The big tech earnings coming this week are top of mind for most people - and for good reason.
But with the impact it has on the market, we'd be foolish to not be preparing for next week's FOMC meeting.
It's no secret that the market prices this ahead of time. You can watch the Fed Funds Futures using the CME FedWatch tool and see that traders have made up their minds, expecting a 25-basis-point hike in interest rates next week.
Well, the Fed can't keep its foot on the brakes for TOO long or risk sending the economy into a DEEP depression.
But there is a different way this could play out.
Talking a look at the Fed Fund Futures, this is what you'll find:
Now, the Fed uses several economic reports to make their decision - such as the Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Cost Expenditure (PCE).
And for what it's worth, we are getting a PCE number on Friday, and no matter if it's hot or cold, it's not going to change a thing. The Fed is locked in at this point...
This is because they also have to keep in mind that what they are doing could leave long-lasting devastation to our economy.
A few weeks back - after the banking crisis - the Fed pivot to a rate-hike pause was expected to come from this May meeting.
But now, as the already troubled regional banks come out with earnings and give news that I wouldn't call good or bad, it's holding the feet of the Fed to the fire for one last rate hike before they start to pump the brakes.
Maybe there are greener pastures ahead and everything is under control. This would mean the banks tightening up their liquidity measures makes it harder for the everyman to get their loan, which in turn slows down the economy and throws a bucket of ice on inflation.
This is akin to the idea that the banks are going to be able to finish the job of squashing inflation...
That could absolutely be the case. We've been waiting to get to this point - over the last rate-hike bump - for months now so the market can get back to trading on what matters, the technicals and fundamentals...
But if the Fed comes out and seems to have a less-than-optimistic tone in their voice, even if they are saying the next session will yield a pause, we are going to be right back to overanalyze every word that comes out of a Fed head's mouth.
Everybody is going to be waiting for the rate cuts to start, which could be later this year.
Heck, there's currently a 25% chance we see it in June, as shown below:
But that doesn't mean you can go out and just load up on calls that expire in a few months...
Remember, historically speaking, the first two rate cuts have resulted in bearish activity in the market.
This is because they drop rates when the economy just isn't doing well.
If the economy is doing well and inflation is under control, it leaves us in that "no landing" scenario that we have discussed before, where they keep rates high so they have ammo to burn in the event they need to stimulate the economy with a cut when things get really bad.
All this really boils down to the idea that the market is expecting us to fall into a recession later this year. That's when the Fed will come out and start to stimulate the market to fix the problem they caused when solving the inflation issue.
As we watch the Fed Fund Futures start to drop after next week's meeting, you'll start to see the option of a rate cut grow in popularity.
When that happens, you need to be sure to hunker down, because there is going to be a final blow to the market.
If you are looking for a place to trade when it happens, keep an eye on the SPDR S&P Homebuilders ETF (XHB), the iShares Core MSCI EAFE IMI Index ETF (XES) (which I talked about yesterday), and the SPDR S&P Retail ETF (XRT).
All of these sectors are going to be hit hard during a recession, and the second we start seeing that cut accounted for, the talks of a recession are going to ramp up violently. You'll want to be short in any of these sectors...
Be sure to keep an eye out for this newsletter, as I will be sure to alert you as soon as it's time to take action to tell you exactly how I'm trading it...
The post This Could be the Final Blow From the Fed appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.