Pro Traders Look Into Microsoft, Cattle Futures

The Fed isn’t going green, but it will continue to fight red-hot inflation.

And the central bank is not worried about winning any popularity contests or political accolades.

That was the message delivered by the head of the U.S. central bank ahead of more economic data releases and what is expected to be more stock market volatility.

As the volatility builds, the team at Simpler Trading is looking into the technology and agriculture sectors.

Federal Reserve focused on inflation fight

As the stock market diligently works to build on early 2023 upside movement, the Federal Reserve (Fed) is sharpening its focus on fighting inflation in the new year.

The head of the central bank made this plan clear – again – during a speaking engagement Tuesday.

And central bankers don’t care if their plans are unpopular.

“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time,” stated Federal Reserve Chairman Jerome Powell during a speech. “But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.”

Powell’s hawkish commitment to fighting elevated inflation will further raise the federal funds interest rates through 2023. The Federal Open Market Committee (FOMC), or central bank, hiked benchmark interest rates another 50 basis points, or .50%, in December.

This pushed the federal funds rate to a range of 4.25% to 4.5%. This is the highest funds rate in 15 years (the rate was just above zero in March, 2022). The central bank authorized seven interest rate hikes last year, including four .75% rate hikes in a row.

Powell, speaking before an audience of foreign central bankers, made it clear that the U.S. central bank has no plans to delve into social movements or “short-term political considerations.”

This includes U.S. political pressure and worldwide calls to support climate change goals.

“It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to address other important social issues of the day,” Powell stated. “Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence.”

“But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals,” Powell stated. “We are not, and will not be, a ‘climate policymaker.’”

“We should ‘stick to our knitting’ and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities,” Powell emphasized.

CPI report may overshadow Fed speak this week

Unlike previous speeches, Powell’s comments on Tuesday didn’t move the stock market needle much.

In the market today, the Dow bounced higher to 33,704.10  points to gain .56% (adding 186.45 points on the day). The Nasdaq moved higher as well, hitting 10,742.63 points for a 1.01% gain while the S&P 500 also moved up by .70% to 3,919.25 points.

Other economic news events may prove more influential to the market than Fed speak. The U.S. Consumer Price Index (CPI) report is scheduled for release Thursday morning.

“That’s a big one,” said Neil Yeager, Futures and Training Room Content Provider, at Simpler Trading. “That’s the volatility for the week.”

The CPI report, which the Fed watches closely, will be followed by the University of Michigan (UMich) Consumer Sentiment Index report on Friday and the beginning of earnings season with several big banks reporting, also on Friday.

As the volatility builds this week, Simpler’s traders are watching potential plays that other traders might miss.

“If we do see movement start to pick up off of CPI later in the week, I think Microsoft is one that starts to move down,” said Allison Ostrander, Director of Risk Tolerance at Simpler Trading.

Allison sees Microsoft (MSFT) as an interesting target because the stock has shown an overall bearish trend for some time. She has observed chart signals continued momentum to the downside, and a weekly squeeze setting up with bearish signals.

For downside plays in MSFT, Allison emphasized being mindful of risk. For her trades, she is working through setups that take into consideration the MSFT earnings report later in January, out of the money options potential, and using spread strategies.

Trader doesn’t shy away from feeder cattle futures

Another market that traders often overlook because it is a bit removed from the more mainstream technology sector is the agriculture sector.

David Starr, Vice President of Quantitative Analysis at Simpler Trading, has taken note of March 2023 feeder cattle futures contracts.

“We can look across a range of markets and see those that are potentially giving us some interesting setups,” David said.

Something David has seen is a move down in feeder cattle from last summer’s high as a trend that is now a choppy move above that low. David is keying on Elliott Waves, a type of technical analysis of stock charts, to see if feeder cattle futures contracts continue down based on current chart signals.

“If it starts to turn downward, that would have me looking to short against the swing high,” David said. “I like this spot as a spot to try.”

Traders wanting to be more conservative could, David said, wait on a more clear signal on shorter time frames.