The S&P 500 shed 1.6% Wednesday after the Fed increased interest rates by 0.25%.
Two weeks ago the market would have cheered this 0.25% hike because at that point, many people were predicting 0.5%. But a lot can change in two weeks, namely the entire banking system falling under threat.
Because of the threat posed to banks, the Fed went ahead with this more measured 0.25% increase despite February’s hot employment report and stubborn inflation data.
But rather than cheer the Fed’s moderate step, investors got cold feet and started dumping stocks Wednesday afternoon.
Lucky for us, this giveback was not a surprise. As I wrote Tuesday afternoon following that day’s big surge higher:
Will this relief last? No, probably not. That’s why savvy bounce buyers are standing near the exits and even locking in some worthwhile profits proactively as we challenge 4k resistance.
Remember, we only make money when we sell our winners and this remains a choppy market. As I’ve been saying for a while, if we are not taking profits when we have them, then we will be taking losses a few days later.
While I was taking profits before the Fed announcement, that wasn’t because I feared a big retreat. As bad as Wednesday’s 1.6% givebacks felt, this only brings us back to Monday’s close. That’s hardly panic material.
Sure, stocks can always fall even further, but we need a new and unexpected reason to crash to fresh lows and the Fed matching expectations is hardly new or unexpected.
Until further notice, continue trading this market as if it is rangebound. That means buying weakness and selling strength.
As I wrote Tuesday afternoon, if we are not taking profits early and often, we won’t have any profits left to take. This applies equally to both bulls and bears. This is not a directional market, this is a back-and-forth market. One day’s up turned into the next day’s down. Don’t get fooled into trading the breakout/breakdown, trade the reversal.
Wednesday’s close was ugly, but we didn’t learn anything new, so expect the selling to dry up fairly quickly. If you are short, be ready to take profits soon. If you’re in cash, that means getting ready to buy the next bounce.
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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.