Hello, Power Profit Traders!
The market has already baked in the September interest rate hike, and we’ve experienced the “Fed Drift” phenomenon before, but what should we expect after the announcement this week – after the dust settles?
According to top analysts and economist the Fed is playing catch up as they raise interest rates. With the European energy crisis, Chinese Covid lockdowns and high inflation, all happening while consumer demand diminishes, our central bank is very likely to send our economy into a recession – which is likely to be coupled with a world-wide recession.
We will also hear more frequently the two dreaded words – inflation and stagflation.
Nobody wants to watch world economies get crushed, but there are two things to remember: The first thing is that we can’t necessarily control what happens to our economy. The second thing to remember is that if we heed the warnings signs, we can at least be prepared for when what happens and take full advantage of current economic times.
Warnings from top economists
Top economists, like Mohamed El-Erian, have warned that the Fed’s rate hikes may fail to squash inflation, and could in fact tank the U.S. economy and job market in the process – something that will inevitably take its toll on the general stock market.
Even after the 20 plus percent stock market drop we’ve had this year, another 20 percent drop will not be unheard of nor will it be surprising.
Last week Goldman Sachs trimmed its U.S. GDP growth forecast for 2023 from 1.5% to 1.1%, so this is another step in the wrong direction for the economy and market.
Additionally, Goldman Sachs has predicted that the Federal Reserve will nearly double its benchmark interest rate to between 4% and 4.25% by the end of this year.
Inflation and Stagflation
With the Russian invasion happening there is an energy crisis over in Europe, and at the same time China continues to have Covid lockdowns, which continues to put pressure on the supply-chain bottle neck we have – which of course is contributing to our inflation problem.
While the U.S. has high inflation and demand is falling as the Fed is attempting to play catch up, we’re falling behind the curve and being led into stagflation conditions – which is a toxic combination of stagnant economic growth, elevated inflation and upcoming rising unemployment.
In fact, it’s not just the U.S. that is suffering. The Financial Times reported corporate insolvencies in England and Wales jumped 43% year over year in August. This is the type of news that lets us know inflation and slowing demand is hitting companies across the globe and that we’re not dealing with a small problem.
Rising Interest Rates
There is an 84% probability that the Fed will raise rates by .75 basis points, and I mentioned earlier that the market has already accounted for this hike.
Any surprises by the Fed could send the market into a tailspin, but essentially, we’re counting on the probabilities.
I mentioned above that we often witness Fed Drift a few days before the actual announcement, but then the aftermath occurs.
As the Fed announces what seems to be the obvious, we may see some chop in the market, but as we consider all the things I’ve spoken of, the market’s trend and momentum that is already in motion will likely continue on its trajectory.
After the dust settles and the market chop subsides, the reality of the world-wide economic situation will continue as top headlines. It’s simply important that as we become aware of the current circumstances that we prepare ourselves.
There are a variety of ways to be prepared for the market’s reaction to all the economic turmoil occurring in the world.
Some of you have moved to cash, while others have hedged your portfolios. It’s important to do what you think is best for your portfolios, but additionally, I think it’s important to take advantage of the situation the market is in regardless of the direction of its trend.
As of August, the chart on the SPY has indicated a continuation of the bearish trend we’ve experienced most of this year. My Tom’s Option Tools chart on the right shows the ten-day moving average line falling below the 30-day moving average. You can see the downward slope of the market since the crossover.
Many of you know that I use more than a moving average crossover to make successful trading decisions, but the first two lines of code I have in my trading software sets the tone.
I am keenly aware of the economic and market conditions. Regardless of what experts are saying, as long as I have an awareness of the circumstances surrounding the market, I am able to be prepared to exploit it.
This year has been successful, and it’s not over yet. That’s why I will continue to share with you the trading strategies I’ve employed over this year along with the success I’ve experienced.
It’s never too late to be aware of the surroundings, be prepared and then take advantage of the opportunities the market affords us, regardless of its direction.
To success!
Tom Gentile
America’s #1 Pattern Trader
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