The Fed did what everyone expected Wednesday and raised interest rates by another 0.5%. That said, the stock market slipped from its midday highs when the Fed’s forward-looking guidance implied another 0.75% of hikes were headed our way in 2023. That was slightly more than investors were prepared for.
But as wild as the previous Fed meetings have been for the stock market, Wednesday’s 0.6% decline was fairly benign. No doubt it was rough getting to -0.6% as the index shed nearly 90 points in the hour after the announcement, but the selling found a bottom in afternoon trade and the market reclaimed 30 of those 90 points by the close.
While these are still big price swings, volatility is definitely coming down as traders get more used to our new reality. What could have triggered a multi-percent selloff months ago, this time market seemed content with little more than a half percent decline Wednesday. That suggests the market is not as overextended as the critics claim. And that makes sense because nearly a year into 2022’s bear market, most overreactive traders have already left the building.
But a loss is a loss and when combined with Tuesday’s bearish intraday reversal, that suggests there is more selling pressure at these levels than interest in buying.
As I wrote Tuesday, weakness after the Fed statement was shortable with a stop above the pre-announcement highs, which is exactly how I traded it. (I came into Wednesday directionally agnostic and was just as willing to buy a pop following the Fed announcement.)
Any further weakness on Thursday or Friday is a clear invitation to add to our short positions with a stop above Wednesday’s intraday highs. If the selling continues, be sure to move our stops down to our entry points in order to turn this into a low-risk trade.
Limited risk and lots of profit potential, what’s not to like about this trade?
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.