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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
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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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday was another wild ride for the S&P 500 as an encouraging monthly inflation report sent stocks flying at the open. Unfortunately, that was as good as it got and the index gave up a majority of those early gains when follow-on buyers failed to show up.
Usually, this kind of bearish reversal is well…bearish. But Tuesday’s price action doesn’t count because the market discounted those early gains. As I’ve been saying for days, the only thing this market cares about is the Fed’s policy outlook and we won’t know what that is until Wednesday afternoon. While Tuesday’s fizzle would ordinarily be a big red flag, given what is really important to this market, the lack of follow-on buying was expected because a modestly improved inflation report is not what is driving this market.
That said, Tuesday’s big pop does show what kind of potential there is to the upside if we get the right cocktail of encouraging news Wednesday. So as high as it feels like we are given inflation and a potential economic slowdown, high is far more likely to get even higher than it is to peak and reverse.
I count myself as an optimist and am looking for prices to continue rallying from the October lows over the near term, but I’m not married to that outlook and will grab on whichever direction the market wants to go Wednesday afternoon.
Give the market a few minutes to process the news and be careful because the initial knee-jerk is often in the wrong direction, but after a handful of minutes, the market will no longer be able to hide its true intention and it will be a big move. Whether that is up or down is anyone’s guess, but as nimble traders, there is no need to guess. Follow the market’s lead and let the profits come to us.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Monday was a good session for the S&P 500 as it recovered all of Friday’s losses and then some on its way to a +1.4% gain.
As expected, the market is trading sideways ahead of the Fed’s interest rate policy announcement on Wednesday, and anyone overreacting to these daily gyrations is having a tough time. The catalyst for the next big move comes Wednesday afternoon. Until then, everything else is random noise.
The only thing that would interest me over the next 48 hours is if the selling or buying gets carried away ahead of the rate announcement and that’s only because it skews the risk/reward in the other direction. The higher (or lower) we go ahead of time, the less room there is to keep going higher (or lower), and conversely, there is a lot more free space to reverse and go the other direction if the news disappoints (or beats expectations).
I wasn’t expecting much and Monday’s gains erasing Friday’s losses confirms that the direction is sideways, not up or down.
As I’ve written many times since the October lows, I like this market and think the odds of a continuation higher is the most likely outcome. The offset is there is more risk to the downside if anything goes wrong.
Rather than put myself in a position where I could get run over by a freight train Wednesday afternoon if I was wrong, I’m happy being a little late to the party to make sure I get on the right side of this trade.
Until Wednesday afternoon, I’m mostly just watching and waiting. Once the next big directional move reveals itself, I’m grabbing on and enjoying the ride.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 crashed through 4k support Tuesday and ended up threatening 3,900 support before recovering a handful of points in the final minutes of the session to finish in the mid-3,900s.
Again, economic headlines were mostly benign and this continues to be a sentiment-driven trade as recent “hope for less bad” morphs into “fear of worse”.
Big stock market crashes are driven by significant and unexpected developments. So far, we can say neither of those criteria have been in play this week. Instead, this is little more than a normal and healthy pullback from multi-month highs.
Everyone knows stocks cannot go up every single day and down days are part of every move higher. But that never stops the naysayers from coming out every time the market slips a handful of points.
As I wrote Monday evening, this is the 8th retreat from relative highs since the October lows. And for those that are counting, seven of those retreats ended with stocks rebounding to even higher prices. While it is too early to say conclusively this will bounce higher, if we want to bet on the high probability outcome, always bet on the continuation because rallies continue countless times but they can only die once.
But just because we expect this dip to bounce doesn’t mean we need to hold it all the way down. I locked in some really nice profits at my trailing stops in the mid-4k’s and I’ve been waiting for the next bounce from the safety of the sidelines. And as a matter of fact, since I’m in cash, the lower this goes now, the more money I make buying the inevitable bounce, so lower is better for me.
But as I said above, I don’t see a lot of downside potential in this pullback and we are most likely close to the bounce. If not Wednesday morning, then that afternoon or over the next two days. Don’t stray too far because the next buying opportunity is almost here.
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