Fed Sets Rate Hikes, Spurs Rally

This week the Federal Reserve sent a clear message to the markets – prepare for interest rate hikes next year.

In turn, the market responded with a solid 100-point move to the upside in the S&P 500. All three major indexes enjoyed a boost following the announcement Wednesday. Simpler’s traders are hopeful for a tailwind and a Santa Rally to close out the year.

However, this market has experienced sharp reversals on a dime and that makes it tough to trade. This was evident today as the Fed rally faded quickly into losses across the board.

Simpler’s traders strategize their trades as they remain light with setups that are maintaining bullish momentum. Traders are still not likely to need, as of yet, a bearish or “Black Swan” strategy, which is typically used as traders attempt to predict unexpected events in the market.

When, and if, the S&P 500 reaches a high of 4,900, Simpler’s traders will look for protection on the downside – although the time frame for that potential high to unfold is uncertain. Reading the market, traders can plan to experience some resistance if that high does occur.

Whether traders see the index hit that high, or not, the message is clear – now is not the time to short this market.

The Federal Reserve is going to taper faster and double the pace at which it winds down its asset purchase program. Interest rates will increase next year and this will be the first increase since the central bank reduced short-term borrowing costs to near-zero as the U.S. grappled with the pandemic.

Federal Open Market Committee members predict at least one 25 basis point hike next year. Potentially three rate hikes could occur before the end of 2022 – all in an effort to reduce inflationary pressures.

Traders are also watchful of triple witching, which occurs this Friday. Triple witching is the simultaneous expiration of stock options, stock index futures, and stock index options contracts all on the same day. This event occurs each quarter and the final hour of trading preceding the close is referred to as “triple witching hour.” It’s not unusual to see increased trading activity as traders close, roll out, or offset expiring positions.

Stay vigilant as we head into the last two weeks of the year.