Move Over Jerome… There’s a New Bank in Town

China's Monetary policy

I’m tired. Today was one of the busiest day trading days of my career. It was full of reversals. Full of false signals. Big moves. Big panics. Near Misses. Emotion. Big gains. More emotions. Big pullbacks. Bigger reversals. Lots more emotion. And it was full of speculation that only comes around a few times a year. As you know, the Fed made a big announcement around interest rates and other monetary policy plans.

But the Fed wasn’t the most important story today. Yesterday, I said that the Federal Reserve was critical to the direction of the markets moving forward. So this was a HUGE event, right? There was a sudden surprise overnight, and it’s quite a development. Let’s recap the day… 

The Fed Did What We Thought

Today, the Federal Reserve delivered an update that sent the markets into a quick tailspin. This is a snapshot of the Nasdaq 100 (QQQ) between 2 pm and 3 pm. 

The central bank announced that it would increase interest rates in every Fed Open Market Committee meeting for the rest of the year. The markets didn’t like the news during the first 30 minutes after the release of the Fed’s prescription for inflation. The market has priced in a move to 1% by the June meeting. This would suggest that there will be a 50-point move during one of the following two meetings. 

But Powell was very calm and cool when he took to the podium at 2:30 pm. The selloff in semiconductors, tech stocks, and the QQQs quickly reversed. In addition, banking stocks that had sold off were moving higher. Powell was calm when addressing concerns about a recession this year. The Fed will take a disciplined approach to contain inflation in 2022. 

Coincidence? I Think Not

I warned yesterday that the Fed’s increased movements on rate hikes have historically foreshadowed some major financial event. This chart either has eight coincidences on it… or we have a pattern. Choose your Irish Whiskey wisely and contemplate if you believe in coincidences… 

I, for one, do not. Momentum is positive for the S&P 500 right now (it turned positive this morning). And we just had our first two consecutive days of gains for March 2022…   

But chasing anything higher with Quad Witching could be a fool’s errand. So I continue to preach discipline in this environment. I stress that anything we saw today in gains could be gone tomorrow or Friday. Cash remains your friend right now. Don’t take unnecessary risks. But do DEFINE your risk in the days ahead. We’re not out of the woods just yet. I’m waiting to see what insiders are buying and selling this week, and if they believe that the bottom is in.

Changes in Central Banks’ Monetary Policy

While everyone was focused on the Fed tightening monetary policy in the United States, another central bank stole the show on Wednesday. China and its central bank announced coordination to accommodate its economy, creating a big old invitation to buy the dip on Chinese stocks… 

The People’s Bank of China will loosen its monetary policy to help support China’s economy. That news complemented a report that Chinese vice-premier Liu He and the State Council’s Finance Committee supported the economy’s weakening housing market and a stock market under severe pressure.

Even more surprising, there were hints that China may cooperate with U.S. regulators over accounting principles and prevent delisting of its companies on U.S. exchanges. As a result, we saw this chart.

Alibaba (BABA) rallied from $87.50 in the opening minutes Friday to nearly $105 per share. Again, this is proof that central bank policies are the most important factors driving stocks. BABA stock hit a new level and surged again after Powell spoke. So too did other Chinese internet retailers like JD.com (JD). 

Now, if you missed this move, you’re in luck. It could be the early innings of a massive run for these companies. But I stress the importance of managing risk if you’re buying the recent dip. There are risks that must be defined before taking any dip into this pool.

What You Need To Be Aware Of

You see, right now, China is providing some support to Russia on Ukraine and recent U.S. sanctions, a factor that is driving investor anxiety. Right now, China and the U.S. may faceoff over the purchase of oil from Saudi Arabia in a non-dollar currency (the yuan). The U.S. may not like that the Chinese central bank announced this accommodative move to its markets on the same day that the Fed was tightening its policy. 

Remember, I don’t believe in coincidences, and China’s announcement last night was a big surprise to the markets. Moreover, they announced this the day before the Fed raised interest rates for the first time in years. And, right now, it’s a BIG assumption that U.S. regulators and Chinese regulators will be able to reach an agreement over accounting practices for NYSE and NASDAQ-listed stocks. 

If you’re going to buy the stock, you have to prepare for the event that Alibaba, JD.com, or any of these other stocks return to their Tuesday, March 15 lows. If you’re going to speculate – even though volatility is high – call spreads and straight call options are your best plays, given that you can define risk ahead of time. 

Looking Into Options

Selling cash secured puts is VERY dangerous because of the risks I listed above. If you’re selling puts and something falls apart in diplomacy, that $90 put you sold could be executed on Alibaba if the stock is back at $75. So, instead, you might be better off buying a simple call and setting a trailing stop. In this case, I think that Alibaba can get back to $120 by April 2022, and JD.com will rip back to the $72 level in that timeframe. 

If you look at the calls right now, you’ll find that they’re trading at reasonable levels. If you buy them, know that you have defined your risk in the total value of that call option. Remember, we’re only on Day 1 of China’s accommodation mode. I said today that Alibaba is either going to $80 or $120 in the coming weeks.

Having witnessed what the Fed did for stocks in 2009, 2020, and every expansionary policy in between, I think the Chinese government has called a near-term bottom for its most prominent tech players. I’m finally bullish after a solid 18 months since BABA fell from dropping under $300 per share.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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