Market Rethinks Fed and Recession Risk

Markets gapped 0.75% – 1.25% higher at the open as traders waited on the Fed.  After the gap, stocks just rollercoastered sideways in a fairly tight range until 2 pm. However, as usual, when the Fed announced its decisions, we saw wide-ranging candles and heavy whiplash action printing new highs and hew lows on the day during the last 2 hours.  Overall, all 3 major indices are printing indecisive Spinning Top candles, just trying to relieve the overextension we’ve had from the T-line and in terms of the 4-week New High/Low Ratio.  Nine of the 10 sectors were in the green with Technology leading the way and Energy in the red on a risk-on session.  On the day, SPY gained 1.40%, DIA gained 0.96%, and QQQ gained 2.50%.  The VXX fell 5.4% to 23.97 and T2122 climbed, but still remains in the oversold territory at 12.00.  10-year bond yields dropped sharply to 3.288% and Oil (WTI) fell 2.6% to $115.84/barrel.

During the afternoon, the Fed raised rates by 0.75% (the largest hike since 1994) to a new range of 1.5%-1.75%, the highest level since before the pandemic.  The Fed also announced its “Dot Plot” where individual FOMC members on average now think the year will end with that benchmark rate at 3.4% (up 1.5% from their forecast in March).  In addition, they cut their GDP growth forecast to +1.7% for the year (down from +2.8% in March).  Fed Chair Powell said that he does not expect 75 basis point hikes to become common, but he does expect a 50-75 basis point hike in July.  The committee also sees unemployment (now 3.6%) moving up to 4.1% by 2024, which is not much of an increase (low-ball estimate?) given the demand destruction that needs to take place to get inflation down to the +2% target.

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In global economic news, at an emergency meeting Wednesday the ECB announced a plan to reduce the borrowing costs of the Euro Zone’s most indebted countries.  (The term they used was “avoiding fragmentation,” but they were referring to the spread in interest rates between Germany and lower-rated countries like Italy and Greece.)  The new scheme plans to cap borrowing costs by buying the bonds themselves under loose (as yet undecided) criteria.  Then overnight, the Bank of England raised UK interest rates for the 5th consecutive meeting, again moving 0.25%. This came as the UK central bank also announced that the UK economy is shrinking (falling 0.1% in March and 0.3% in April). So, the UK is now clearly dealing with stagflation as inflation is a bit over 11% and they are also experiencing a falling GDP. The British Pound fell 0.80% against the dollar after the announcement.

Elsewhere abroad, Reuters reported after the close that the WTO is considering e-commerce tariffs.  There has been a moratorium on such tariffs in place since 1998, but nations such as India, Pakistan, Indonesia, and South Africa are threatening to block another extension of the moratorium with those countries now forgoing tens of billions of dollars in revenue annually as a result of that moratorium.

On the Russia story, President Biden announced another $1 billion in humanitarian and military aid for Ukraine. Among the weapons in this tranche are 155mm howitzer shells (made by GD), HiMARS rockets (made by LM), and trucks to tow 155mm howitzers (made by OSK).  Elsewhere, Russia reduced the flow of natural gas through its pipeline to Europe again, bringing the total reduction to 60%.  Gazprom said it was doing so in retaliation over Canadian sanctions preventing SMNEY (Siemens Energy) from delivering overhauled equipment.  So, overnight Germany’s Economy Minister Habeck urged all homes and businesses to scale-back natural gas usage with the specter of rationing ahead (not to mention that natural gas prices have spiked 35% in Germany this week due to the supply reduction). All of this is pressuring the Western alliance against Russia as France has already begun talking about Ukraine’s need to compromise (give up land) with Russia eventually and Germany and Italy are slow-playing providing the arms they promised Ukraine. At the same time, the US, UK, and former Soviet satellite states now in NATO are standing strong.

So far this morning, CMC and JBL have both reported beats on both the revenue and earnings lines.  KR reports at 8 am.

Overnight, Asian markets were mixed, but leaned to the downside.  Hong Kong (-2.17%), India (-2.11%), and Thailand (-2.04%) paced the losses.  Meanwhile, Malaysia (+0.94%) and Japan (+0.40%) led the gainers with a handful of other exchanges only modestly in the green.  In Europe, with the exception of Russia, stocks are deeply in the red across the board at mid-day.  The FTSE (-2.44%), DAX (-2.93%), and CAC (-2.44%) lead the way on trading volume with many smaller exchanges making bigger moves down in early afternoon trading.  As of 7:30 am, US Futures are pointing to a significant gap lower after rethinking the Fed announcements overnight.  The DIA is implying a -1.82% open, the SPY implies a -2.25% open, and the QQQ is implying a -2.65% open at this hour.  10-year bond yields have spiked back up to 3.45% and Oil (WTI) is off 1.25% to $113.88/barrel in early trading.

The major economic news events scheduled for release Thursday include May Building Permits, May Housing Starts, Weekly Jobless Claims, and Philly Fed Mfg. Index (all at 8:30 am).  The major earnings scheduled before the open are CMC, JBL, and KR.  Then, after the close, we get a report from ADBE.

In economic news coming Friday, we get May Industrial Production and hear from Fed Chair Powell again.  Friday is also a Quadruple-witching day as well as the last day before a 3-day weekend.

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After the Fed’s (expected) rate hike on Wednesday, as usual, the market has had a night to rethink Chair Powell’s words. In hindsight, it appears the market is now going to put more weight on the probability of a recession after Powell said the landing may be bumpier than previously expected during his presser. Therefore we are staring at a gap down open and bond rates continue to show high volatility as they trend higher. Jobless Claims and the Philly Fed Mfg. Index may have some sway on markets, especially if they report unexpected numbers. However, the main driver traders need to watch is the repricing of stocks based on an increased likelihood of recession sometime in the next 12 months.

The whipsaw is very real during times when we are thinking about changing trends and as we’ve seen lately, gap-chasers can get hurt. Trading is our job. So, do the work and work the process. Wait for confirmation. Stick with your trading rules, trade with the trend, and consistently take profits when you have them. Always move your stops in your favor. Remember that the first rule of making big money in the market is to not lose big money in the market. So, don’t be stubborn. If you have a loss, just admit you were wrong and take it before it grows. As they say, the best time to have taken a $500 loss is when you are now staring at a $1,500 loss. Finally, remember that you get rich steadily over the long run in Trading…not by striking it rich on one or two trades. So, give up that lottery ticket mentality.

Ed

Swing Trade Ideas for your consideration and watchlist: VMC, CAG, TSN, CF, XLE, M, ON. You can find Rick’s review of tickers on his YouTube Channel here. Trade your plan, take profits along the way, and smart. Also, remember to check for impending earnings reports. Finally, remember that any tickers we mention and talk about in the trading room are not recommendations to buy or sell.

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