t see it. Lately everyone’s been on the AAPL bandwagon as iPhone 6 sales knocked the ball out of the park, but recent developments in China lead many to question if the China growth will still be there. That was enough to weaken prices and from there the selling snowballed. Today’s look looks like capitulation and there is a good chance the stock will rebound to the 200dma. How it responds to this level will let us know if this is a false bottom on our way lower, or just another great buying opportunity on our way higher.

The other major story traders are worried about is the Fed’s first rate hike, but paradoxically raising interest rates will actually be a bullish catalyst. We saw this phenomena last year with the start of the dreaded Taper. Everyone expected the end of quantitative easing would depress prices because it meant the end of easy money used to bid up stocks. In reality we saw the opposite. The start of Taper spawned a great year for stocks because a reasonable and predictable Taper replaced the uncertainty that preceded it. Expect this market to follow a similar pattern once the Fed’s rate hike plan is formally announced.

While it is always nice to watch my account swell in value, I’d actually be more concerned about the sustainability of these levels if prices were wedging higher. That is when the last of the buyers are coming to market and we are on the verge of exhausting of demand. Selling like we’ve seen in recent days chases off the weak owners and clears the way for a sustainable move higher. The harder part is figuring out the exact timing of the breakout. It could happen tomorrow. Or we could slip a little further and retest the 200dma before launching the next move higher. While I cannot predict the exact timing of the next move, I’m confident it will be higher. When market is given every excuse to breakdown, but it stubbornly holds near the highs, that tells us the path of least resistance is higher, not lower.

Jani

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Dana Silver August 5, 2015

What was the TAPER phenomena last year ?

    Jani Ziedins August 5, 2015

    The Fed started reducing its bond purchases by $10bil/moth in January 2014 and completely ended quantitative easing in October 2014. This was the much feared “Taper”. As scared as people were of the end of easy money, the S&P500 rallied 11% in spite of Taper. I expect we will see the same thing happen when the Fed finally starts increasing interest rates back to more traditional levels (2-3%).

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