Market Tries to Steady After Fed Whipsaw

Markets gapped about a half of a percent higher at the open Wednesday.  This turned into a long sideways grind in a tight range on low volume for all 3 major indices right up until the Fed announcements at 2 pm.  That abruptly came to an end, when the Fed news hit and we saw the true definition of whipsaw. After the announcement, there was a small surge higher for 5 minutes, only to be met by a massive 1.6% to 2% collapse in the 5 minutes after that initial surge.  The volatility continued when Fed Chair Powell began to speak, the bulls surged the market back up by more than a full percent, to take us to the highs of the day in all 3 major indices at about 2:50 pm.  However, the whip was not done as the bears stepped in shortly after 3 pm to drive us back down into the close, taking us out on the lows of the day.  

On the day, this action left us with large bearish engulfing candles that had a significant upper wick and that had failed a retest of the T-line (8 ema) in all 3 major indices.  All 10 sectors were red on the day with Consumer Defensive (-0.53%) by far the strongest and Consumer Cyclical (-2.58%) by far the weakest sector.  The SPY lost 1.73%, the DIA lost 1.71%, and the QQQ lost 1.82%.  VXX gained over 2% to 18.86 and contrary to what you might expect, T2122 dropped deeper into the oversold territory at 3.45.  10-year bond yields fell to 3.514% and Oil (WTI) fell two-thirds of a percent to $83.42/barrel.

In Economic news, August Existing Home Sales came in a bit stronger than expected (4.8 million versus the 4.7 million forecast and 4.82 million in July).  EIA Weekly Crude Oil Inventories also followed the API number from Tuesday evening by building less than was expected (+1.142 million vs +2.161 million barrels forecast).  Across the pond, the UK’s new PM Truss announced corporate tax cuts and reversing a planned corporate tax increase as her plan for fighting a recession.  IFS (the non-partisan arbiter of UK government spending) called the move disappointing and said there is little chance the cuts would ever pay for themselves and they will likely increase the UK budget deficit by around 3.5% of GDP.  However, as stated above, the day’s big economic news came out of the Fed.

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In Fed News, the FOMC decided to go with a 0.75% rate hike (to 3.25%) which was exactly what more than 80% of traders had been expecting.  The FED statement also indicated that they will keep hiking well above the current level in order to fight inflation.  The FOMC now projects the “terminal point” (the highest they will raise rates) to be 4.6% and that this level will be reached in 2023.  The “Dot Plots” (the individual FOMC member expectations) do not foresee a rate cut until at least 2024.  Meanwhile, the Fed projections see unemployment rising from the current 3.7% to a high of 4.4% next year.  They also expect GDP Growth to slow to +0.2% for 2022 and then rise slowly to a long-term rate of +1.8%.  (That +0.2% growth number for 2022 is a sharp cut from their June estimate of +1.7%.  This coupled with the wording “below trend growth” scared many traders.)  However, the Fed expects headline inflation to drift lower the rest of the year, coming down to a 5.4% number (compared to July which expected 6.3% inflation by year-end).  Finally, they expect to have inflation back down to 2% by 2025.

In stock news, META announced plans to cut costs by 10%.  This is likely to include job cuts, but nothing was announced yet.  Then after the close, MSFT announced an increase in its quarterly dividend by 10% to $0.68, payable on 12/8 for holders of record on 11/17.  On the opposite side, GLT announced it has suspended its dividend in order free up cash for the operational and financial needs of the company.  Also, after the close, FUL, KBH, LEN, SCS, and TCOM all reported misses on the revenue line while also beating on the earnings line. KBH and SCS went further to lower forward guidance while the others left guidance as it was stated the previous quarter.

In Energy news, the UK government announced a multi-billion-pound bailout program to help companies pay their energy bills.  They also will cap wholesale energy prices for the next six months.  In the US, the Senate ratified (in a bipartisan manner, 69-27) the “Kigali Amendment” to the Global Environmental Treaty.  This amendment outlaws various HFC gasses used in HVAC and Refrigeration units.  These both followed an oil surge after Putin’s ratcheting of tensions calling up another 300,000 reservists and then threatening nuclear attacks (by saying they were being threatened with nukes).  However, the Fed got the last word as the Dollar reached a new 20-year high after the Fed news, working against all dollar-denominated commodities and driving oil down. 

Overnight, Asian markets were mixed but leaned to the red side.  Thailand (+0.72%) was by far the biggest of the 3 winners.  Meanwhile, Hong Kong (-1.61%), Australia (-1.56%), and Taiwan (-0.97%) led the majority of the region’s exchanges downward.  In Europe, stocks are mostly red at mid-day with the notable exception of Russia (+2.04%).  The FTSE (-0.32%), DAX (-0.62%), and CAC (-0.68%) are leading the region lower in early afternoon trade.  As of 7:30 am, US Futures are pointing toward a modestly red start to the day.  The DIA implies a -0.01% open, the SPY is implying a -0.13% open, and the QQQ implies a -0.28% open at this hour.  10-year bond yields are up again to 3.54% and Oil (WTI) is up eight-tenths of a percent to $83.64/barrel in early trading.

The major economic news events scheduled for Thursday are limited to Q2 Current Account and Weekly Initial Jobless Claims (both at 8:30 am).  The major earnings reports scheduled for Thursday, ACN, DRI, and FDS report before the open. Then after the close, AIR, COST, and FDX report. 

In economic news later this week, on Friday, we see Mfg. PMI, Service PMI, and Fed Chair Powell speaks again. Meanwhile, in earnings reports later this week, on Friday there are no major earnings reports scheduled.

So far this morning, ACN has posted beats on both the top and bottom lines.  Meanwhile, FDS beat on revenue while missing on earnings.  The DRI report missed on revenue and reported in-line in terms of earnings.

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In late-breaking news, the Bank of England raised rates by 0.50%, which followed the same move made by Norway’s Central Bank. However, Turkey is swimming against the current by cutting interest rates by a full percent…even as the country is suffering from 80% inflation. Meanwhile, the US Dollar is down this morning (versus the basket of 10 peer currencies). Some of the Dollar’s move lower is due to the Japanese government intervening to prop up the Yen for the first time since 1998.

With this backdrop, the strong bear trend remains in place across all 3 major indices. It now looks (ahead of weekly unemployment data) like we will open just a modest amount lower. However, we are again extended from the T-line (8ema) and are deeply oversold in terms of the T2122 indicator. There is also potential support not far below. So, beware of the potential for “gap and reverse.” As yesterday’s Fed whipsaw should have taught us…we simply can’t get caught chasing. Otherwise, Mr. Market will punish us severely. So, be patient and remember that the first rule of making big money in the market is to not lose big money in the market.

Keep in mind that trading is our job. It’s not a hobby. So, treat it that way. Do the work and follow the process. Stick with your trading rules, trade with the trend, and take those profits when you have them. Demonstrate patience and wait for confirmation. Don’t be stubborn. If you have a loss, just admit you were wrong, respect your stop, and take the loss before it grows. When price does move in your direction, always move your stops in your favor (remember the “Legend of the man in the green bathrobe“…it is NOT HOUSE MONEY, it’s all OUR MONEY!). Lastly, remember that you get rich slowly and steadily in Trading…not by striking it rich on one or two trades. So, give up that lottery ticket mentality.

See you in the trading room.

Ed

Swing Trade Ideas for your consideration and watchlist: GME, AAPL, UBER, SQQQ, GOOG, AMZN, SDS. 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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