To Answer Your Question on a Fed Rate Hike…

Fed Interest Rate Hikes

Yesterday, I sent you a note about today’s announcement by the Federal Reserve. If you recall, I’m not expecting that the Fed will “save the market” and call off rate hikes or tapering. As I showed – the markets anticipate that a rate hike will come in March. 

I also showed you this chart… And I immediately received a question about what this chart shows…

Source: CME Fed Watch

This is the measurement of where the markets (the probability) that the Fed will raise interest rates dating back to February 2021. The probabilities you see are the likelihood that the central bank will raise rates on March 16, 2022. 

That meeting, obviously, isn’t the meeting today. It’s the Fed’s NEXT meeting, the one that will likely be referenced as the starting point for its rate hikes.

As you can see, the markets did not expect that the Fed would start to move on rate hikes (in March) until mid-October and early November of 2021. The orange line reflects the anticipation of a rate hike from “0 to 25” basis points to “25 to 50”.

Meanwhile, the Blue line reflects the expectation that the Fed will hold rates where they had been since the onset of the crisis. This is really important because as fewer people believed that the Fed wouldn’t raise rates, there was a pretty significant impact on the market…

Rule 1: Show Your Work

Now, look at the performance of the Invesco QQQ Trust (QQQ) – an index that tracks the Nasdaq 100 (an index that is heavily in technology stocks, with many trading at very stretched valuations.)

The QQQ lags the Blue line. As rate hike expectations increase (thus forcing the blue line lower) so too does the QQQ. The question is whether the QQQ will get any short-term bounce as a result…

I wish I had a crystal ball for today. I wish that I could sit here and tell you what the central bank is going to do. Even more, I would state that I wish I knew how the market will react. But I don’t. Anyone who says they can is a fool.

What I can tell you is that you need to look at the ProShares Ultra VIX Short Term Futures ETF (UVXY) at 2 pm today when the Fed releases its statement on interest rates and monetary policy. If the VIX (and reflective UVXY) starts to climb, it will be a bad time for the market. If it falls, it will be bullish for stocks. 

My advice is to trade the TQQQ or the SQQQ after the first move higher by either fund. Use a 2% trailing stop, and see what you can squeeze out of the reaction. 

I’ll return with insight on how this trade worked out on Thursday and discuss where the next move is for investors. As a bonus, I’ll have one of my favorite energy stocks to trade right now that I’ll be giving away.

Momentum for Wednesday

As we focus on the Fed meeting, it’d be pretty fair to anticipate some positive moves ahead of the announcement, particularly after Microsoft’s positive earnings report. However, we’re not close to being out of the woods. Market momentum – of all 8,300 stocks in the market – is very negative right now, and cash has remained a solid option for traders and investors.

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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