The S&P 500 squandered a really nice +1% open Tuesday and finished -0.4% in the red. Ouch.
While this performance would normally give me pause near recent highs because this price action often suggests a near-term top, we can’t read the same into Tuesday’s fizzle simply because everyone is so fixated on today’s interest rate announcement. Rather than hint at what’s coming next, Tuesday’s fizzle was nothing more than the market entering a holding pattern as we wait for the Fed’s next big move.
A 0.75% rate hike today is a virtual lock. What’s less certain is what happens in December with the Fed previously signaling a modest slowdown to more conventional 0.5% rate hikes. If the Fed maintains that outlook, expect stocks to rally in anticipation of rate hikes tapering off in the early part of 2023. On the other hand, if the Fed tells us they need to remain aggressive, ie another 0.75% hike is coming next month, expect stocks to tumble as the light at the end of the tunnel gets extinguished.
My best guess is the Fed will stick to their prior guidance and telegraph a 0.5% hike in December and a gradual slowing of hikes next year. But that’s just a guess. Good thing I’m a nimble trader and will trade the market as it comes at me. Regardless of what I think, I will be buying strength today afternoon or selling weakness.
From a purely selfish point of view, I’d actually like to see the market disappointed because there is a lot more downside at these levels than upside. Shoring a selloff back to the October lows would be far more profitable than buying a continuation up to 4,000 resistance. But I don’t get to choose, which means I’m taking whatever the market gives me.
The market often throws off a head-fake or two following such a widely anticipated news event, but 30ish minutes after the announcement, the market won’t able to hide its true intentions and that’s when we buy strength or short the weakness. Smart money will be jumping aboard early and enjoying the ride.