Posted 9:30 AM ET – PRE-OPEN MARKET COMMENTS FED-DAY – I am expecting a relief bounce after the FOMC statement. Notice that I used the word bounce, not rally. I have noticed some subtle changes between the price action in March and the price action in the last week that are forcing me to temper those expectations. I describe them below. There are still many unresolved issues that will weigh on the market this summer. The biggest will be economic activity. The fear of higher interest rates is that it will lead to a recession. We will not have that piece of the puzzle until September.
There are many positive and negative influences and that is creating extreme market volatility. Buyers flex their muscles and buy programs kick in. The next day sellers take control and the bottom drops out.
On the negative side of the ledger we have a 50 basis point rate hike ahead of us and another 50 basis point hike likely in June. The Fed’s balance sheet run off is at twice the expected rate. This news has been broadcasted through “Fed speak” in the last month, but everyone will act as if it is a complete surprise when the news hits. Before the March statement the market made a higher low and we saw buying on Tuesday before the release. This was a sign of pent up buying. This week we have seen a new low for the year (lower low) and no buying yesterday. That tells me the excitement to buy is not as great or that the selling pressure from fear is greater.
The war in Ukraine will impact food and energy prices and inflation is hitting levels we have not seen in 40 years. China is battling Covid-19 and Beijing is heading into lock down. China’s manufacturing PMI came in much weaker than expected and it is solidly in contraction territory.
On the positive side of the ledger, we have strong earnings releases so far. I know it does not seem like it. Here are some statistics. The blended earnings growth rate for Q1 S&P 500 EPS currently stands at 7.1%. This compares to the 4.7% expected at the end of the quarter. The blended revenue growth rate is 12.2%. Of the 55% of S&P 500 companies that have reported for Q1, 80% have beaten consensus EPS expectations. In addition, 72% have surpassed consensus sales expectations, below the 78% one-year average but above the five-year average of 69%. In aggregate, companies are reporting earnings that are 3.4% above expectations. Corporate buybacks are at record levels. Mountains of cash on the side line and less shares outstanding will eventually lead to higher stock prices.
Swing traders with a 3-4 week time horizon should wait patiently in cash. Our moment will come after the FOMC meeting if we get the bounce I suspect. We are likely to sell out of the money bullish put spreads on strong stocks to take advantage if inflated option implied volatilities. Keep searching for stocks that have excellent earnings reactions and relative strength. A 50 basis point rate hike is expected and the market is expecting a 50 basis point rate hike in June. Once this news has been released, we should see a relief rally like we saw in March. We are not going to predict a bounce, we are going to wait for it and then place some short term swing trades. If we don’t get that bounce, we will wait.
Day traders can look for opportunities early, but be very careful taking new positions after the first 3 hours. The action is going to come to a complete stop and you want to be flat going into the FOMC statement. If you are going to trade the reaction, wait for 30 minutes after the statement. There is a press conference. Ideally the direction will be set and it will continue after the press conference. Trading stocks with relative strength/weakness is always a better approach than trading futures which can be super volatile. Keep an eye on bank stocks and gold. Those tend to be big movers after an FOMC statement.
Support is at the low from Monday. If we breach it after the statement we will probe down to the $370 level over the next few weeks. Resistance is at $420 and $430.