Fed Not Done, Market Falls On Higher Interest Rates


Simpler Trading Team

6 min read

The day after tomorrow arrived today with the stock market struggling for positive gains and eventually succumbing to the aftereffects of central bank interest rate hikes.

The Federal Reserve (Fed) made it clear yesterday that plans to raise rates will continue until “the job is done.”

What lies ahead is setting up for a rough end to a struggling year in the stock market with no real relief as the new year draws closer.

Fed raises interest rates, market falls further

Choppy price action today included the Dow flirting with positive gains throughout the session before posting losses into the final hour.

The other large indexes never gained ground on the day and closed down as well.

In the market today, the Dow closed at 32,001.25 points to drop .46% (dropping 146.51 points on the day). The Nasdaq tumbled to 10,342.94 points for a 1.73% loss while the S&P 500 crumbled 1.06% to 3,719.89 points.

The unstable action today was set up by central bank announcements on Wednesday.

The Federal Open Market Committee (FOMC) hiked benchmark interest rates another 75 basis points, or .75%, and pushed the federal funds rate to a range of 3.75% to 4.0%. This was the sixth interest rate hike this year from the FOMC, and the fourth .75% rate hike in a row.

Equities across the board felt the pain of the news which market participants had hoped would go the other way with the Fed backing off hawkish plans. Fed Chairman Jerome Powell made it clear that more rate hikes are coming.

Only definitive slowing of inflation will halt future interest rate hikes.

“They didn’t back off at all,” said Bruce Marshall, Senior Director of Options and Income Trading at Simpler Trading. “That’s steamrolling – like a bull in a china shop. That’s not what the market wants to hear. This means that most likely we’re going to go lower.”

Inflation still elevated with higher interest rates

That the Fed sees the need ahead for more rate hikes is scary, Bruce said, because the central bank is looking at a lot more economic data than the average person.

Bruce understands that the Fed is working to get ahead of crushing inflation – now at 40-year highs – but does question certain central bank policies and attitudes toward economic problems, i.e. the Fed last year stating that inflation is transitory.

Inflation hasn’t gone anywhere but up across the board.

“They got way behind the power curve and that’s why they’re doing these big rate hikes,” Bruce said.

Bruce offered insight into what happens when the Fed keeps hiking rates.

The result – which is just what the Fed has said it wants to accomplish – is a slowdown in sales and growth within consumer markets such as housing, autos… pretty much anything to do with consumers and interest rates.

“If the Fed is going to keep raising rates and we keep getting bad (economic and inflation) numbers, the market is going down,” Bruce said.

More news – good or bad – to hit stock market

More economic data – good or bad – is set to hit the stock market this week and next.

The nonfarm payroll report numbers are set for release Friday and U.S. Consumer Price Index (CPI) numbers on Thursday, Nov. 10. Sandwiched between the two economic data releases are the nationwide elections on Tuesday that could affect the stock market.)

“If the Fed is going to keep raising rates and we keep getting bad (economic and inflation) numbers, the market is going down,” Bruce said. “We need to trade this thing with a downward bias.”

He keeps a keen eye on the 200-day simple moving average across the indexes and in big-name stocks. This is a key price level that has proven a strong resistance point against any price action to the upside.

Bruce noted that even that key signal – which has a months-long pattern – isn’t a guarantee in a market that has shown it can shift directions on any type of news. He doesn’t plan to get loaded up on one side of the market, short or long.

“You have to be really nimble to get on either side of this market quickly,” Bruce said. “Things can change on a dime. That will be the case for a while.”

Bruce sees a strong possibility that this market will test the lows of the year at some point.

“Right now we have to be aware that there is probably more downside,” Bruce said.

Veteran trader stays the course in rough trading year

Bruce continues searching for trades with well-defined setups that require low capital and have potential for higher payout than the risk involved. He continues using more complex options setups such as the broken wing butterfly, diagonals, and calendars.

Bruce stressed the importance of traders at all skill levels understanding when to use which setup with each trade placed. This market turns so quickly that traders must be nimble and adjust the trade setup as needed, Bruce said.

“To know when to use which trade and how the trades work is critical to long-term success,” Bruce said.

Bruce has observed how wild swings in implied volatility and Volatility Index (VIX) aren’t presenting “normal” signals as the stock market sorts through all the outside influences, such as Fed actions and unexpected economic data.

Bruce daily works to adapt and use volatility, price, and direction to his advantage in how he sets up trades. He knows that what works today will likely change tomorrow based on how the market moves.

He encouraged traders to be prepared for missteps, even losses, as this volatile year closes.

“This has been a tough year to trade,” Bruce said. “Don’t feel bad. This is a tough market.”

Bruce has adapted like he has for more than 30 years and his BIAS trading portfolio is up 28% on the year.

Still, he doesn’t wait for the next news event to dictate his trading plans. He is already gearing up for 2023 and putting in place plans to work market conditions.

He works each trading day decision by decision while evaluating all market variables to develop a path for what lies ahead.