To Hike, or Not to Hike?

By Jani Ziedins | End of Day Analysis

Sep 15
S&P500 Daily

S&P500 Daily

End of Day Update:

Tuesday’s 1.3% gain in the S&P500 was one of the best looking day’s we’ve had in a while. We closed at the highest levels in weeks as fear of a bigger selloff continues to dissipate. But there are a lot of flaws in this strength.

Volume was light as few people traded ahead of the Fed’s rate hike decision due later this week. This reduced volume leaves the market vulnerable to larger moves because smaller traders have greater influence. Another concern is Tuesday’s intraday trade was fairly one-direction, suggesting more of a short-squeeze than legitimately fought for and earned gains. This notion is s further reinforced by the lack of a fundamental or headline catalyst behind this move. It felt like a day where people were buying for no other reason than other people were buying. While a legitimate reason can emerge to justify this move, without something substantial to support us, this strength will likely fizzle. And lastly we are approaching the upper end of a recent trading range that we retreated from a couple of times previously. In range bound markets, relief often gives way to fretting. Until we breakout and hold those gains, we should be more inclined to take profits at these levels than continue chasing prices higher.

It is hard to avoid the rate hike chatter. Will they? Won’t they? If our economy is so fragile that its fate rests on the outcome of a 0.25% change in short-term interest rates, then we have far bigger things to worry about.

Personally I think the Fed should raise rates because that is consistent with all the things they’ve been telling us. Markets are far better at dealing with bad news than uncertainty. A 0.25% rate hike now or in six or twelve weeks isn’t going to make much of a difference to anything. But the market is paralyzed by now knowing what is going to happen. Postponing the rate hike will only extend this largely unproductive debate over when the first hike will be.

We saw the same anxiety and fear ahead of Taper, but once the Fed announced Taper and started reducing its bond purchases, the market embraced that certainty and predictability, paradoxically rallying throughout the entire taper process. I have little doubt the same will happen if the Fed lays out a responsible and methodical rate hike plan. That eliminates the uncertainty hanging over us and finally lets the market focus on our steadily improving economy.

In the near-term, I have absolutely no idea how the market will react to either a hike or delay. Give me the Fed statement early and I wouldn’t know how to trade it. Only after the fact will we be able to come up with the “official” explanation for why the market rallied on a hike/delay or plunged on the hike/delay.

While we cannot get ahead of the Fed announcement, the way the market trades afterward will go a long way to telling us its mood and where it wants to go next. Will it embrace the half-full story, or obsess over the half-empty? The ideal bullish setup will be a knee-jerk selloff on a rate hike, but then the selling quickly exhausts itself and we break through 2,000 resistance. That would be the capitulation bottom of the correction. This reversal could play out over hours or weeks, but it would be a strong sign the market will rally into year-end. The harder price action to get behind will be a pop if the Fed keeps rate at zero. That is far more likely to fail since what the Fed is really telling us is they don’t think our economy is strong enough to handle a 0.25% bump in interest rates. Surely not a ringing endorsement of our economy.

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.

Martin September 15, 2015

I don’t think this is only about the US economy. The FED must take into account the global economy and mainly the emerging markets. If they raise rates and that would have a negative effect on the global economy, European economy, Asian markets, it will all come back on us like a boomerang. Unfortunately FED is not in a position to pretend that it is all about the US economy and ignore the rest of the world. And the rest of the world is in even bigger mess than the US. I think FED missed the boat. They should have risen the rates in 2013 or 2014, now the economy and the world actually show signs of slowing. Well, let’s see what they would do, but in this matter I agree with Peter Schiff who once said “Yellen has no clue and never had on what’s happening”. She had no clue in 2007 – 2008, she certainly is out of touch now too.

    Jani Ziedins September 16, 2015

    I don’t think it’s the Fed’s job to worry about how poorly China is handling their transition to a market economy. If those problems spill over to our shores then we can do something about it, but until then we cannot make policy decisions based on what could happen. Everyone knows China has been lying about their situation for a while. If the US was significantly vulnerable to a Chinese slowdown, it would have shown up in our numbers already. The other thing is a strong dollar will prop up these fragile export economies because it allows the US consumer to buy more of what they’re selling. Everyone trying to devalue their currency at the same time doesn’t work and it’s time for the US to go the other direction.

      Martin September 17, 2015

      As I expected, FED was paying attention to the world economies (China and emerging markets) and tumbling markets. You are right on your arguments why they should have increased the rates, but they were too scared to do that. Bringing more problems in the future.

        Jani Ziedins September 17, 2015

        Yep, you were right on the Fed. Only years from now will we know if this was the right decision, but that will be for the academics and historians to argue over. In the meantime we have to figure out how to trade it.

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