The Federal Reserve raised interested rates by 75 points yesterday and the stock market dumped hard on that news. The Nasdaq gave a sell signal as its daily stochastics closed back below 80.
See the three circles on the above chart?
The Fed rallied into this Fed meeting and dumped just like it did in September and the Jackson Hole meeting in August.
Now the financial media explained the drop by saying that Jerome Powell was hawkish on rates, saying that they now expect that rates will get higher than what they said at their last meeting in September. A lot of stock market gurus were claiming the market would rally after the Fed meeting and they were wrong again.
In reality, the WSJ already had reported exactly what Powell was going to say days ago over the weekend, so the idea that the market was fooled by the news is silly.
Something else happened.
The stock market has been declining since around New Years. It’s a bear market, but these type of declines tend to end when there is a panic washout and we haven’t seen one happen yet all year. Even in major market corrections the VIX (“fear index”) typically gets above 40 and it hasn’t done that so far. I have been trading the markets now since the 1990’s and have been through several bull and bear markets. There is something happening now that is very similar to what happened during two long market declines that took place in 2001 and 2002.
During those declines, even though it was a major bear market, all the experts kept predicting bottoms and telling people to average down as they are now. Every time the market had an up day they would say you had to buy, because a new bull market is coming. The Federal Reserve was lowering rates, during 2001, at just about every meeting and the experts kept saying you had to buy, because rates were coming down. Now the experts all keep saying you have to buy, because interest rates will eventually stop going up, or worse are the ones that claim the Fed is going to “pivot.”
I want to tell you that the news of the Fed actions at these meetings doesn’t really matter, because it is already known ahead of time.
The Fed leaks ahead of time to the Wall Street Journal and reporters like Steve Liesman what they are going to do.
So, if you want to know what the Federal Reserve is going to do just read them!
The markets were not surpised.
Instead what happened at the meeting this week, and in September, and the Jackson Hole meeting, is exactly what happened in 2001 with Federal Reserve meetings.
That is the market would rally or have bounces right into these meetings and then sell off.
Traders bought the rumor and sold the news so to speak.
You could trade this trend of buying right into Fed meetings and then selling the meeting or shorting stocks on the day of the meeting.
This is likely to continue to be a trend now with Fed meetings going forward for months – no matter what the Fed actually does at the meetings.
This market downturn will end, not when the Fed pivots, but when there is a true panic washout.
That is when the real buy point will come.
Trying to anticipate Fed pivots and future news is spinning your wheels, just like millions spun their wheels to the point where they could no longer spin anymore in the 2000-2003 bear market and 2007-20009 bear market.
Trying to play rallies and fad stocks is a tough game.
By pushing stocks up they got suckers to buy into hype and then dumped on them!
The only way now to buy and make money is be extremely selective with something that is really in a special situation of its own, because the broad trend is down. I wrote an article on what you need to look for in stocks earlier this week you can find here.
The easiest play is to reduce risk and have large cash reserves until this is over.
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If you have any comments or thoughts just put them in the box below.
-Mike
