Inflation Is Running Hot – No Surprise – Expect Market Volatility

February 10, 2022

Posted 9:30 AM ET – Let me keep this short and sweet. The market will remain volatile until the FOMC meeting in March and we are likely to trade between the 100-day MA and the 200-day MA.

Inflation is running hot, but we already know that. This morning the CPI came in at .6% and that was higher than the .4% analysts were expecting. The Fed is more hawkish because of inflation and there is a 95% chance that they will raise .25% in March. Some Fed officials are calling for 3 straight rate hikes and after the big jump in jobs last month they can justify that level of hawkishness. Omnicron cases are decreasing and the economy no longer needs the safety net.

The first wave of Fed tightening is never received well by the market and we are seeing those nervous jitters. In time, Asset Managers start buying when they confirm that tightening did not stifle economic growth. Some of the biggest market rallies during periods of rising interest rates. Ideally, the interest rate hikes are the result of strong economic growth and not inflation. That is a bit of a new twist this time around since inflation has not been this hot in 40 years. We can expect a volatile year after a 100% rally from the Covid-19 low in 2020.

Swing traders should have a full SPY position on from the $435 level. We are using the 200-day MA as our stop on a closing basis (the index has to close below this level and we check the price 5 minutes before the close). We are well above that level and the first target is SPY $460. If you choose to swing trade, selling out of the money bullish put spreads and distance yourself from the action. As I said yesterday, you have to sell these on market dips (like today) and not during market rallies (like yesterday). Wait for support and focus on companies that will do well during periods of inflation.

Day traders need to stay flexible. I have stressed the importance of not marrying one side of the market or the other. If we get a directional move and it stalls, expect a reversal. This type of market is when 1OP shines. It is your guide. All of the gains from yesterday will be stripped away.

Support is at the 200-day MA and resistance is at the 100-day MA.
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