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Fed-Day Reaction Might Be Small
www.oneoption.com
The market is not expecting a rate cut today so we are likely to hear the same rhetoric.
PRE-OPEN MARKET COMMENTS FED-DAY – The market staged a nice bounce from deeply oversold conditions a few weeks ago, but the upward momentum has stalled below major resistance. The 200-day MA and the 50-day MA are converging at a horizontal resistance level and it will take spectacular news for the market to power through that level. I don’t see that happening today. In fact, the Fed could splash cold water on bulls.
Powell has stated many times in the last few months that he is satisfied with employment and inflation is heading in the right direction. He is content with current policy and we can expect “higher for longer”. The market has been able to shoulder this hawkish stance.
Daily price movement is impacted by tariffs and trade deals. “Big announcement later today.” The market rallies. Traders are thinking that it could be the first trade deal. Later we find out that the news will have little impact on the market. I feel that the market is setting up for a “sell the news” event. The bid is strong because trade deals could be an upside catalyst. Once a few deals are announced, reality sets in. The 10% base will remain and there will be other concessions by our trading partners. The tariffs will cause supply disruptions as companies shift resources to preserve profits. If Congress passes the budget, that will be significant. Those tax cuts will provide a market boost.
With all of this potential good news, why am I bearish? The global economic backdrop is bearish and even without tariffs, trade deals and tax cuts that reality remains. The market over-reacted to the tariffs and then Trump backed off. Now we are seeing an over-reaction the other way. The US trade deficit ballooned this year (exports – imports) when companies imported goods ahead of the tariffs. That supply needs to be worked off and we are going to see that bear out in upcoming economic releases in June and July.
Investors are looking around thinking, “Hey, that wasn’t so bad. Earnings have been good and the tariffs have not had an impact.” The tariffs were barely implemented in Q1 and the buildup artificially pushed demand forward. Now we have to pay for it. The hurt is coming, I just don’t know when.
I am comfortable taking some starter swing shorts at this price level. I know I might have to take some heat the next month so I am keeping it small. Short stocks and if you buy options, go way out to September. This is a longer-term perspective. It is going to take time for weak economic data points to surface and until we see that, the market will tread water.
What would get me neutral? If the market can close above the 100-day MA for a week straight, I will have to shift my bias. That level is not far away, but it will take a lot to push us through that resistance.
From a day trading perspective this is going to be a dull start to the day. I am also not looking for a big reaction after the statement. The market is not expecting a rate cut and it is not going to get one. We will be in a holding pattern waiting for trade deals. While we wait Trump will prop up the market with comments like… “Big news after the close.”
Support is at the 50-day MA and resistance is the 200-day MA.
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