The table was set for a move lower on hawkish comments and it didn’t happen.
PRE-OPEN MARKET COMMENTS THURSDAY – Yesterday the Fed delivered a fairly hawkish statement. The market weathered the news and I view that as bullish.
Most of the Fed members believe that two more rate hikes will be needed this year. The market is pricing in a rate cut in Q4 and Powell said not to expect that. He said that the Fed got inflation wrong last year and that they are not going to make that mistake again. Inflation is showing some signs of improvement, but it is still very stubborn and it is not falling as quickly as they had hoped. He also said that economic conditions are consistent with a soft landing.
The market was vulnerable to a downside surprise reaction yesterday. This is triple witch and that usually breeds volatility. VIX/VXX has been tanking and the “sell volatility” trade is very crowded. That makes it vulnerable to a spike (squeeze). The hawkish comments could have been a catalyst, but the market quickly found support. This was a wasted opportunity for bears.
Powell said that the heavy lifting has been done. They had to act quickly last year and now they are closer to the end of tightening. They still do not know the economic impact of the previous rate hikes because they have yet to filter through the economy so it was prudent to pause and evaluate. I believe this is what has buyers excited. We’ve seen the fastest rate hike in decades and the economy has not tanked. We did not know what would happen six months ago, but now buyers are confident that the bottom is not going to fall out so they are in “risk on” mode.
For long term swings I would still like to get through the summer and these next two rate hikes. On a short term basis, I would still be swinging short term from the long side. Until we see a long red candle greater than 50 S&P 500 points on heavy volume I would stay the course. SPY $430 needs to hold.
There are a few scenarios that could play out. An instant bounce on heavy volume that starts with two stacked green candles would signal a quick gap fill this morning.
A gradual drift lower with mixed overlapping candles is our best scenario. It gives us time to evaluate and it is a sign that the move lower is wimpy. That support would be a good entry for longs.
Nice stacked long red candles would represent heavy selling and then we need to patiently wait for support.
Support is the low from Wednesday and resistance is the high. We need nice heavy volume today and with triple witching we should get it.